Revised Sebi rules to boost action in primary market
Given how bullish foreign investors seem to be on the India story and how the capital market regulator has rewritten rules to rejuvenate the primary market, equity fund-raising by companies might touch new highs this year. On a rough reckoning, more than R1.25 lakh crore worth of paper is waiting on the sidelines in the form of fresh issuances and divestments. If corporates do manage to pick up such a large amount, it would beat the record R1.04 lakh crore raised in FY 2008 — the year the Sensex came close to touching 21,000 in January 2008. The next big round of fund-raising happened in FY10, when Indian companies mopped up R94,848 crore.
The merchant banking fraternity is confident the flows will be more than adequate to absorb the deluge of equity. Edelweiss Capital chairman and CEO Rashesh Shah estimates inflows of funds into the stock markets of as much as R2 lakh crore. “If LIC invests close to R50,000-60,000 crore and FIIs bring in some $15 billion or around R1 lakh crore, that alone is R1.5 lakh crore,” Shah points out. V Jayasankar, senior ED and head of equity capital markets, Kotak Investment Banking, is confident Indian markets will see foreign flows of $30 billion this year, of which half could be absorbed by the primary markets. “In the last two years, India received inflows of about $20-25 billion each year even when the economic environment was challenging. We feel it is healthy if some flows go into the primary space,” he says pointing out that too much money chasing a limited number of stocks could lead to an asset bubble.
Action in the primary market is likely to pick up now that the Securities and Exchange Board of India (Sebi) has stipulated a 25% minimum public shareholding norm for state-owned firms; close to three dozen PSUs would need to sell shares which, at current market prices, could fetch the government approximately R60,000 crore.
Sebi has also allowed an additional 100 companies to use the offer for sale (OFS) route to sell shares, a move that may see more shares sales since the OFS mechanism is considered transparent and facilitates price discovery. Moreover, now that companies with a post issue capitalisation of less than R4,000 crore need to dilute 25%, or R400 crore, whichever is smaller, several of these might be encouraged to do an initial public offering (IPO). So far this year companies have managed to pick up close to R8,000 crore and going by corporate announcements and board meeting resolutions an estimated R60,000-70,000 crore worth of issuances — by way of institutional placement — is in the pipeline.
Also on the cards are the residuary stake sales in Hindustan Zinc (HZL) and Balco, worth an estimated Rs 20,000 crore.
Investment bankers feel IPOs may take about six to eight months to hit the market given the documentation needed to be completed. “Several firms have initiated the process for IPOs and work will begin now. So clearly, you will see a lag of six to eight months between the market recovery and the IPOs,” Kotak’s Jayasankar explains.
Firms like Yes Bank, Idea Cellular, and KSK Energy have been among the 15 early birds to take advantage of bullish investor sentiments and raise equity capital in last three months. About twenty other companies, including HDFC Bank (which plans to raise Rs 10,000 crore of equity capital), IDBI Bank (Rs 4,000 crore), Larsen & Toubro (Rs 3,600 crore), and Indian Overseas Bank (Rs 3,600 crore), have already received board approval and have sought shareholders’ nod to proceed with fund raising.
“The 25% upswing in benchmark indices since early February this year has encouraged many companies to scout for equity capital to retire debt as well as expand capacities... Investors are also willing to participate given that sentiment will remain strong,” said Girish Nadkarni, MD of Motilal Oswal Investment Banking. Nadkarni believes that companies could raise about $10-12 billion excluding government divestitures and that fund raising will be dominated by infrastructure companies and banks, especially public sector banks. “Indian corporates have been encouraged by the positive sentiment. A new stable government at the Centre and expectations of higher economic growth have increased investors’ appetite,” said Ajay Saraf, ED and head corporate finance and institutional equities, ICICI Securities.
While some firms like Jaiprakash Power (Rs 3,000 crore), Future Retail (Rs 2,000 crore) and Indian Hotels (Rs 1,000 crore) will use most of the proceeds to pare debt, firms like L&T and Idea Cellular that generate strong cash flows too are raising equity to buy spectrum.
Benchmark indices have given positive returns to the tune of 25% since February this year, helping Indian markets the best performers globally, on expectations of Modi’s victory in the national elections. The Bharatiya Janata Party (BJP)-led NDA government won 334 out of 543 seats in the recently concluded general elections, official data shows. More importantly, many domestic and foreign brokerages have increased their targets and foresee a multi-year bull run in Indian equities.