Pre-IPO placement gains speed

The primary market, which is humming with activity, is witnessing an increasing trend of pre-IPO equity placement by companies which sell off part of the stake to private equity players or hedge funds just before hitting the market.

The primary market, which is humming with activity, is witnessing an increasing trend of pre-IPO equity placement by companies which sell off part of the stake to private equity players or hedge funds just before hitting the market.

The trend has seen a number of high-profile players including Suzlon Energy, Reliance, GMR Industries and Mahindra & Mahindra Financial Services going in for this mode of capital raising. A slew of other companies, including Reliance Infocomm, Kingfisher Airlines and GoAir are also thinking about opting for the same route.

‘‘The number of companies going in for pre-IPO equity placement has been growing. One of the reasons for this phenomenon could be that with India’s growth story attracting investors from far and wide, there is competition in betting on the winning players. Through a pre-IPO equity placement, the investor is assured of confirmed allotments. However, this is not the case when he invests through an IPO,’’ an investment banker said.

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Merchant bankers also say that with market regulator Securities and Exchange Board of India (Sebi) tightening the norms on discretionary allotments, institutional investors who were favoured by these allotments are finding pre-IPO equity placement as an alternate mode of putting in their money, getting a good price and sizeable stake in the company.

‘‘Generally, the price at which these investors pick up stake in the company is significantly lower than what the prospective IPO price. The only hitch for these investors is that there is a lock-in period involved but then these investors are in the game for the long run,’’ ICICI Securities managing director and CEO S. Mukherji said.

Historically, private equity players have always favoured new companies while going in for a pre-IPO equity placement. However, with the upturn in the Indian economy, players are not hesitant in putting their money in companies like Reliance or GMR.

‘‘I think that such pre-IPO equity placements not only help the company financially but also give retail investors confidence to invest in that company,’’ Mukherji added. Industry trackers also believe that such placements also help companies in better understanding of the value of their shares in the market.

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‘‘I think that there are safeguards available in pre-IPO equity placement. The only danger is if there is an internal deal between the issuer and the buyer for setting the pre-IPO deal price as a benchmark for the IPO price. I think that such an aggressive pricing would harm the retail investor,’’ Prime Database CEO Prithvi Haldea said.

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