The global macroeconomic indicators do not paint a very encouraging picture of the immediate future. Russia is still at war with Ukraine, several developed economies are grappling with recession, and the Israel-Hamas conflict means the world now has a new war to deal with. The gloomy outlook for the world’s economic future has not, it seems, dampened the excitement for initial public offerings (IPO).
As many as 28 companies are aiming to raise Rs 38,000 crore in the second half of fiscal 2023, while another 41 are awaiting market regulator Securities and Exchange Board of India’s (SEBI) nod to launch IPOs worth Rs 44,000 crore, according to Prime Database. Deven Choksey, managing director of KRChoksey Holdings Pvt. Ltd told The Core that finding investors isn’t a challenge as the “market has a lot of money”. Choksey said, “There is a market cap of nearly 1 trillion dollars for the public shareholders. So, I think there are certainly investors to subscribe to the newer IPOs. And good businesses won’t have any problems in attracting investors.”
A curious category among companies aiming for IPOs are banking, financial services and Insurance (BFSI), 12 of whom are planning to go for IPOs this year while two small finance banks have already launched their IPOs in July and August respectively.
The banking and finance space's bull run has motivated nearly 12 BFSI companies to capitalise on the momentum. Factors driving the trend include reducing dependency on private investors, providing exit routes for venture capital, and achieving better market capitalisation. However, recent IPO challenges faced by fintech major PayTM and public sector life insurance company Life Insurance Corporation of India (LIC) show that the IPO route isn't always a recipe for success.
Bull Run For BFSIs
A boom in the market and the sudden surge in the stock prices of the listed banking and financial companies has given others in the sector the confidence to go public.
Be it PSU banks like Punjab National Bank, Bank of Baroda and State Bank of India or small finance banks like Suyodyay, the share prices have gone up by more than 65% on an average in one year, as per the data on National Stock Exchange (NSE).
Chokkalingam G, founder of Equinomics Research told The Core, “After many years, the BFSI segment has been reradiated in the secondary market. Many PSU banks that were trading almost at a half of their trade value a year ago, many of them are now trading at 1.5 times their book value. So there is a tremendous bull run in the banking and finance space. BFSI companies now want to capitalise on this by rushing to the market at an appropriate time.”
Less Reliance On Private Investors
Another significant factor prompting BFSI companies to go public is the desire to reduce their dependence on the private investors. While IPOs are typically seen as a less favoured exit option for private equity-backed companies in comparison to mergers or strategic sales, the IPO market is still considered a forerunner for the exit route.
Pranav Haldea, managing director of PRIME Database Group said, “A lot of these companies have had venture capital and private equity investments in the past few years. IPO will provide an exit route for such investors. If a company is listed, there are open disclosures, there is more transparency and one can do a follow on capital raising also with much ease.”
Analysts believe that the companies irrespective of the number of private investors they have, always aim to go public eventually. “For any company, be it for the BFSI sector or other sector, it is not possible to go public immediately after they launch their brand. So, at the beginning, they have to have private investors on board. But once the company has established itself, it always aims for an exit route for private investors by getting listed and getting a more democratic set-up for the business,” said Chokkalingam.
Another potential drawback of having only private investments that the experts highlighted was that the founders may have to give up control over their company in exchange for the capital they need and need to cater to the interest of the investors. This option may be lucrative for the initial few years, when they need the financial security, but in the long run, it might adversely affect their business.
Reduced FDI Inflows
Amidst gloomy economic forecasts and market turbulence, BFSI companies are also reconsidering their long-term goals.
Falling foreign direct investment (FDI) is among the reasons for increasing worries. Government data released in August revealed a 34% drop in FDI equity inflows to $10.9 billion in the June quarter compared to the previous year. The BFSI sector, which previously attracted a substantial share of FDI, may face reduced investments due to the declining inflow.
“The repo rate has gone up in the US and European countries. So investors are also investing more in foreign bonds as they would give better returns,” said a senior banker from a PSU bank, requesting anonymity.
Analysts also pointed out that the market had witnessed how global investors chose to migrate to a safe haven like the US after the Russia-Ukraine War broke out in 2022. The Israel-Hamas war situation will likely add to these fears prompting Indian companies to reduce their dependence on foreign investors and generate wealth from the domestic market.
Challenges That Remain
Be it One 97 Communications, the parent company of fintech major Paytm or LIC, IPOs of finance companies have failed to yield success in the recent past.
Paytm opened its IPO on November 8, 2021 and closed on November 10, 2021. From November end the share price of the company continued to fall. While the company was trading at a price more than Rs 1,700 per share till November, it went below Rs 550 per share by the end of March 2022. In fact, fintech major Paytm has lost more than 75% of its market value since listing.
Similarly the listing of India's largest IPO, LIC seemed jinxed as the stock debuted at an 8% discount and has never seen that IPO price since then. Within a year of going public,LIC share prices plunged around 35% from the listing price and 40% from the upper band of the IPO price. The shares get listed on Bombay Stock Exchange and the NSE on May 17, 2022. The price band was set between Rs 902 to Rs 949 per share and the price fell to below Rs 550 within a year.
Analysts stressed on the fact that the stock prices for these companies didn’t behave well due to their wrong valuation.
Choksey said, “Public sector companies probably need to engage more themselves with the investors to take them more into the confidence. That is where many public sector companies are lagging behind as compared to the private sector companies, but this should not be equated with any other BFSI companies who are hitting the market today.”
Some analysts believe that major players like Paytm often try to manipulate the market, which is not possible for the PSU companies like LIC or other small companies, and somehow all the companies fail to get a level playing field.
Kishor Ostwal, SEBI registered analyst and CMD, CNI RESEARCH told The Core “Paytm and Zomato didn’t work because they were at an exorbitant price. There is a policy discrepancy and haphazardness in the IPO. This is a controlled market and few merchant bankers and anchored investors have cornered the market.”
He further explained that if the issue succeeds then the retail investors get more allotment that eventually led to unexpected behaviour of the stock. For example, the issue opened well for PayTM and everybody got allotment and the stock crashed.
Bankers and analysts said that another problem with government IPOs was that most were undersubscribed. Be it the Indian Railway Catering and Tourism Corporation or LIC, whenever the government has diluted through FPO or IPO, share prices have decreased. Often chastened by the dismal market conditions created due to the dominance of a few players, some companies wait in the queue for long to go public and eventually open IPOs at lower valuation.
However, analysts assured that even if the market was volatile and dominated by few players, if a company could assure growth and profitability, then the investors sentiment did come in its favour.
Avinnash Gorakksakar, a SEBI-registered analyst said, “If the company is good and the business is sustainable, and the company offers at a good valuation which is reasonable and attractive, then even if the market sentiment is bad, the merchant banker, investors will take the risk of hitting the market. But if it is an average business with aggressive pricing, then it becomes very difficult.”
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