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Boom time for India's primary share
market
By Indrajit Basu
KOLKATA - Last year proved to be
particularly good for the Indian primary market.
But going by the number of initial public
offerings (IPOs) lined up for this year, 2005
could well make a history of sorts. According to
Prime Database, which claims to be the only
database dedicated to the country's primary
capital market, floats worth $14.2 billion are in
the pipeline, and the year may register offerings
of nearly $9 billion, compared to $7 billion in
2004.
"Never in the history of our markets
has an amount so large been targeted to be
raised," says Prithvi Haldea, founder of Prime
Database, adding that this year will offer plenty
of choices as well. "On the heels of a buoyant
2004, scores of large companies have announced
their plans to raise money from the capital
market. The key characteristics of a majority of
prospective issuers are one or a combination of
well-established companies or promoters,
divestments either by the government or by venture
capitalists, and follow-on offerings.
Significantly, the rally is not concentrated to
one or two industry sectors but across the board,"
says Haldea.
With issues slated to hit
markets from industries spanning oil and gas,
telecom, power, chemicals, banking, technology,
finance, infrastructure and even aviation, the
public offerings this year will undoubtedly be
widespread like never before. But more
significantly, most of them will be top-quality
offerings that could make selection difficult for
local IPO investors.
So, why is the IPO
market buzzing in the country? And more
importantly, given two bitter IPO scams in the
past - one in the mid 1980s and the other in the
mid 1990s, both of which drove the secondary
markets into pits for years - how is it that the
country's primary capital market still dares to
mobilize such huge funds?
The 1995 stock
market crash, in particular, which took almost
four years to recover, was caused by as many as
1,444 IPOs mopping up $4.2 billion (at 1995-96
rupee-dollar exchange rate) in less than 12
months, and it still rankles. Much of that IPO
boom was due to a combination of an immature
market environment and scant regulations which
allowed fly-by-night operators to dupe
unsuspecting investors.
The biggest boost
for the current primary market buoyancy comes from
the changes that stock market regulator Securities
and Exchange Board of India (SEBI) has made over
the past few years. Be it the tightening of IPO
rules for ensuring better quality primary issues,
or formulation of book-building norms for more
realistic IPO bids and better price discovery
process, or steps to ensure less volatility in
post-IPO listings, SEBI has initiated significant
regulatory changes that have made transparency in
the country's markets comparable with any
developed market in the world. "Thanks to SEBI,
the country's capital markets are perhaps better
regulated now than even the US," says Dhirendra
Kumar, managing director of mutual funds tracking
firm Value Research.
However, it is also
true that SEBI's efforts to boost the IPO market
were aided significantly by the secondary markets,
which have been experiencing an unprecedented bull
run over the past two years. According to a study
by the Financial Express, investors who had
subscribed to the slew of IPOs last year are
currently sitting on almost 50% gain caused by a
booming market and "are thus yearning for more
quality IPOs".
Experts add that the IPO
and stock market crashes of the yesteryear have
made Indian investors cleverer. They now see
"longer-term IPO investing to be more attractive
than the speculative secondary market investing",
says Mathew Easow, a stock market analyst.
According to the country's leading
financial paper, The Economic Times, "The most
interesting twist lies in the army of new
investors who have stormed the markets." Unlike
the stock boom in the mid-1990s, which was largely
fueled by old sellers keen to book profits,
however little, the current boom has been
engineered by young investors. They are willing to
bet big, stay longer and have a better knowledge
and long-term outlook of the markets. And to top
it up, India's economic fundamentals are far
stronger than ever before, a growing economy
constantly fueling demand for funds. Which also
explains why companies across the board are
charting out capital expenditure plans to finance
expansions as well.
Clearly, the biggest
beneficiaries of the IPO boom have been the
investors as well as India Inc. But this sustained
boom is also helping the government in pushing
forward its much-needed divestments. For instance,
this year's pipeline includes offerings of at
least 14 public sector units (PSUs), larger than
the number of PSU divestments last year. "And we
thought that the United Progress Alliance
government's divestments plans were stymied by
pressures from leftist allies," quips Haldea.
Now that the floodgates have opened, some
argue that India may be getting swamped. Although
there is no sign of IPO fatigue just yet,
"domestic and foreign investors have already
started to sort and sift", says Ved Prakash
Chaturvedi, chief executive officer of Tata Mutual
Fund. But G N Bajpai, who, before retiring as the
chairman of SEBI recently unveiled yet another
slew of measures to make IPOs more
"investor-friendly", is confident that the IPO
market will boom this year as well. "There is a
very strong global interest in Indian stocks. I
see no reason why that interest should disappear.
It is naive to think that people will just buy
stocks from the secondary markets," he said.
Last year, foreign institutional investors
(FIIs) pumped close to $9 billion into the
country's equities. This year, FII investments are
estimated to exceed $10 billion. Moreover, over
the past few weeks, India has unshackled local
financial institutions considerably so that they
can increase their exposure in domestic equities.
For instance, for the first time ever, the
government allowed local and privately managed
pension funds to invest 5% of their corpus in
local blue chip companies and 10% in equity-linked
mutual funds. The Reserve Bank of India, the
country's central bank, also allowed privately
owned banks to raise their exposure in the stock
markets from 5% of outstanding advances at the end
of the previous financial year to 10%.
But
the icing on the cake came from the 2005 budget
announced on Monday. Its sweeping tax changes and
increased spending in infrastructure was an
instant hit with foreign and local investors who
took the country's benchmark index - the BSE
Sensex - to an all-time high within a few hours of
the budget presentation. The budget has set a
long-term bull note for the stock market, say
experts, that could see record FII inflows this
year. Analysts say India could see as much as $10
billion from FIIs this year, while another $7
billion could flow in from pension funds and
banks, and about $15 billion from local financial
institutions in the short term. Is it a surprise
that so many people are looking for initial
offerings?
Indrajit Basu is a
Kolkata-based equity-analyst-turned-journalist
with more than 12 years of experience in
business/finance and technology journalism.
Besides writing for Asia Times Online, he also
writes for US-based publications, as well as IT
companies.
(Copyright 2005 Asia Times
Online Ltd. All rights reserved. Please contact us
for information on sales, syndication and republishing.) |
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