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White-knuckle volatility forces companies to let IPO approvals lapse
Some firms may blue-pencil valuations because of capital requirement compulsions or for providing exits to their investors. Still others can afford to wait
While the initial public offering (IPO) market has gained some momentum, not everyone is able to ride the bus. Market volatility has forced several companies to let their approval granted by the markets regulator — the Securities and Exchange Board of India (Sebi) — lapse.
After vetting the IPO draft red herring prospectus (DRHP), Sebi offers its final observations. A company has to launch its IPO within one year from the date of the final observations.
About half a dozen such approvals have lapsed over the past two months. Another half a dozen are staring at expiry by the end of this month. These IPOs could have cumulatively raised Rs 14,000 crore. The issues expiring this month could have mopped up about Rs 6,000 crore. Industry players say some companies plan to re-file their DRHPs, so that they can have another stab at listing. Meanwhile, some are looking at alternative ways of raising capital, including availing of debt.
ESAF Small Finance, Penna Cement, and Inspira Enterprise are a few companies that have seen the one-year approval period lapse. Companies whose approvals are set to expire this month are Healthium MedTech, VLCC, and India1 Payments. DRHPs are a preliminary prospectus filed ahead of an IPO containing key details such as number of shares being offered, financial results, and risk factors, among others.
“There is a lot of volatility in the market right now. From the time you decide to launch a deal to listing, things can change dramatically,” says Dharmesh Mehta, founder, DAM Capital.
Four IPOs have cumulatively mopped up Rs 4,120 crore in the past week, making it the busiest week for IPOs this year, particularly in terms of the number of deals launched. Meanwhile, four more IPOs worth Rs 5,000 crore will be launched this week. The flurry of launches is underpinned by a surge in the secondary market, with the Sensex and the Nifty jumping 5 per cent in the past month and getting close to ratcheting up fresh record highs.
“The IPO generally tracks the secondary markets. Until the secondary markets come back strongly, we will see some companies putting their plans on the back burner. But if the secondary markets move positively in the next few weeks, it may embolden some companies to try their luck,” says a banker.
Latest gold rush notwithstanding, the year 2022 has been a lukewarm one for IPOs. Sustained outflows from foreign portfolio investors (FPIs), spike in volatility, and correction in the broader markets have weighed on deal-making this year. FPIs have been net-sellers in seven of the 10 months this year. Until October, they were net-sellers to the tune of Rs 1.6 trillion. The US Federal Reserve’s hawkish pivot, recession fears, and war in Ukraine have made FPIs sellers. Moreover, DRHPs were filed last year when the IPO market was robust and valuations were benign. Bankers say promoters who had filed their documents last year will have to lower their expectations. As a result, many would prefer to wait than sell at depressed valuations.
“For months, the IPO pipeline has been dominated by smaller-sized issues. Larger-sized IPOs are not getting enough support. The FPI presence in IPOs is insufficient. Moreover, some sectors are now out of favour with investors and the firms in these sectors no longer command the valuations they expected at the time of their filing. Not everyone would want to cut their valuations for the sake of getting listed,” says Rajendra Naik, managing director, Centrum Capital.
Mehta says some companies may blue-pencil valuations because of capital requirement compulsions or for providing exits to their investors. Still others can afford to wait.
“Despite headwinds, the capital cycle is picking up after a decade and many of these companies will raise funds — either from the markets or privately,” adds Naik.
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