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Lack of alternative equity market instruments a challenge

The country?s primary market has almost slipped into a coma as initial public offerings and qualified institutional placements slow down to a trickle.

The country?s primary market has almost slipped into a coma as initial public offerings (IPOs) and qualified institutional placements (QIPs) slow down to a trickle. This is just the kind of situation when the Indian capital market could have benefited with the availability of a few alternative equity market instruments, says Sanjay Bajaj, managing director & head of equity capital markets, HSBC Securities and Capital Markets (India). In an interview with FE’s Ashley Coutinho, Bajaj says primary market needs some triggers in the form of policy action from the government and softening of interest rates to spur back into action.

It?s been a dull year for primary issuances. Do you see things improving?

Market participants, including corporates, are in a wait-and-watch mode. Companies will always be in need of capital and there will always be a need to deploy capital. Historically, our markets have demonstrated the ability to turnaround rather quickly.

For instance, in 2008-09 there was a lull in primary market activity for about 15 months, during which no significant deal or sizeable IPO went through. Then, suddenly, things started looking up after June 2009 and the flurry of activity continued till early this year. The year began quite well and some of the sizeable deals were the Tata Steel FPO in January, followed by the Canara Bank QIP, PFC FPO and the L&T Finance IPO. At HSBC, we had the opportunity of having led many of these transactions. There were no significant issuances in the last six months, after July 2011. Most investment bankers and corporates are waiting for that ?U-turn Moment,? the way it happened in June 2009. It could be the currency or interest rates or inflation or euro zone, or an aggressive policy action from the government?a combination of any of these factors could provide the trigger for the turnaround.

Quite a few companies that got listed this fiscal have suffered significant erosion in their share prices.

We have seen stocks of several small companies come off sharply in the past few months. The key reason for this could be the low liquidity seen in these counters. If the float size becomes small, the ability to attract sizeable investors goes down and the trading activity gets affected as a result.

However, I would really contest the notion that pricing is the issue. The pricing for IPOs is announced two days before the book opening. So you have enough indication of the demand and acceptance of the book building price range, from investors before opening the books. The fact is that nobody announces a price band in a book building mechanism till there is enough confidence coming in from the buyer?s side.

What is your advise to investors?

When the overall markets go down, stocks do tend to underperform. Invariably in these times even the good quality firms take a hit, post listing. But the investors need to take cognisance of the fact that they are not in the business of just playing the game of listing gains. In every issue that we bring to the markets, there is always pricing feedback taken from potential investors. The company and the bankers decide where the sweet spot for everyone is.

The government is set to miss its disinvestment target this year as well. What do you make of it?

I think it?s a little unfair to judge the government?s divestment track record solely by looking at an April to March timeframe. The government has had a very successful track record in the capital market. It understand all aspects of the capital market has the experience behind it and knows everything that?s possible and doable. If you are only confining yourself to the period between April and March, then it?s not just the government, even private sector corporates haven?t been able to raise resources equivalent to previous years.

What are the challenges currently faced by the merchant banking industry?

The biggest challenge right now is the state of the market and lack of alternative equity market instruments. For example, in a scenario when interest rates begin to soften and equity markets have not started peaking, there ought to be an emergence of a domestic convertible bond market along the lines of the equity-linked market overseas. Another challenge is undercutting of fees particularly on government deals. We are in a market where volumes are down 70% plus. So there is the challenge of getting the revenues back along with the deal flow.

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First published on: 14-12-2011 at 00:44 IST
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