The mobilastion by way of initial public offers (IPO) in the first half of this financial year may have hit a nine-year high, but a closer look at the data suggests that the trend did not signal a revival in capital formation and corporate investment in the broader economy. Of the Rs 16,980 crore raised through public issues in the six-month period ended September 30, 2016, only 23 per cent accounted for fresh capital raised by companies for future expansion. The remaining 77 per cent were accounted for by the OFS (offer for sale) process — the proceeds went to equity shareholders who sold their shares in these issues.
Unlike in the last IPO boom in 2007-08, when money was raised through public issues for investment in greenfield or brownfield projects and expansion of businesses, the bulk of the increase in capital market activity this time was utilised by private equity investors and other investors to make an exit from their investments made 5-6 years ago. In the case of IPOs in 2007-08, more than 93 per cent of the Rs 41,323 crore raised through 85 public issues went directly to the companies as they were raised through issuance of fresh capital. Only 6.5 per cent of the aggregate amount raised during that year was offer for sale and went to sellers.
According to IPO data sourced from Prime Database, in the period between April and September 2016, offer for sale by sellers accounted for an aggregate of Rs 13,127 crore or 77 per cent of the total money raised by 15 companies through public issues. The amount raised through fresh capital stood at Rs 3,797 crore. In an OFS, the proceeds from the issue goes to sellers such as the government, promoters, venture funds and other investors.
In fact, some of the largest issues during this period did not see any fresh capital raised and the entire component of the IPO was OFS. This included the Rs 6,056-crore issue of ICICI Prudential Life Insurance, Rs 1,236 crore of L&T Infotech Ltd, Rs 1,038 crore of Mahanagar Gas Ltd and Rs 894 crore of L&T Technology Services Ltd.
“Capital formation is not happening and it is mostly the PE investors making an exit from companies on completion of their investment horizon,” said the head of a leading mutual fund company. The head of a leading merchant banking and broking firm said that while a large number of private equity firms invested in Indian companies in 2010-11, they are looking to make an exit on completion of their investment horizon.
Prithvi Haldea, founder chairman of Prime Database, says that the shift from fresh capital to OFS is the result of a combination of factors, including exit by PEs in line with the strengthening of the markets. “It is also reflective of fact that the market is not willing to give money to new projects of new companies about which they don’t know much. In case of OFS where a PE is making an exit, investors know that the company has a history and proper due diligence has been done on it,” said Haldea.
Interestingly, investors lapped up most of the issues that came over the last six months. Most of the issues this year got subscribed multiple times and 11 out of the 15 are trading above their issue price (as on Friday), thereby generating return for the investor.
Even as analysts and experts say that the IPO mobilisation this year does not reflect capital formation in the economy, the merchant banking and broking firm chief pointed out that exit for PEs is very important, too, as it allows them to make fresh investment in new companies and upcoming businesses.
“This kind of OFS should be seen as healthy postponement of fresh capital. Also, PEs support small businesses when they are in need of capital and exit for them is important, too,” he said. The surge in public issues and mobilisation of money was in line with a sharp revival in equity markets over the last seven months. The benchmark Sensex at the Bombay Stock Exchange moved up by over 21 per cent between March and September 2016.