The 2006-07 financial year was expected to be a year of unprecedented activity in the Indian equity capital markets following the extraordinary stock market gains of the preceding three years.
The US$6 billion raised through public equity offerings during the year was the highest in the country’s history, but many a rueful banker will admit that the amount could have been much higher.
Several trends affected the level of activity in the Indian equity capital markets during the year, and are likely to influence the nature and volume of deals over the next 12 months.
Focus on quality
A number of equity offerings were postponed or cancelled after the rapid and substantial stock market declines in the summer of 2006 and early 2007. Investor appetite for new offerings revived fairly quickly, but the focus was on high quality issuers with credible long-term prospects.
Companies with successful operating histories such as Tech Mahindra, Firstsource Solutions, Mindtree Consulting and Idea Cellular attracted high demand and were several times oversubscribed by retail and institutional investors.
Two IPOs topped the US$1 billion mark. Reliance Petroleum and Cairn India were remarkable in that they were not sold on the basis of historical results but rather on the reputation of their promoters, management and investors’ confidence in their ability to execute ambitious long-term business plans.
The promise of real estate
Real estate was expected to be the big IPO story of 2006-07, due in large part to the government’s willingness to allow foreign institutional investment in real estate IPOs.
A large number of real estate companies started IPO plans and filed draft prospectuses with the Securities and Exchange Board of India (SEBI).
Very few have come to market to date, delayed by valuation concerns and extended scrutiny by the SEBI of disclosures contained in the prospectuses.
The SEBI has urged greater transparency in disclosure, particularly of land reserves and development plans, and is in the process of formulating disclosure standards for these companies. After these standards are released and met, the SEBI may clear many of the deals that it is reviewing and the current financial year could see a number of real estate IPOs come to market.
Willingness to innovate
The last year has also seen a number of regulatory developments in the Indian equity capital markets, some of which are fairly innovative.
– QIPs: The “qualified institutions placement” (QIP) emerged for listed companies to raise equity capital from institutional investors. QIP prospectuses are required to comply with the disclosure guidelines prescribed by the SEBI but do not require SEBI review or clearance.
As a consequence, QIPs can be launched and completed more quickly than a SEBI-registered follow-on offering. They are seen as more cost-efficient than an overseas depositary receipt offering. Several Indian companies such as Mahindra Gesco, Peninsula Land and Apollo Tyres have successfully completed QIPs, which have, to some extent, contributed to the dearth of overseas depositary receipt offerings from India. However, a maximum of 49 institutions can participate in a QIP and it remains to be seen whether larger capital raisings that require a wider investor base will ensure a residual role for overseas depositary receipt offerings.
Pre-IPO placements: In a departure from its traditional requirement that an issuer’s capital structure be finalized before filing of a draft IPO prospectus, the SEBI now permits issuers to conduct private placements of shares after the filing of the draft prospectus and prior to the commencement of the public offering.
This innovation is particularly useful to issuers that want to bring in “cornerstone” investors and to establish a pricing benchmark for an IPO. Both Reliance Petroleum and Cairn India benefited from this innovation and were able to bring in Chevron and Petronas as cornerstone investors.
IPO grading: The SEBI has said that issuers must obtain a grading of their “fundamentals” linked to an IPO.
The grading has to be done by a SEBI-registered credit rating agency, which assigns a grade on a five-point scale.
The grading should give investors an indication of the relative “quality” of the IPO but the utility of this proposal is yet to be tested.
Arun Balasubramanian is a partner at Linklaters LLP. His practice is focused on India-related capital markets matters, and his recent transactions include the US$1.9 billion IPO of Cairn India, the US$700 million AIM listing of Unitech Corporate Parks and Tech Mahindra IPO. His other transactions include the IPOs of TCS, NTPC and IDFC and the ONGC and IPCL disinvestments.
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