Chapter: 6 Indian scenario of IPO market

Transcription

1 Chapter: 6 Indian scenario of IPO market 6.1 Milieu The Indian capital market today presents a vastly different picture from what it was a decade ago. A radical restructuring of the economic and financial system of industrial deregulation, liberalization of policies relating to FDI, public enterprise reforms, reforms of taxation system etc. have contributed immensely for the development of economy and can be directly traced to the introduction of new economic policy undertaken by the government during The Indian economy has expanded at a rapid rate of growth during the last decades and the corporate sector has emerged as the biggest contributor in this growth story. The decade has witnessed large inflow of foreign investments and has also seen the emergence of Indian multinationals on the global corporate scenario. The performances of the corporate sector and its growth in the last decade have also provided buoyancy in the stock market. In fact, some of the Indian corporates are now commanding in terms of market capitalizations which can be compared as amongst the top companies in global standard. However, as indicated in various studies, the low participation of the common people in India and the low market penetration from this segment of population spreading across vast diverse locations are continued to be a cause of concern. It has been ascertained that the total number of retail investors is less than 2 percent of the total Indian population. Today s investors are having a wide array of choice to park their surplus in different portfolios. But the irony is that most of the instruments have some limitations and as such, the investors, especially the small investors are much more vulnerable since they are found either partially or totally ignorant about the modalities and the intricacies of the equity investment and are guided by some superficial knowledge regarding investment. In these segments we have elaborated on the ground realities of Indian capital market, its brief history, and the overall performance of the Indian primary market. The influx of FIIs and their participation in the Indian equity market are also explored in this chapter. We have also enquired into the contributions Page 150

2 of the other various participants in the Indian primary market to provide a more comprehensive look of the market. 6.2 Indian IPO market activity Against this backdrop, the role of capital market and its behaviour demand special vigilance. It is observed that during the post liberalization era, a large number of corporate houses have followed the route of IPO. It is regarded as one of the important sources of funds with long or indefinite maturity for the company. It is evident that IPO has a special place in Indian capital market. This is not the case with most other countries, rather, it is the fascination of individual investors for IPOs that has brought about many booms and bursts. This was however, not the scenario even 20 years ago. The traditional investment instruments were hugely popular because they were found safe, gave decent returns and were easy to invest in. Today, investors have realised that traditional investment instruments are more about wealth preservation than wealth creation, when their need are fulfilled by investment options like mutual fund, SIP, IPO, ETF, etc. The following figure gives us a vivid description of new issue capital raised during the pre-reform era (i.e., period prior to 1991) which includes the debenture and preference shares of listed companies excluding the capital raised by public sector undertakings. Period Table 6.1 New Issue Capital in India during the Pre-reform Era Equity shares Debentures Preference Shares Total (Rs. in Crore) , ,357 Source: Compiled from various report of RBI The reform initiatives taken in the realm of capital market has accentuated the importance of Indian capital market with the implementation of new economic policy. With the repeal of Capital Issues (Control) Act 1947 and subsequent abolition of the Office of the Controller of Capital Issues (CCI), a new regulatory body, named SEBI, was born with statutory powers conferred in the year 1992 to regulate and reform the Page 151

3 capital market in India. As per the data provided by SEBI on IPO issue in India the following information has been revealed. Table 6.2 IPO Activity in India in recent Times Year No. of issues Amount (Rs. in Crore) Source: SEBI Total , From this figure some important features are found about the IPO activity in India. It is seen that the IPO activity in India like the global trend have been moving in cycles. The number of IPOs in was only 18 and the total amount of money raised through this new issue was only Rs.404 crore. However, there has been a surge in IPO activity during with the increase in both the number of IPO and the total amount raised. In India, the year to saw an active market for IPOs. Though the number of IPOs was small, the amounts being raised were increasing during this time period. The best year in terms of IPO activity seems to be the year as both the number of deals and money raised has reached a new height. It is to be noted that this single year has also remained the best year of IPO Page 152

4 related activity throughout the globe. This signifies an important fact about the IPO performance in India with the assertion that the Indian capital market is more and more integrated with the global IPO market and that any major changes in the world capital market can also be felt in the Indian market. Since 2007, the world major economies, including US and European Union have been experiencing recession and this has adversely impacted the IPO activity in the international markets, including India. The year 2008 has seen a significant dip in both the number of IPO deals and quantum of capital raised. The recent years, however, have seen some revival in the IPO activities but it has yet to recover completely. 6.3 Some important features of Indian IPO market An IPO usually occurs when a company, which is presently not listed at any stock exchange, makes either a fresh issue of shares or makes an offer for sale of its existing shares or both for the first time to the public through a public offering for its security. The shares are made available to the investors at the price determined by the promoters of the company in consultation with the investment bankers. The successful completion of the IPO process leads to the listing in the secondary market and subsequently trading begins at the designated stock exchange. In India, there are many stock exchanges are operating, but among them, most of us have concerned with the two major stock exchanges, namely BSE and NSE. An important development that took place in the Indian capital market and fuelled the growth of IPO market was the establishment of National Stock Exchange (NSE), a state of the art exchange supported by sophisticated technology in order to ensure improving trading practices and inspecting any unethical dealing. This is further complemented by a strong legal framework to strengthen the governance structure, the hallmark of the Indian capital market in the last two decades. Though BSE has a long history and it is the first officially recognized exchange in India but with the establishment of NSE, the role of BSE and its business have impacted considerably. Now, NSE is bigger compared to BSE in terms of volume of transactions, market capitalisation and liquidity whereas in terms of the number of listed companies the BSE remains the undisputed leader. A company can be listed its stock simultaneously in both the BSE and NSE or in either of these two exchanges. Page 153

5 The emergence of SEBI as the supreme regulator paved the way for a transparent and vibrant capital market which is committed to its business of managing the market efficiently and not subject to the influence of any exogenous factors. It also helps the Indian capital market to emerge as a strong economic force to reckon with. This is further evidenced by growth in the new issue market in the last decade backed by ensuring compliance of best market practices of enhanced disclosure and increased investor protection. Another important institutional mechanism undertaken by the SEBI was the introduction of bookbuilding method of pricing IPO. Currently, a firm, going public, has the option to choose either the bookbuilding mechanism or the fixed price mechanism at the time of IPO. Institutional investors are usually averse to participate in fixed price public issue due to uncertainty of attachment and lack of opportunity cost. On the other hand, they like to participate largely in book built transactions because of its transparency. Table 6.3 IPO Activity through Bookbuilding mechanisms Year Book built IPOs % of all IPOs Source: Compiled from various reports of SEBI The spirit behind the introduction of bookbuilding mechanism in India is to discover the right price for a public issue, which in turn would eliminate arbitrary issue pricing by the promoters without taking into account the prospective investors feedback. Although bookbuilding procedure first started in the year 1999, initially it was not very popular. This can be inferred from the above figure. However, it gained Page 154

6 popularity over the conventional fixed price method as from 1999 to 2008, the number of companies opting for bookbuilding mechanism of pricing have increased manifold. Some of the features of Indian IPO market, as are identified by various international agencies monitoring Indian economy, (such as Ernst & Yong, Deutshe Bank etc.) can now be explained with this backdrop in mind. a) Buoyant Indian IPO markets were usually propelled by foreign capital inflows, robust corporate profits and a burgeoning stock market. b) The sudden surge in capital inflows in the Indian IPO market is caused by foreign institutional investors who are eager to invest in high growth emerging markets as because the investment scenario in developed economies seems to be not encouraging. c) The Indian IPO markets, riding on the growth trajectory till 2007, have been greatly influenced by the maturity and depth of the institutional mechanism along with stringent regulatory standards. The supremacy of SEBI as a guardian of capital market ensures this strict regulatory regime and thereby helps in restoring the confidence of the investors especially the common retail investors. That is why, the IPO market thrives on the inflow of FIIs money. d) The other reason, often cited for the meteoric rise in IPO activity in India in the last decade, is largely attributed to strong fundamental and economic pragmatism practiced by the respective institutions coupled with steady economic growth of Indian economy, which is only second to China in the world during the last decade. e) Another important trend is observed by Ernst & Young in their report, is the localization trend followed in the country. Here companies have a preference to list in the Indian bourses rather than overseas market of developed countries. f) In India, the composition of new issue market has been largely dominated by certain sectors, such as the infrastructure, real estate and energy sector and the information technology sector as well. Page 155

7 6.4 Foreign Institutional Investors (FIIs) in Indian Capital Market: An Overview According to Section 2(f) of the SEBI (FII) Regulations 1995, the term Foreign Institutional Investor (FII) is defined by SEBI as under,. an institution established or incorporated outside India which proposes to make investment in securities. Provided that a domestic asset management company or domestic portfolio manager who manages funds raised or collected or brought from outside India for investment in India on behalf of sub-accounts, shall be deemed to be such... Entities covered by the term FII include the following foreign entities / funds. 1. Pension Funds 2. Mutual Funds 3. Investment Trusts 4. Banks 5. Insurance Companies / Reinsurance Company 6. Foreign Central Banks 7. Foreign Governmental Agencies 8. Sovereign Wealth Funds 9. International/ Multilateral organization/ agency 10. University Funds (Serving public interests) 11. Endowments (Serving public interests) 12. Foundations (Serving public interests) 13. Charitable Trusts / Charitable Societies (Serving public interests) FIIs can invest their own funds as well as they can invest on behalf of their overseas clients registered as such with SEBI. These client accounts that the FII manages are known as sub accounts. Further, the following entities proposing to invest on behalf of broad based funds, are also eligible to be registered as FIIs:- i. Asset management companies ii. iii. iv. Institutional portfolio managers Trustees Power of attorney holders. Page 156

8 The contribution of the FIIs in the Indian capital market is very prominent. These institutions generally contribute to the foreign exchange inflow in the country. Some of the other important advantages that FIIs offer are it lowers the cost of capital and access to cheap global credit which supplement the domestic savings and investments and because of the necessity of huge investments in different priority sectors to cater to the need of the future growth and sustainability. The contributions by the domestic financial institution and savings cannot match up that investment requirement and thus foreign investments becomes necessity and are important. The FIIs are also required since their presence often leads to higher asset price which ultimately benefits the investors in general. In this regard, it is to be noted that, sometimes confusion arises as to what is the difference between FDI and FII. In effect, FDI refers to international investment in which the investor has the long term commitment and interest in an enterprise or sectors in another country, by way of acquiring controlling interest. It may take the form of buying or constructing a factory in a foreign country in the form of property, plants and equipments, etc. FDI is more direct and permanent in nature than the portfolio investment (usually referred to as foreign portfolio investment, FPI) as it is more difficult to pull out or is less likely to sell off at the first sign of trouble in the resident country. According to the definition given by IMF and OECD, the acquisition of at least ten percent of the ordinary share or voting power in a public or private enterprise by non-resident investors make it eligible to be categorized as foreign direct investment (FDI). It also reflects the aim of sustaining a lasting interest by a resident entity of one economy in an enterprise which is resident in another economy. On the other hand, FPI represent the passive holdings of securities such as foreign stocks, bonds, or other financial assets. It is not required to take active participation in the management and does not represent a controlling stake in an enterprise. Unlike FDI, it is very easy to pull out the foreign portfolio investment by way of selling the securities as they are liquid. Hence FPI or FII can be much more volatile than FDI. Finally, FPI is usually directed to short term benefits of earning capital gain and dividend and easier to escape as compared to FDI. In India, the union government in its budget of has announced, In order to remove the ambiguity that prevails on what is Foreign Direct Investment (FDI) and what is Foreign Institutional Investment (FII), it is proposed to follow the Page 157

9 international practice and lay down a broad principle that, where an investor has a stake of 10 percent or less in a company, it will be treated as FII and, where an investor has a stake of more than 10 percent, it will be treated as FDI. A committee will be constituted to examine the application of the principle and to work out the details expeditiously. This somehow clears the ambiguity of the debated issue of FII and FDI investment which is critical for the sustenance and growth of Indian capital market. The foreign investments in India are expected to be categorized in four distinct heads. Amongst them, the investment in Indian companies either listed or otherwise is important since this investment is not taken through the route of stock exchange. The other form of investment which is through the route of stock exchange is usually known as FII or Qualified Foreign Investors (QFI), is gaining prominence in the last decades, also known as Foreign Portfolio Investment (FPI). It is fundamentally different from the FDI as it is highly volatile in nature and this form of investment is not permanent. The other important forms of foreign investment include investment by way of ADR and GDR issues by an Indian entity. Finally, the investments made by NRIs and PIOs also contribute to the growth of foreign investments in India. The following figure will exhibit the net FII investment made in India during the last decade. One feature about this FII movement of investment which is clearly visible in the Indian capital market is that the FII are volatile. FIIs have been allowed to invest in the domestic financial market since 1992 and since then their activity has impacted the performance of the stock markets of India significantly in the last two decades. During this period, India has emerged as one of the important destinations for global investment. This has been reflected in the number of FIIs registered with SEBI. The number of SEBI registered FIIs in India has also increased during the last two decades. The liberalization process of the Indian economy has been a contributing factor for the increase in financial flows. From the figure below, it is observed that during period of 1999 to 2002 the net FII investments were very low. And collating information with the other facts we see that the IPO activity during this period was also very low with few offerings. This period is also referred to as cold issue period. However, from 2003 to 2007 Indian capital market witnessed a period of high activity but the FII inflow was not in Page 158

10 commensurate with the market trend during the same period. In recent years, there have been increases in volume and value of FII investments and institutions. Figure 6.1 Source: SEBI 6.5 Contribution of Individual Retail shareholders and FIIs in some select IPO companies: Case study Retail Individual Investors (RIIs) means an investor who applies or bids for securities for a value of not more than Rs.100, 000. Historically, the Indians have the higher propensity to save compared to other countries in the world. Despite this favourable fact, the households in India are not too keen when it comes to investing in equity shares. It is generally believed that retail investors in India systematically lose out to other categories of investors because they sell the winning stocks too quickly and hold on to the loosing stocks too long. In the following table, we try to present a picture of the extent of shareholding of some of the IPOs that went public during 2003 to Though the data are not chosen using sampling procedure, it is indicative in nature. Our purpose is to look into the position of retail individual investor and the contribution of foreign institutional Page 159

11 investors in the scheme of overall shareholding pattern post-issue. We have observed that the individual shareholding is at abysmally low compared to the total shareholding. The figure also shows that there are two categories of retail investors: a) individual shareholders holding share capital upto Rs. 1 lakh and b) individual shareholders holding nominal share capital in excess of Rs. 1 lakh. We have studied only ten companies IPO and found that none of the companies shareholding of the retail investors exceeds ten percent which is much below the prescribed limit. Though we cannot claim this to be a general trend but it is a matter of great concern for our policy makers. Similarly when studying the contribution made by the foreign institutional investors in Indian IPO it is observed that there position is significantly higher in comparison to large number of retail investors. The SEBI has to waken up to the fact that it has fallen short in its key role to develop the capital market and increase the base of investors. In India, the retail participation in the stock market has declined from 20 million in the 1990s to 12 million in 1999, and just around 8 million in 2009, this despite the fact that the sensex has grown by 20 times during this period. As a percentage of the total population, the retail investors participation is just 1.3 %, whereas in the US and China it is 27.7% and 10.5%. Table 6.4 Shareholding pattern in some select Indian IPOs as on 31 st December, 2008 Name of the company Number of FII (percentage of total shares) Individual shareholders holding nominal share capital Rs. lakh Percentage of total shares Individual shareholders holding nominal share capital in >Rs.1lakh Percentage of total shares Biocon 45 (6.16) Indiainfoline 46 (27.46) Gitanjali Gems 36 (20.53) Emami Ltd. 4 (0.8) J K Cement 39 (13.28) Maruti 261 (15.65) NDTV 17 (23.79) Renuka Sugar 44 (20.73) TCS 16 (5.6) 740, Triveni 12 (14.53) Source: Compiled from shareholding data of NSE Page 160