Firms swerve into private equity lane

The continued volatility in the stock markets is making several companies that were planning to go public to use venture capital and private equity to raise money instead.

Merchant banking sources say companies are now forced to reconsider the initial public offer market as there are no assurances that subscription to an IPO will be favourable under present market conditions.

"On the one hand, pre-IPO placements and private equity deals that were being negotiated have hit a roadblock of sorts, with buyers insisting on renegotiating the deal price in view of the current market. On the other hand, companies that were in the early stages of planning an IPO are looking at the viability of taking the private equity or venture capital route to raise money instead," said a merchant banker.

With the amount of exposure companies acquire just prior to and during the IPO, there is a certain loss of face if the response to the issue is not substantial.

"In a private placement, the deal needs to be announced only after it is struck; so if things do not work out right, both parties can walk away and no one else needs to know. This is working on the minds of companies looking to raise capital," said an industry source.

Pre-IPO placement of some high-profile issues waiting to hit the market have also run into rough weather. Sources say protracted re-negotiations are on in deals, including that of a large real estate company and a capital goods manufacturer.

The number of offer documents and red herring prospectuses filed with the Securities and Exchange Board of India has also fallen sharply.

While there used to be as high as eight IPO offer documents filed with Sebi in February, by the last week of May this had dwindled to two.

Though no postponements of previously announced IPOs have taken place yet, companies are following a wait and watch policy before announcing their IPO schedule.

"While, earlier, companies would be waiting at various regulators' offices and insisting on early clearances of documents, now they are willing to let the regulators take their time. No one wants to rush into this market with an IPO now," said the director of investment banking at a leading Indian broking house.