Secondary share sales continued to dominate the initial public offering (IPO) market. For a third year in a row, the share of secondaries was more than 80 per cent in the total IPO proceeds for the year 2019-20. In fact, the secondary pie has grown every year since 2014-15 from 41 per cent to 88 per cent for the just concluded financial year.
High secondary sale isn’t a bad thing. It provides exits to private equity investors, freeing up capital to invest in newer companies. It also helps promoters liquidate some of their holdings, thus incentivising them to list. However, the lopsided nature of the IPO market, with only secondary share-sale dominating, is a sign of worry, say experts, as this results only in change of ownership of the equity. More importantly, it signals that the equity markets are being used less and less for expansion activity and setting up of new manufacturing units.
Market players say fewer companies are entering the market from capital intensive sectors.
“In the last few years, the large issuances were done by insurance and finance players who were well-capitalised and did not necessarily need large primary capital. The primary-secondary mix in an IPO is a function of the funding requirements of the company and whether the existing investors want to monetise. Public market investors would want the investee companies to be well-capitalised. If you raise primary requirements far in excess of company needs, it will depress the return on equity,"" said Nipun Goel, head of investment banking, IIFL Securities.
Experts point out that the Indian markets have turned averse towards companies that require loads of capital to sustain the business. Thus companies from the real estate, infrastructure, power and large-scale manufacturing have barely been able to tap the equity capital markets in the past many years.
"This trend underlines the nature of companies markets appreciates. A decade ago, we had infra companies getting listed which were asset-rich and needed funds. The way things are looking, there is no investment happening in the economy. Hence, this trend is likely to continue until the cycle turns," said Pranjal Srivastava, independent capital markets professional.
Experts say to a certain extent private equity investors are doing the job IPOs used to do 10-15 years ago. However, there is a downside to this. “PE have been investing more and more in new-age companies that don’t require huge amount of capital and have high return on equity. This rules out many companies are considered to be critical to support the core of the economy such as roads and other big infra projects. Eventually, these companies come to the IPO market,” said an investment banker asking not to be named.
Experts said for the markets to fall in love again with infra and manufacturing companies, they will have to improve their financial track record first.
While the IPO pipeline for next financial year looks healthy, the fresh issue component may continue to be lower. Most of the companies that have filed for IPOs, continue to have high share of secondary sales.
“We will see a more primary capital being raised when the capex cycle and primary investments start to turn positive,'' said Ajay Saraf, executive director, ICICI Securities.