Staid Capital Markets

Primary capital market activity in the form of public offerings and rights offerings is virtually down to a trickle. While that is not at all surprising considering the somber market conditions, some numbers have been recently reported in the Business Standard as follows:

Fund mobilisation through initial public offerings (IPOs) touched a six-year low in 2008-09 due to the weakness in the secondary market and the global financial turmoil. India Inc mobilised only Rs 2,034 crore, down by over 96 per cent from the Rs 52,219 crore raised in 2007-08.

Globally too, fund-raising through IPOs was restricted to $49.46 billion, down 83 per cent from the $292.21 billion raised in 2007-08. Of this, emerging markets raised $23.69 billion in FY09 as against $107.83 billion a year earlier. In the us, the figure was dismal for 2008-09 at $6.47 billion when compared with $68.30 billion raised via IPOs in 2007-08.

In India, just 21 IPOs hit the market in 2008-09, compared to 90 offers in 2007-08. There was only one offering of over Rs 750 crore by KSK Energy Ventures at Rs 831 crore, compared with 11 such offers in 2007-08.

Only two of the 21 IPOs (less than 10 per cent) were oversubscribed by more than 10 times.

The situation in India is not different from that in other parts of the world. For example, the Deal Professor notes some statistics:

Not surprisingly, 2009 is a disaster and so far. According to Thomson Reuters data, only $969 million has been raised in initial public offerings year to date. This week’s offering by the Chinese game maker, which raised about $120 million, was only the third I.P.O. of the year.

According to Dealogic, the future is not looking bright either: There are only 12 I.P.O.s in Dealogic’s 180-day backlog of offerings that have registered with the Securities and Exchange Commission, and they are expected to raise a combined $2 billion. Of those 12 offerings, 50 percent are from companies in the technology industry. At the same time last year, there were 142 I.P.O.’s expected to raise a total of $28.7 billion.

The current I.P.O. market is clearly affected by the financial crisis. But there is a more general trend in the data above. Proceeds from initial public offerings over the last 15 years have been static, with only a slight blip during the Internet bubble.

The last paragraph above makes for interesting comparison between the U.S. and India. While the U.S. markets have been static over the last few years, the Indian markets have witnessed a boom during the same period (with some drop in a few years in between). This period marks the series of reforms initiated by SEBI, including the introduction of the bookbuilding process for price discovery, dematerialization of securities (and the consequent availability of scripless trading) and the use of “shelf prospectus”, just to name a few. Hence, if one were to chart a graph of capital market activity in India in the last decade, it would likely look quite choppy.

The obvious question is whether the regulator (i.e. SEBI) can initiate any measure to prop up the markets. To that extent, SEBI has indeed made progress over the last year in simplifying the process for IPOs as well as rights issue (much of which has also been discussed on this Blog), but it seems clear that in tight market conditions and the consequent lack of liquidity in the markets no amount of nudging on the regulatory or policy-making front will help. However, when the markets do begin showing signs of activity, these reform measures already undertaken would stand in good stead.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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