Despite the gloom and doom one sees on the ground, the trend of companies raising funds in the primary market through Initial Public Offerings (IPOs) is set to hit a record in 2021. So far in 2021, 27 companies have raised nearly Rs 41,299 crore – which is more than what was raised by way of IPOs in each of the last three years – 2018, 2019 and 2020.
Many more firms are in the pipeline to hit the capital markets for the first time. According to Prime Database, 21 companies have received the nod from the Securities and Exchange Board of India (SEBI), the stock market regulator, to raise Rs 28,706 crore. These issues are expected to open over the next few months.
Then there are another 27 companies that have filed offer documents and are waiting for SEBI approval – to raise Rs 60,476 crore through initial public offers or follow-on public offers (FPOs), according to Prime Database. (Only Ruchi Soya, out of these 27, has filed papers for an FPO to raise Rs 4300 crore). This list of 27 companies includes One 97 Communication, the owner of Paytm, which is expected to raise Rs 16,300 crore – the highest ever fundraise by any company in an IPO. If things go according to plan, Paytm will hit the markets around Diwali.
The year 2017 was when funds raised by IPO hit a record, at Rs 67,147 crore. As the pipeline from the Prime Database indicates, 2021 is headed for a new high.
The financial year 2020-21 saw GDP growth contracting 7.3 per cent as a nationwide lockdown imposed in the last week of March 2020 to curb the spread of the virus brought economic activity to a grinding halt. So, what is keeping the IPO market buzzing amid a once in a century pandemic and after a contraction in economic growth, which was the first in four decades?
There are multiple reasons. The first being the pandemic itself. “The retail investor base has multiplied,” says Arun Kejriwal, a Mumbai-based senior analyst. “The onset of Covid-19 pandemic led to new investors being born. You are sitting at home, and one activity you can do, apart from your regular work, is to open a demat account and a trading account and start trading. Opening a demat account does now cost you much,” Kejriwal says. “There is a new breed of investors in the market. The base of investable people has gone up.”
The number of demat accounts grew by 50 per cent since the lockdown was imposed in March 2020. What is also evident is that investors’ have not lost money in the IPOs, barring a few – a reason that explains investors confidence in the primary market.
“Most of the IPOs are over-subscribed. The shares have opened at a premium. Barring one or two issues, investors have not lost their money anywhere. The returns have been there in the primary market,” Kejriwal says.
According to Pranjal Srivastava, partner-investment banking at Centrum Capital, it is not only the traditional companies coming to the primary market. “There is a good supply of very different kinds of IPOs. It is a good mix of manufacturing, speciality chemicals, e-commerce, fintech – different kinds of companies are coming with IPOs, which is attracting new investors,” Srivastava says.
The second reason for the boom in IPOs is the stock market itself – the secondary market. The BSE Sensex, which touched a low of around 25,000 in the last week of March 2020, has doubled since then. The secondary market had a rub-off effect on the primary market.
“One is the kind of positive momentum we see in the secondary market, which rubbing-off on the primary market,” Srivastava says. “If the secondary markets are doing well, then primary markets automatically start doing well,” he says.
India has been the third-largest recipient among major emerging market economies (EMEs) in terms of foreign portfolio investments till the first week of this month – after China and Brazil. According to the Reserve Bank of India data, India accounted for 2.6 per cent of the world market capitalisation in June 2021. India’s market capitalisation rose 66 per cent in one year to $ 3.02 trillion in June, outpacing the 44 per cent growth in the global market cap.
“India is also becoming an attractive destination for foreign portfolio investments (FPI) in equities in 2021,” a report prepared by RBI researchers headed by deputy governor Michael Patra observed.
“FPI equity valuations have risen in financial services, software and computer services, oil and gas, metals and mining, consumer durables, chemicals and capital goods sectors, which together account for 64 per cent of the total increase in these valuations during 2021 so far,” the report which was released mid-July said.
Will the bull run continue?
One of the reasons for the booming equity markets is the abundant liquidity available in the market. The Indian central bank has promised on several occasions in recent times to maintain the easy money policy till a durable economic recovery is in sight. Interest rates are at a multi-decade low amid slack demand for credit. Lenders are not expected to increase rates till the time loan demand comes back.
“We are seeing a lot of IPOs getting launched, and a lot of DRHPs [draft red herring prospectus] are being filed with Sebi. The pipeline is also strong,” says Pranav Haldea, managing director, Prime Database.
“What we are also seeing is strong listings. This is only going to encourage more and more companies to launch IPOs in the near future. The secondary market also continues to be buoyant. One of the pre-condition for IPOs is bullishness in the secondary market,” Haldea says while explaining why the momentum is likely to continue.
The liquidity will also stay for a while, which is expected to keep the equity markets buoyant. “There is no immediate risk as such. The risk will emerge if the liquidity tap shuts off, if the interest rates start rising – which are not visible. There is no reason why the liquidity tap will be shut,” Srivastava says.
(The writer is a Mumbai-based journalist)