The stock market is down and the latest monetary tightening moves by RBI have made debt even more costlier. High inflation had led to tight monetary and credit policy stance by the central bank over the last six months but the latest quarter review from RBI has made things even worse with the corporate sector now reliving the high interest rate regime of 90s. Coupled with the fact that the primary equity market is not showing any signs of recovery, the corporates are seeing both debt and equity becoming expensive.


So where does India Inc raise its funds? If the trends of the last two years is anything to go by, private equity flows have emerged as a strong alternative for companies looking for growth capital. But does that mean private equity would emerge as a preferred route for raising money and we would see many more private equity deals? Not really, say a few from the industry.

“No, I don’t think there will be an increase in the private equity deal making because that presupposes that equity is competing with debt,” said Ajay Kumar Kapur, CEO of SIDBI Venture Capital, the venture capital arm of Small Industries Development Bank of India.


With debt becoming expensive, probably , promoters could look for equity as an option to raise money to part finance their projects but that may not necessarily translate into a surge in private equity. “Private equity can never replace debt,” said Vivek Mehra, Head, Private Equity, Yes Bank.


He added that the promoters who are in the middle of their capex plans will revisit their expansion plans now and set reduced targets for themselves. Indian promoters are still not comfortable with diluting so much of equity yet, because by diluting equity, one is invariably diluting the control or the ownership of the enterprise, which does not go down so well with them.


Having said that, with credit situation becoming tight and the avenues for raising money getting restricted, does this warrant a better bargaining power in the hands of private equity investors?

“Valuations are more driven by sentiment and I don’t think that long term investors would ride on the game of multiples,” said SIDBI Venture Capital’s Kapur. According to him there could be a little erosion in the values because the benchmarks have gone down but on the whole there will be an upswing: “Now, that there is a bit of a stability, it can help coming to a common benchmark.”

Others like Yes Bank’s Mehra say that the investors are now more cautious and selective in the deal making: “Frankly a lot of promoters still expect the valuations that they saw in 2007. So there is a gap between promoters expectation of the valuation and the investors’ assessment of the valuation. The promoters are finding it difficult to sink in the fact that the happy times are over now.”


However, the consensus is that deals where promoters have “real desire” to close will definitely happen. The credit policy will pan itself out in 30-45 days and the picture would get clearer. Already some banks have raised their prime lending rates.

All this means bad news for the economy. According to a Dun & Bradstreet study, India Inc’s business optimism index is at its lowest since Q4 2004 and business sentiment for Q3 2008 is down 11.2% quarter on quarter. The report found that all the six optimism indices – volumes of sales, net profits, selling prices, new orders inventory levels and employee levels have declined as compared with the previous quarter.


Post the quarterly monetary review of RBI, the impact would be felt not only by unlisted companies, but also by entities that plan to raise money through the rights issue route. The industry view is that the promoters looking at a successful rights issue would have to do it at a considerable discount to the current market price.


But all is not gloomy on financial street. One space that could see an increased amount of activity could be distressed investing . The current downturn could mean the best time for value picks and some players are setting up special situations fund. An increased liquidity pressure coupled with declining internal accruals and reduced funding options has aided the emergence of these funds. “Sectors like real estate can really make use of such funds,” added Yes Bank’s Mehra.

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