Explained: Just two offerings in six months, what is ailing the IPO market?

Why have IPOs slowed to a crawl?

A look into the past throws some answers to the current trend. In the 10-month period between September 2008 and June 2009 when the world was undergoing a financial crisis and there was high volatility in the markets, only three companies entered the market to raise funds through their IPO. In fact, one of the three closed for subscription before the Lehman collapse on September 15, 2008.

Experts say that when markets are volatile and investor sentiments are low, IPOs tend to fade away. This is on account of several factors. While investors are more comfortable with proven, well known companies in times of stress and are unlikely to venture in new, lesser known companies, it is also not wise on the part of companies to come up with their issue in such times as their ability to price the IPO at a premium goes down significantly because of the market conditions.

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Primary market activity is only a reflection of the secondary market and if the secondary market is weak then it is unlikely that the market will see companies venturing with their IPOs. Some feel the key challenge for any company trying to issue an IPO is its ability to meet investors physically and tell their story. “The sheer challenge of getting things done is one of the reasons behind fewer IPOs. Completing filings with Sebi, holding roadshows, and meeting investors has become more difficult,” said Naveen Kulkarni, chief investment officer at Axis Securities.

He added that the situation may be worse for MSMEs with investors, in general, favouring large-cap stocks which are perceived as safer investments. “Liquidity is not an issue but it is investor trust in a new company that is the biggest concern in times of volatility. There has been a large appetite from investors for large caps over the last few months, though things have improved since June,” he said.

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What will spur a recovery in IPOs?

As primary markets follow the secondary market, ideally things will improve only when there is stability in the secondary market and concerns around Covid-19 are behind. Many feel that once a medical solution to Covid-19 is achieved and the economy opens up completely, the market may see return of IPOs as companies will enter the market to raise funds for future growth and expansion plans.

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“If the current liquidity remains and there is a plateauing of Covid-19 and further opening up of the economy, you might see more high-quality issues particularly from the sectors which are beneficiaries of the health crisis, including pharmaceuticals, biotechnology, and specialty chemicals,” said Vikas Khattar, head, equity capital markets at Ambit Capital. He further added that IPOs would be difficult to come by from sectors that have been negatively impacted by the pandemic.

In what ways can companies raise funds from the market in these times ?

While new companies looking to get listed will have to wait for market conditions to improve, experts say large companies may look at using rights issues or follow up offerings or qualified institutional placements to raise capital from the equity markets.

A man walks past the Bombay Stock Exchange in Mumbai. (Express Photo: Nirmal Harindran)

Many feel that listed companies may prefer right’s issue over follow up public offerings as rights issue is a more democratic approach to raising funds and it allows the existing shareholders the right to invest first in the company. Further, there is no requirement of shareholders’ meeting. A board approval from the board of directors is sufficient and adequate. Thus the turnaround time for this capital raise is short which is much suited for the present situation unlike other forms of capital raising which require shareholders’ approval and take some time to fructify.

Further, in case of a fast track rights issue, draft offer document is not required to be filed with SEBI. As such, companies do not have to wait for public comments for 21 days, neither is there a provision for SEBI to vet the document and issue observation letter in case of fast track issue. Thus this is a more time efficient way of raising capital.

In July itself, three companies — Shriram Transport Finance, Aditya Birla Fashion and Retail and PVR Ltd — have filed their final letters of offer for rights issue. Earlier, Reliance Industries had raised a record Rs 53,124 crore through its Rights issue in May-June 2020.