How many of us remember the era before 1990 and those of us who do, which one of us would want to travel back in time and stay there? None of us, I guess. We had only one TV channel Doordharshan, single screen theatres, waiting period to get a telephone or gas connection, Gazebo pizza and campa cola; not to forget no mobiles and Rs 90 per minute for an overseas call.
"No power on earth can stop an idea whose time has come" said the then Finance Minister, Manmohan Singh, quoting Victor Hugo while presenting the Union Budget on 24 July 1991. And with these words started the long and painful process of economic liberalisation in India. The liberalisation aimed at ending the licence-permit raj by decreasing government
intervention in the business, thereby pushing economic growth through reforms. The policy opened up the country to global economy. It discouraged public sector monopoly and paved the way for competition in the market giving birth to "Capital Markets".
Capital Markets, in any economy, plays an important role in promoting and sustaining the overall growth of that economy. It is an imperative channel to mobilize funds required by corporates and simultaneously provide an effective source of investment for investors looking for opportunities to earn other sources of income. It also plays a crucial role in obilizing savings for investment in productive assets, with a view to enhance a country's long-term growth prospects.
Capital Markets encompass the means that drives an economy, whether it be by way of debt or equity or whether they be from the domestic or international source. A country that restricts its Capital Markets is not only less attractive for investors (be it foreign or domestic) but also imposes a major hurdle on economic growth and paralyses the entire growth of the nation. Capital Markets not only helps a company and country prosper, but also helps deployment of funds with a good rate of return to the investors.
Inital Public Offerings (IPOs) in the recent times
Initial Public Offerings or IPOs, a part of Capital Markets, has witnessed a significant rise in the last two years. An IPO marks the start of a company's publicly traded life and has many benefits, such as access to capital to fund growth, enhancement of company profile, superior efficiency of business, liquidity, improvement in stock value and in turn shareholder's wealth creation abilities.
Companies around the world continue to ready themselves to go public. Whether a company is owned by its founders, a family business, a conglomerate, government, private equity or venture capital, it is important to build confidence and gain investors' trust. This can best be achieved by being IPO ready in all areas.
However, going public is not for every company. The pitfalls are numerous and the stakes are high. Lack of adequate preparation and poor market timing can jeopardize an IPO. Getting IPO readiness right means implementing change throughout the business organisation and the corporate culture. Once they are listed, companies are subject to increased requirements as regards filing, transparency and compliance, as well as scrutiny by investors and analysts, and overall accountability for delivering on promises.
Companies are going public now that are riskier than they used to be in the past. They are exhibiting lower levels of profitability and often negative profitability when they go public and that was much less common in past decades. Much of their value resides in future growth prospects rather than past realisations of success, so the characteristics of the firms that are going to public markets and the willingness of shareholders in the public markets to fund those types of companies have really changed over the decades.
So what are the signs to watch out for when you try to spot the IPO with a higher failure risk?
Among the factors to look for, following are a few:
1. Whether or not the company has selected a high prestige underwriter and accounting firm, as these do not want to be associated with low quality offerings;
2. At a time of 'hot' stock markets, there may be a higher risk of failure as listing requirements may have been lowered to meet excess demand from investors;
3. Non-tech firms with high selling, general, and admin costs would be more likely to fail;
4. While companies with high gross margins which can charge premium prices are relatively at lower risk, as are companies with relatively high sales volumes at the time they go public.
5. If a firm goes public with a low offering price, that's an indication of a higher failure risk company, and if a company is more mature when it goes public that's an indication of a lower failure risk company because they have the history behind them and knowledge of operations. If they are heavily leveraged financially speaking, they are much higher risk, more likely to fail.
Nevertheless, the benefit of an IPO certainly outweigh the pitfalls and companies are lining up to go public. In addition to the IPO readiness, the economy also provides its own thrust to these companies to go public, such as relaxing and revising norms, positive policy reforms, digitalization, improved fiscal conditions, inflation rate, growth in exports, and increased FDI inflows.
What is in store for IPOs in the second half of 2017?
A packed schedule awaits the IPO market in 2017 and investors may be spoilt for choice. The IPO market, which shone all through 2016, saw a mega start to calendar 2017 as 13 IPOs worth Rs 6,500 crore have been filed with Sebi to hit the market, while others with total issue size of Rs 4,700 crore have already filed draft papers with the market regulator. All of these are likely to leave investors spoilt for choice. The last calendar year saw a strong revival in retail investor interest in the primary market, while most of the issues rewarded them with handsome listing gains. The second half of 2017 awaits the NSE IPO, followed by IPOs of government-owned companies such as IRCTC, IRFC and IRCON, etc.
With positive macroeconomic factors, continuing regulatory and tax reforms and a robust investor and business sentiment, 2017 promises to be a healthy IPO year. India's re-emergence as a strong, well governed economy gives further impetus to investors' interest.
Sebi, under the guidance of its new chairman Ajay Tyagi, has proposed a number of reforms to boost overall capital markets, such as relaxing lock-in norms for private equity investors, granting promoter rights to private equity investors, improving corporate governance norms, more particularly specifying the roles and responsibilities of independent directors in listed entities.
In the past, Sebi has pushed for reforms such as reducing IPO funds monitoring and expanding the definition of Qualified Institutional Buyers or QIBs to include systematically important NBFCs. Since QIBs are one of the key participants in the IPO market, the revised norms would incentivize NBFCs to apply for a larger share of IPO allotment. The shifting of systematically important NBFCs to QIB category will expand the scope for more retail investor participation in the IPOs.
The second half of 2017 may see some major IPOs hitting the capital markets to fund business expansion and working capital requirements of corporate houses. Few IPOs that are expected to hit the markets in 2017 are Vodafone India, Go Air, SBI Life Insurance, Cent Bank Home Finance (CBHFL), Hinduja Leyland Finance, Nakshatra World, Cochin Shipyard, GVR Infra Projects, Matrimony.com, VLCC Healthcare, Hinduja Leyland Finance and KPR Agrochem.
The Indian aam aadmi is rushing into stocks, spurring a rally and risks in IPOs. The rally is partly the result of a drive by Prime Minister Narendra Modi's government to wean people off property and gold and channel savings into stocks through mutual funds. The gains have led to soaring valuations, particularly, in the telecom sector, which some analysts believe are unsustainable and could lead to volatile price swings.
Since May 2014, when Modi came to power, retail investors ploughed a record $31 billion into Indian equities through mutual funds, more than the estimated $21 billion by foreign investors over the same period.
In our enormous world of IPOs, we must also give credit to the government for the initiatives and reforms taken by it to augment SME IPOs. Due to the encouragement to these IPOs, SME IPO is witnessing participation from a wider class of investors and the trend is expected to continue. In addition to retail investors, even institutional investors have shown interest in SME IPOs and with the current euphoria, these companies will soon migrate to the main board and join the unicorns of the BSE and NSE.
(The writer is Senior Partner, Rajani Associates)
Updated Date: Aug 03, 2017 17:25 PM