| IPO Devolvement - Low Retail Confidence |
During the first six months of 2000-01, as compared with the same period of last year, there were 84 public issues of equity capital during April-September 2000-01 as against just 17 during the corresponding period last year. By way of amount too, the increase was significant, rising to Rs.1,812 crore in the current year from Rs.902 crore last year. (The first half of 1998-99 had seen 14 equity issues for Rs.332 crore). According to PRIME, at a combined level (debt and equity), the current half witnessed 86 public issues compared to only 21 in the previous year. The fall in the amount was on account of financial institutions not raising debt at the same level as they did last year.
Like the previous year, the equity offerings in the current year, according to PRIME, were mainly from the ICE (information, communication and entertainment) sector, 77 out of the total 84 issues. In terms of amount also, out of the Rs.1,812 crore, the ICE sector dominated with Rs.1,572 crore or 87 per cent of the total. While the IT sector raised Rs.505 crore through 66 issues, the media sector collected Rs.282 crore through 9 offerings and the telecom sector Rs.785 crore through 2 issues.
What is, however, disturbing was the flooding of the market by small issues, as many as 54 of the 77 ICE issues were of less than Rs.5 crore, with 43 of them being less than even Rs.3 crore each. A notable development of the period, according to PRIME, was the taking off, of the book building route with as many as nine companies, namely Aksh Optifibre, Creative Eye, Hughes Telecom, Mascot Systems, MRO-Tek, Mukta Arts, Pritish Nandy, SIP Technologies and Tips Industries using this method. However, the response to these issues was moderate with 6 of these managing to sell only at their floor price levels and 2 (Creative Eye and SIP Technologies) having to withdraw their offers due to lack of investors' support.
But that was not the case with these two issues-as mentioned earlier. Hughes Tele.com, the basic service operator in Maharashtra, was the first telecom company to hit the domestic market with an intention to raise around Rs 749 crore at a base floor price of Rs 12. Kotak Mahindra Capital Company (KMCC) and Industrial Bank of India were the lead managers to the issue.The promoters decided to pump in Rs 137 crore in to the public issue and the money was being raised to finance the Rs 3,485 crore expansion including the broad band network in Maharashtra circle.The issue had leading financial institutions including ICICI Ltd, Life Insurance Corporation of India (LIC) and Unit Trust of India (UTI) subscribing to its equity. The institutional interest came after the company along with their merchant bankers gave a detailed individual presentation to the FIs. The company wooed the US investors and has foreign institutional and mutual fund participation also. But the 10% being offered to the public got undersubscribed.
In the case Pritish Nandy Communications Ltd, also the same thing happened. The book built portion got subscribed but the 10% offered to the small investor was undersubscribed. One cannot quarrel with the credentials of PNCL if one goes by its past track record. The funds to be raised were for an expansion plan which would cost Rs.45.84 crore. Towards raising these resources the company came out with a public issue of 26,17,000 equity shares of Rs.10 each for cash at a premium of Rs.145 per share aggregating to Rs.40.56 crore. Prior to the issue there were some doubts raised by analysts as to the projected income and profits of the company in the prospectus. But like mentioned above the institutional investors were firmly behind the issue.
So what happened to deter the "small investor" in these two cases. One view is that the restriction or limit of the 1000 shares in public portion has dampened the enthusiasm of many investors. It really has made the small investor the target of the public portion. Any other investor who has confidence in the issue would not like to be restrained to this 1000 shares limit and would participate in the book building portion itself.
Another view is that the small investor has turned cagey. Having lost money in the IPO boom of last year he is scared to commit funds today. His confidence is at a all time low. Also at the premiums charged, both in the case of Hughes telecom and PNC, he was not comfortable. So he decided to withhold his investment.
Coming to the fund raising companies point of view-with this devolvement they are left with a gap between their fund requirement and actual funds raised. So what are they to do. Statutorily they have to abide by the 10% portion to be offered to the public norm. So how do they make up this mismatch in case of the devolvement.
"Well, one way is to allow the companies to retain the oversubscription of the book built portion, so as to make up the shortfall. And secondly may be it is time for the government to realize that there is really no need for this 10% to be offered to the public. May be there is really no room for the small investor in the IPO market. He should concentrate on the secondary market as he is ill equipped to judge and analyze the IPO's" says Mr.Prithvi Haldea of Prime database, the leading database on the primary market in the country. With these kind of changes being suggested, and investor confidence showing no signs of picking up in the near future, may be the time has come to change the rules of the IPO game and let the big boys play. Ofcourse this would mean far reaching changes in the statutory and legal acts governing the same, but perhaps these are signs of the markets maturing.
Aru Srivastava
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