Deutsche Equities India is among the dominant players in the domestic capital market and ranks second based on funds raised since January 2008 till date in the equity market. Sanjay Sharma, head, Equity Capital Markets, Deutsche Equities India spoke to Rajesh Bhayani on the trends in capital market, especially in the IPO segment and the recent lacklustre listings among other issues. Excerpts:
What are the key trends in the primary capital markets?
As the economy shows signs of revival, India Inc. will need money for growth and for strengthening their balance sheets, and hence, we will see them tapping the primary market through IPO, follow-on offerings and QIPs. Companies from infrastructure, financials, metals and mining sectors will continue to lead the fund raising activity in the primary market.
What are the reasons for IPOs getting a weak response on listing these days?
Expectations of investors have to change from a huge IPO pop in a bull market to more realistic ones. Nothing changes in the company’s fundamentals in a three week period from IPO to listing other than company becoming a listed one – so investors should expect a 10 to 20 per cent IPO “pop” factored in for the change in market conditions in that period. What is happening currently is that apart from the retail and HNI investors, some of the institutional investors also expect consistently good performing IPOs in which they can rotate the money to get higher annualised returns.
There are few institutional investors who also take long term view of the company, but given the proportionate allotment procedure in Indian IPOs, at times they get allotment less than their minimum holding size in which case they also exit on listing putting additional pressure. In a fully mature market IPOs will not get oversubscribed more than five times and will deliver normal returns on listing. Fundamentally there is not much difference between investing in an IPO and in secondary market so expectation of very high returns on the first day of listing is not rational.
Is this because of high pricing of IPOs?
While deciding the IPO price band, bankers need to keep a buffer for the change in market conditions in the time period between deciding the issue price or band, the date of launch and the ultimate date of listing. SEBI has accepted the industry demand to reduce this period and has now allowed price band announcement two days prior to launch and is trying to reduce the period from closure of deal to listing. With this change, issuers need to provide for a lesser period of market uncertainty and hence possibly price bands are becoming more optimum.
As markets mature we will see more realistic return expectations and hence more realistic oversubscriptions. Investors will start looking at fundamentals of the company rather than bet on the technical /event-based returns from the IPO.
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Sebi is contemplating asking institutional investors to make full payment along with application or soon after allotment. Will this solve the issue of very high over subscriptions?
Not necessarily so. Currently, while institutional investors only pay ten per cent amount at the time of application, most institutions have internal requirement for providing for or blocking the cash assuming all shares are allotted to them. The only flexibility they get is a few days to organise the funds. Further, the investment decision is not predicated on the requirement of paying a lesser amount initially. While a requirement of paying full amount on application may not impact the responses in a bull market, it may do so in difficult market conditions. The key would be to reduce the post issue time and possibly reconsider discretionary allotment to institutions.
Most IPOs are done on a book building basis, where retail investors have virtually no say in deciding the price. Isn’t it resulting in pricing IPOs at optimum price?
Given the way IPOs are done here, the book building exercise does not end up as a price discovery mechanism. In most cases, price discovery happens prior to the finalisation of price band through investor meetings/discussions and finally a judgment call by issuers and bankers. Ideally that should happen in the book building process and depending on the demand price tension amongst investors.
In the current regime of proportionate allotment the issues are priced at top end of the band in bull markets and at bottom end in bear markets. There is no incentive for an investor to indicate a higher price. Internationally the allocations are finalised depending on the size, price and timing of the bid from investors, and hence, there is a price tension for getting higher allocation.
Another pitfall of this is that most investors (institutional and retail alike) participate on the last date of the issue thereby putting additional pressure on the administrative infrastructure and also leaves the retail investors without any price guidance. I understand SEBI is considering closing the QIB part one or two days prior to the retail part and this would be a good transparent way of providing guidance to retail investors.
What do you make of the recent move by SEBI permitting discretionary quotas for anchor investors and in QIP issues?
Allowing anchor investor is a good move in the right direction. This will move the price discovery from happening prior to price band finalisation to one day prior to the issue launch.
More companies are raising money through QIPs making it an attractive instrument. How long will this euphoria last?
SEBI’s move to allow QIP issuance is a welcome move which enables listed companies a faster means of raising money. The change in pricing guidelines where the six month average was removed from the pricing guidelines has also helped. However, even the minimum pricing formula based on two-week average pricing makes the timing of fund raising by QIP uncertain for issuers.
We feel that since the QIP is available to only qualified institutional investors and there are certain checks and balances in terms of minimum number of investors and the maximum allocation to one investor, leaving the pricing decision between the buyer (QIB) and seller (issuer company) would be more appropriate. May be a limit of + or – 10 per cent from last traded price may be stipulated as is the case in secondary market where investors are allowed to buy and sell shares at a price they feel right subject to the circuit filters.
