Even as the equity capital raised in 2017 through the primary market hit the highest level in a decade and a half, data shows that only a small portion of this money raised has gone to the companies for growth and expansion.
Of the Rs 46,239 crore raised through IPOs in 2017 (until October 27, 2017), a record 80 per cent or Rs 37,089 crore has gone towards offer-for-sale in these public issues with just Rs 9,150 crore going to the companies in the form of fresh capital issued.
Data from Prime Database for the last 16 years shows that while IPO mobilisation has been the highest this year (previous high was Rs 37,535 crore in 2010), the share of fresh capital in the issues is at its lowest percentage — less than 20 per cent of the total issue size (the previous low being 24.5 per cent in 2003).
In fact, mobilization through offer-for-sale is at an all-time high this year both in absolute terms and in percentage terms and thus the money has mostly gone to investors offering to sell their holding in the companies, thereby making either a partial or a full exit.
Experts say that if a company raises fresh capital, it reflects the fact that it perceives a pick-up in economic activity in the near future and has plans for business expansion and growth. But that’s not the case when shares being offered during IPOs are those comprising offer for sale.
“This is not a healthy trend for the economy. This is an opportunistic activity by existing investors to sell their holding through OFS and the risk of equity is being transferred to retail investors,” said C J George MD, Geojit Financial Services.
Pranav Haldea, managing director, Prime Database, calls this as a “worrying trend” and said that companies from manufacturing or services sector are not raising fresh capital. He however, said that “with the government making investments, private investment will follow.”
“The private sector capex cycle comes with a lag. Now, a lot of government infrastructure spend is happening and I think the private investment will follow that,” said Haldea.
Some see the OFS numbers as evidence that private equity (PE) investors are cashing in. Vikas Khemani, president and CEO, Edelweiss Securities, said that the fact that PE investments made in the past have matured and investors are able to monetise their investments is a positive trend. “It will give further confidence to investors to invest,” he said.
“Lots of PE investors invested in the period between 2004 and 2008 and even in 2010 and many of those investments have matured and companies have gained in scale. There is nothing wrong with PEs making an exit. I feel that it is a good development that the investors are able to monetise and make some money as that brings more confidence in the market for further investments. The fact that we are witnessing significant foreign direct investment across several sectors indicates that fresh investments are also taking place,” said Khemani.
Haldea also said that it is important that investors are able to monetise as it keeps the entire cycle of funding and investment ecosystem functioning. “But there has to be a balance and fresh capital at 15-20 per cent of the money raised in the market is not healthy,” he said.
While partial exit by investors is something that all experts say is welcome, they raise their concerns over full exit by investors.
George, however, says that when PEs make an exit they may either reinvest or just go away and that is not the case with fresh capital raised by companies.
“In case of OFS, the investors may either come back and reinvest or decide to take the money out but when a company raises money as fresh capital in an IPO, it is certain that the money would get invested by the company for purposes related to its business as there are regulatory requirement and they are even answerable to the shareholders,” said George.
In the three-year period between 2006 and 2008 when the economy was growing at a fast pace, while the total money raised through IPOs amounted to an aggregate of Rs 70,935 crore, the amount raised as fresh capital was Rs 66,931 crore (94.3 per cent of the total issue).
However, over the last two years (2016 and 9 months of 2017) while the total amount raised has been Rs 72,733 crore, that raised in the form of fresh capital has been only Rs 18,326 crore (25.2 per cent of the total amount raised). The remaining amount has been raised as offer for sale by existing investors in the companies.