The initial public offering (IPO) market is expected to remain moribund even as share sales in large listed firms rake in billions of dollars. Investment bankers say the IPO market freeze could extend till the end of this year despite several concessions given by market regulator Securities and Exchange Board of India (Sebi). On the other hand, there is healthy appetite for shares in listed companies with leadership position in their respective sectors, they add.
Last month, Sebi decided to extend the validity by six-month for IPOs whose validity expire between March 1 and September 30. The move is set to benefit about a dozen companies, who were cumulatively looking to raise about Rs 15,000 crore. Some of these companies include Shriram Properties, Bajaj Energy, Angel Broking, and Indian Renewable Energy Development Agency.
Investment bankers said while the extension is a welcome move, many companies have already decided to shelve their IPO plans due to deterioration of the market conditions.
“IPO market generally tracks secondary markets. Till the secondary markets come back strongly, we will see slowdown in IPO fund raising. But if the secondary markets move positively in the next couple of months, some of the companies can potentially benefit on account of the Sebi relaxation on IPO validity,” said Jibi Jacob, head—equity capital markets, Edelweiss Financial Services.
The benchmark indices came off as much as 40 per cent from their peak in January before recouping bulk of the losses. Currently, the benchmark Sensex is down 26 per cent on a year to date basis.
“Everything depends on how long this lockdown continues. Even if the businesses resume by the end of May, it will still be at least a few months before issuers consider coming to the market,” said, Pranav Haldea, MD, Prime database.
Market players said extension of the timeline is only one aspect, however, those wanting to do an IPO now have bigger challenges.
“The valuation for the entire market has come down. So companies and promoters who had filed their documents last year, will have to lower their expectations. As a result, many could want to wait then to sell at depressed valuations,” said an investment banker .
Bankers said this year could be a washout year for the IPO markets. So far in 2020, only one company-SBI Cards and Payment Services—has been able to launch its IPO. The company’s stock price currently quotes at over 30 per cent below the issue price, weighing on sentiment of regular IPO investors.
Bankers say listed companies with good track record will, however, be able to tap the markets with rights, qualified institutional placements and other fund raising avenue.
“Investors will be sceptical about investing in a company where public information is limited. One has to see more fundraising in the secondary market space to gauge investor interest. If secondary issues continue to be well-received, there is a fair chance that IPO market too could pick up,” said Pranjal Srivastava, independent capital markets professional.
Experts one needs to assess the impact of the lockdown on companies that are waiting in the wings to launch their IPOs.
“There has been a material change in business and financial of many companies due to the lockdown. There are doubts if some of the companies will be able to bounce back to their pre-covid levels. It is high doubtful if such companies will have any takers for the IPO,” said the banker quoted earlier.
Beside extending the validity, Sebi has also allowed companies to change the fresh issue component of IPOs up to 50 per cent without having to re-file the draft offer prospectus.
” I don’t think companies will do an IPO just because of the concessions. As the majority of IPOs are offer for sales, there will be a bit of wait and watch for the climate to improve,” said Jacob.
Some believe there will be takers at discounted valuations.
“In any bearish market, there will be some issuers who would be willing to accept a lower valuation. Either because they need the money or they want to give an exit to investors. And there will be some promoters who feel the valuations are low and would prefer to wait,” said Haldea.