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Initial Public Optimism

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After 18 months of lull, investment banks and commission broker-distributors are hoping to hear their cash counters ring as the primary market shows signs of a revival. They are expecting the current financial year to be driven by government companies' disinvestment-related public issues and existing large listed companies' Qualified Institutional Placement (QIP) issues.

Piggybacking on a rising secondary market, the primary market that comprises of public issues — Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs), and qualified institutional placements (QIP) — has seen 21 equity issues worth Rs 17,717 crore in the first seven months of 2009. It could overtake the figure for the whole of 2008 when 46 primary market equity issuances, totalling Rs 20,514 crore, had taken place.

The contours are, however, changing. A bulk of new equity issuances this year (82 per cent in terms of value) have been through the QIP route partly due to desperate issues from cash-strapped companies such as Unitech and Indiabulls Real Estate. Of this year's six public issues, just two — Adani Power's Rs 2,488-crore issue and Mahindra Holidays's Rs 278-crore issue — made up 86 per cent.

But the week of 7-12 August is seeing the first big disinvestment happening with NHPC's Rs 5,000-6,000 crore offer hitting the primary market. With this, the government stake will come down from 100 per cent to 86.4 per cent. As per data collated by Prime Database, 15 companies have got Securities and Exchange Board of India's (Sebi) approval to come out with a public issue and their aggregate estimated issue size is Rs 5,071 crore. Of these, Oil India, another disinvestment public issue, will take up Rs 2,500 crore. The next large-size expected public issues are of Pipavav Shipyard (Rs 700 crore), Godrej Properties (Rs 600 crore) and C. Mahendra Exports (Rs 300 crore).

Click to View Enlarged ImageRetail investors will not have much to choose from except for getting a higher allotment percentage in the government companies' public issues. "We are seeing only a few large issuances and in a few sectors in the primary market for public issues," says Amit Rathi, managing director of Anand Rathi Financial Services, which is a lead manager in two forthcoming public issues with an aggregate float size of Rs 425 crore.

Big-ticket disinvestments sucking out liquidity from the stockmarket do not seem to be a concern for investment banks and companies wanting to hit the primary market for the first time. "Most potential issuers do not mind waiting for another 6-9 months to see if they can get better valuations," says Rathi.

But Sebi's expected directive for listed companies to ensure a minimum of 25 per cent shareholding is in the hands of non-promoters could bring about public issues or QIPs that will compete with new issues. According to a 4 August report by CNI Research, a Mumbai-based research company, there are about 150 companies where promoters will have to bring down their shareholding to 75 per cent. The CNI report states that at current market values, the market cap held by promoters in excess of 75 per cent is Rs 1,43,580 crore. A large part, Rs 1,18,561 crore, is from 30 government-owned firms where the government holds 75-95 per cent of equity stake.

The primary market contours, in terms of public versus private issues, are also changing fast. QIPs, allowed from 2005, have dominated the primary market this year, and were also a significant contributor in 2007 (see ‘Raising The Cap'). In all probability, the dominance of QIPs would continue. But that does not mean much for the average retail investor

(This story was published in Businessworld Issue Dated 17-08-2009)