The primary market has been on a roll for the past two years. Large issues, huge over-subscriptions and companies in the new sectors like real estate and even one dot-com. Over 60 per cent of the IPOs ( initial public offer) are trading above their issue price. There are big bang IPOs in the pipeline in the coming year.
SANJAY SHARMA, head-equity capital markets, DSP Merrill Lynch talks to Priya Kansara about the equity capital markets, the amount that is likely to be raised and the sectors that will be raising these funds.
He also has suggestions to create an IPO friendly market and how retail investors can make the most of their IPO investments. Sharma has a total experience of 15 years in equity, debt and advisory businesses. He has been in Merrill Lynch for about 14 years in various roles, and has been the head of capital market for the last two years.
How much money is expected to be raised from the primary market in the coming year? Which sectors are going to drive it?
The total amount expected to be raised from the capital markets is in line with the amounts raised in the last two years and is likely to be about $14-15 billion (over Rs 60,000 crore).
Real estate, infrastructure, BPOs and telecom are likely to be the major sectors that will be going for fund raising. The retail sector, which is also a part real estate play may raise funds, depending on business needs. However, this may be in the last quarter of the next year or in 2008.
Besides IPOs and rights issues, Indian companies have raised money from other sources. How has the break-up been in the past two years?
In calendar year 2005, a third of the $14 billion raised was through domestic market, American Depository Receipts/Global Depository Receipts and Foreign currency convertible bonds (FCCBs) each.
In the year 2006, out of the $15 billion, $5 billion was through FCCBs, $3.5-4 billion by way of ADR/GDR and $5.5 billion was from the domestic market and $650-700 million was through qualified institutional placements (QIPs).
A break-up for future capital raising would depend on the relative merits of the product for individual issuers. However it makes more sense for a listed company to go for a QIP issuance.
ADR/GDR are products which would be used for building international profile for business reasons and not necessarily for tapping a new pool of investor base.
FCCBs as a product can be looked at from the perspective of raising equity at a premium or raising cheap debt. Given the bullish market, companies are looking more at it as equity at a premium, and only time will tell if these bonds get converted or are redeemed as debt.
There have been either substantial listing gains or companies languishing below their IPO price this year. How do you explain that?
According to our data, of the 57 issues this year, 35 (about 60 per cent) are trading above their issue price giving an average return of 68 per cent and the rest are trading below the issue price with an average negative return of 26 per cent. On an overall basis, these issues have given average returns of 34 per cent to investors.
The Indian regulatory environment requires deciding the price band three weeks before the launch of the IPO and the listing happens about three weeks after the issue closes.
Though there is technical flexibility to revise the price band, it becomes difficult in practical terms due to the need of informing the retail public at large.
This means that the issuer/banker needs to factor about six week of market uncertainty while deciding the price band. One of the ways to reduce this time frame could be electronic transfer of money (since most of the time after the closing of the issue goes in clearing cheques from across the country). This would reduce the time frame from closing to listing by about two weeks.
How do you explain wide swings in the retail paticipation in the IPOs?
Retail participation is a factor of markets, and thus is impacted by market sentiment. While some of the issues launched post May had less than 100,000 applications, recent issues like Cairn, Sobha Developers and Parsvnath Developers received more than 400,000 applications each.
With so many fund raising options like FCCBs, ADR/GDR, QIP and private equity with the issuer, what is the best strategy for retail investor?
It is best for retail investors, to route their investments through mutual funds which is the practice internationally. Globally, retail participation is either through mutual funds or through wealth managers or value added brokers.
Mutual funds are much better equipped to manage the money for retail investors. Further, systematic investments plans (SIP) should be preferred since they take out the market timing risk for retail investors.
What are the issues according to you which still needs to be improved to make IPOs a real success and more transparent?
Indian markets have come a long way and SEBI has done an exemplary job in terms of disclosures, introducing the book building concept, reducing the time frame to six weeks from pricing to listing as compared to the old fixed price era when it used to be 3-4 months etc.
I think reducing the time frame from pricing to listing further is one of the most important step required to make it close to the international standard (which is 3 days from pricing).
The Indian markets are pretty transparent, both in terms of disclosures in offer documents and in the book building process.
Given the fact the Indian book building process is through an open book, it is not really helping in price determination as almost all bids come in on the last day and are either at the top end of price range (in bullish markets) or at the bottom end (in bearish markets).
Further, with margin money requirement for institutions, even the QIB orders come in on the last day thereby not providing the guidance to retail investors--which was the intention of having an open book.
Do you think rating or grading of IPOs should be made compulsory? Why?
I don't believe in grading of equity issues as a concept. Grading is something which is more relevant for debt issuance.
In equity issuance, just grading the company may not give the right picture to the investors, especially when the pricing is not known.
