Companies have again started looking at initial public offerings (IPOs), but it will take some time before the issues are actually launched, says Sanjay Sharma, managing director, equity capital markets, India corporate and investment banking, Deutsche Bank. In an interview with Ashish Rukhaiyar, Sharma says the near future will be dominated by OFS to comply with regulatory requirements and that safety net is not a good idea for equity instruments. Excerpts
Can we say that the IPO market is showing signs of recovery?
The markets are better than last year, but, I think, the companies are still not in a state of readiness to raise funds from the primary market. Last year, we saw secondary market blocks dominate, which does not require much of a lead time.
In the first half of this year, QIPs, blocks and OFS will dominate. As regards IPOs, corporates have started discussing IPO plans and, we believe, they will hit the market in the second half of the calendar year.
Even if you look at QIPs, the companies with enabling resolutions are far and few. Another important aspect is that investors have become very selective. So, when we say that the market is back, it is back only for quality companies and well-priced ones.
Are companies now sure of going ahead with their IPO plans?
If you look at companies going ahead with their capex plans, the trend is limited to a few sectors and it is not across the board. It will take some lead time. Also, it is not that large greenfield projects are coming up. So, we will see smaller IPOs, but it is still time before we see a company raising more than $1 billion in an IPO.
Any downside risk?
As far as primary markets are concerned, the risk is if secondary markets become volatile. For secondary markets, the government is taking the right steps and we are seeing good FII flows, but the events to look out for are the Budget and, also, when the inflows to domestic institutions come back.
Are foreign investors open to investing across sectors?
The interest level we are seeing is across sectors and not dependent on whether it is public sector or private sector company. There might be some sectors that may be going through a bad cycle or may have some regulatory uncertainties. Interest levels are higher for large caps than mid caps.
Do you think all companies would be able to comply with the 75% public holding norms?
We would divide that universe into 80:20. So, the top 80% in terms of volume (20% in terms of number) will be able to comply. These are the companies that are well traded, researched and highly liquid names. The balance 80% in terms of numbers of companies and 20% in terms of value may find it difficult, not because of lack of intent, but because of small size and lack of liquidity.
What are your views on the proposed safety net mechanism for IPOs?
Personally, I am not very comfortable with the idea of a safety net. First, conceptually, safety net for an equity instrument does not work. If retail investors feel they are equipped to make an investment decision in an equity IPO, they should go ahead and invest without any expectation of safety net and if they feel they are not equipped to take the call, they should invest via experts like mutual funds. Second, it gives a false level of comfort to retail shareholders, I don’t think investors should invest in an IPO just because there is a safety net, but look at the fundamentals of the company.
