With the Sensex trading above 20,000, it is obvious that several corporates are contemplating raising money. In fact, many have already lined up big plans. According to estimates, there is a possibility of $24 billion being raised from major IPOs, including that of Coal India, SBI and Indian Oil, for the balance period of 2010-11. The list would possibly have been even bigger if certain microfinance companies had not deferred their plans following recent controversies. The question that comes to mind is whether the market will be in a position to absorb so much fund raising.
Before we dwell on this all important question, let me state for the record that top quality issues like Coal India are extremely important from the long term point of view. They add to the breadth and depth of the market. This is where India scores over China, since it has a lot more companies with decent enough market cap on offer.
Coming back to IPOs and market liquidity, it is actually a virtuous or vicious cycle (whichever way one looks at it). When there is liquidity, companies plan to raise money; when the liquidity is absorbed or withdrawn, companies defer their plans and wait for the next bout of liquidity.
For now, strong global liquidity has resulted in large fund flows into emerging economies like India. Governments of developed economies like the US have taken all possible measures - interest rate cuts, fiscal stimulus, quantitative easing, tax cuts, healthcare spending, and currency devaluation, more recently, to revive their languishing economies. Thus, liquidity is and would remain plentiful even after fund raising in near future.
Another benefit of an IPO like Coal India is that it would attract whale investors like large pension funds and global funds focused on stock ideas. They perhaps would not have otherwise brought that capital into India. Supply of good quality paper creates its own demand. This will effectively displace stock holdings in other markets through higher allocation to India. For retail and HNIs, liquidity need not necessarily come from selling of stocks. In fact, in most cases, it will come from money lying in banks, bonds and through leverage. While domestic funds may need to withdraw from secondary market, overall such issues will increase the base of retail participation in equities and bring in new foreign money as well.
To put things in perspective, we expect $30 billion of net FII inflows and $5bn of DII inflow in 2010-11, which may nearly match the lined-up paper supply (IPOs and QIPs) and therefore, not disrupt the secondary market materially.
The author is head of research (India Private Clients), IIFL