Drawing institutional investors towards public issues, especially small or mid-sized ones, has become a big challenge for investment bankers with Initial Public Offer (IPO) mandates.
Qualified institutional buyers (QIBs), which include sovereign funds, insurance companies and mutual funds, among others, have become wary investing in IPOs, where the post-listing market capitalisation of the company would be less than Rs 1,000 crore, i-bankers say.
The bad performance of IPO stocks, aggravated by sharp correction in the secondary market last year, a crackdown on half a dozen IPO companies, mostly small, for rule violation, and the recent listing day trading controls have seen QIBs shy away from public issues.
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“Unless, the company is worth more than Rs 1,000 crore after listing, institutional investors are not willing to take a look. That has become the minimum basic criteria now,” said a top executive with a domestic investment bank.
Poor appetite among QIBs, which have 50 per cent reservation in public issues, is making it difficult for investment bankers to conduct presentations to potential investors and analysts. Since January 2011, at least 30 companies with IPO approval from the Securities and Exchange Board of India were not able to hit the market with their offerings. These companies together could have raised Rs 33,000 crore, according to research firm SMC Global.
“If the company is very small, then we are definitely not looking at it. Otherwise, it’s on a case-to-case basis. We look at the merit and size of the business,” said Gopal Agrawal, chief investment officer, Mirae Asset.
Many IPOs, especially smaller ones, have failed to garner full QIB subscription, considered an important indicator of the offering’s attractiveness.
Experts say correction in the secondary market has brought down the valuations of listed companies from various sectors to compelling levels. In such a backdrop, institutional investors prefer to invest in already listed stocks, which already have a track record.
“There are enough opportunities in the market for buying already listed companies. Then, why look at any other company?” said Prashant Shetty, managing director at IDFC Investment Banking. “An investor might want to hear the story but he will not invest unless it's extremely attractive.”
Despite a decent recovery in the secondary market this month, primary market conditions continue to be gloomy. Investment bankers, despite having mandates from companies and valid regulator approvals, have no option but to allow an issue to lapse.
“It is difficult attracting institutional investors at the moment. There are not too many issues hitting the market. It will take at least another couple of months for the primary market to revive,”said Girish Nadkarni, head of equity capital markets at Avendus Capital.
Experts believe the going could get tough for small companies to mop funds through the primary market. “Small companies will find fund raising through IPOs very difficult. They'll have to opt for private equity (PE) till they grow to a reasonable size,” said the banker quoted earlier. Already, a few IPO-ready companies which were unable to roll out their issues due to the unfavourable environment have tapped PE money instead.
Of the 35 IPO companies that have listed since January 2011, about 20 are still trading at a discount to their issue prices. And, stock performance after listing has been very volatile—while a few have seen their share prices more than double, a lot of these are currently trading 80 per cent below their issue price.
