Merchant bankers battling with IPO deluge

Due-diligence being used to check firms not sure of their plans

Merchant bankers are working overtime to convince a host of corporates, which are eager to ride the market rally, not to hit the primary market.

They are using the due-diligence process as a deterrent to keep out companies which don't need the money or can't justify the amount they want to raise.

More than Rs 40,000 crore is expected to be raised from the equity market in calendar 2005, building on the Rs 30,000 crore raised through public issues in 2004, according to industry estimates.

Top merchant bankers are being approached by at least 20-25 new companies every month but only a percentage of them get the nod.

"We are cautious. We look at the track-record, promoter history and most importantly what they plan to do with the money before taking them to the next level. Very few reach the regulator stage for approval," a merchant banker said.

However, all "rejects" do not go by what their bankers say. They go to other merchant bankers till they find someone who "helps them out" in a very competitive merchant banking industry.

A familiar scenario in the rating industry till a few years back where a corporation could "buy" a better ratings from agencies keen to expand business.

"We are being approached by big and small companies to raise money from the market on a regular basis, specially in the last one year. Companies want to ride the equity market rally and many small firms don't even know what they will do with the money they raise," said a senior associate with a leading domestic merchant banking firm.

In 1999-2000, almost every company wanted to ride the technology boom. This time the equity rally is broad-based and this has enthused all sorts of companies to raise money, said merchant bankers.

"It's difficult to say no to them and we tend to go through the due-diligence process. In the process, we end-up wasting a lot of time and resources," he added.

But some market watchers are expressing concern over the number of IPOs still hitting the market and also their valuations.

"Some recent issues including some high profile ones are over-valued and can turn out to be detrimental for the market in the long term," a broker said.

Almost all recent public issues have received a very good response as investor sentiment continuos to be high. But in this wave many companies, which are not fundamentally very strong, are also entering the market.

Besides, even some big companies have also asked for a higher premium for their shares, not leaving too much on the table for the investor, analysts said.

Market entities are concerned that if investors, specially retail investors, burn their fingers with over-valued shares or invest in fundamentally weak companies, they may go away from the equity market. This will be very detrimental in the long term for the market, they add.