Since economic liberalization in 1991 and following SEBI’s efforts in spearheading the primary capital markets, IPO activity of Indian companies has witnessed significant growth. A recent study that compares global IPO activity with the US domestic markets provides key comparative data that help assess India’s performance. In a paper titled “The U.S. left behind: The rise of IPO activity around the world”, Craig Dodge, Andrew Karolyi and Rene M. Stultz find, from a “comprehensive sample of 29,361 IPOs from 89 countries constituting almost $2.6 trillion (constant 2007 U.S. dollars) of capital raised over 1990 to 2007”, that there has been a steady growth of IPOs around the world in comparison with a decline in IPO activity in the U.S.
A few key findings from the paper are extracted below:
Some of the decrease in the importance of U.S. IPO activity compared to worldwide IPO activity is due to lower IPO activity by U.S. firms, but much of it is explained by the considerable growth of IPOs in other countries that occurs throughout the sample period. To a large extent, this growth is fueled by the emergence of global IPOs, which include both IPOs in which some of the shares are sold outside the home country of the firm going public, and foreign IPOs in which of all the shares are sold outside the home country. … U.S. firms have never been active participants in the global IPO marketplace. This newer global IPO phenomenon is an important tool linked to the globalization of capital markets.
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This paper documents dramatic changes in the IPO landscape around the world. U.S. IPOs and IPOs from other common law countries have become less important, whether one looks at counts or at proceeds. In fact, U.S. IPO activity has generally not kept pace with the economic importance of the U.S.
Global IPOs have played a critical role in increasing the importance of IPOs by non-U.S. firms. Though firms in countries with weaker institutions are less likely to go public with a domestic IPO, they are more likely to go public in a global IPO. That is, global IPOs enable firms to overcome poor institutions in their country of origin. Perhaps as a result, the laws and institutions of a firm’s country of origin have become significantly less important in affecting the rate and pace of IPO activity in a country.
There are important global drivers in domestic IPO activity. Higher levels of worldwide IPO activity outside a country are strongly and positively related to the level of IPO activity in that country. However, IPO activity is also related to domestic market conditions. Firms are more likely to choose to go public at home when valuations are higher in the home market.
The data analyzed in the paper provides some interesting insights into IPOs by Indian companies. In terms of number of IPOs, India stands in 2nd place (behind the U.S.) with 4,867 IPOs during the period of study, of which 4,777 are domestic IPOs and 90 are global IPOs. This signifies not only a high number of IPOs in absolute terms, but also demonstrates the overwhelming contribution made by domestic IPOs where securities are listed on Indian stock exchanges. Global IPOs (which presumably, in the Indian context, refer to ADR/GDR offerings listed on foreign exchanges) pale in number. The data indicate the strong attraction of domestic markets in luring Indian companies to list rather than to look overseas. This may also be explained by the fact that even when Indian companies embark on domestic IPOs and list on Indian exchanges, a substantial portion of the capital nevertheless comes from foreign investors. In that sense, foreign investors find comfort in investing in domestic Indian IPOs without requiring issuer companies to activity scout for overseas listings.
The analysis of proceeds raised in IPOs, however, presents a different picture. On that count, India stands in 18th place with total a capital-raising of $32.2 billion, of which $17.8 billion is from domestic IPOs and $14.4 billion from global IPOs. The leading countries on this parameter are the U.S. ($647.7 billion) followed by China $254.6 billion). At first blush, this may suggest lack of depth in the Indian capital markets in the overall scheme of things. But, the correlation between the number of IPOs and the proceeds raised is also an indicator of one important factor. That is, there appear to be a large number of Indian IPOs with relatively small amounts of capital raised. This could be read to mean that a larger proportion of India’s companies have access to the public capital markets even while raising small amounts of capital. This makes the capital markets regime beneficial not just for large companies, but also for small and medium sized companies.
Of course, several other factors have a role to play in assessing the contribution of IPO markets as the paper suggests, including the quality of the country’s institutions such as corporate governance norms and the availability of sophisticated intermediaries and advisors such as investment bankers, lawyers and accountants.