Indian equity markets have been languishing since Reliance Power’s IPO in February with the market effectively being shut since then. Thomson Reuters data shows that total year-to-date Indian primary equity issuance has been just US$14.2bn, versus US$26.3bn in 2007.
Against this backdrop the Securities Exchange Board of India (Sebi) has been unrolling a slew of market-friendly measures to help revive the market. Crucially, it has revised the floor price formula for the pricing of qualified institutional placements (QIP) and preferential allotments to institutional investors. Preferential allotments to promoters will still be subject to existing guidelines.
The floor price is now based on the two-week average stock price preceding a board meeting to open the QIP. In the past, it was based on the higher of the two-week or six-month average. Given that markets were falling, the six-month average took over – making it impossible to price deals since they would have to be offered at a premium to current prices. ECM bankers have welcomed these moves.
“The change to floor price formula is going to be helpful and it’s a positive step by the regulators … But it depends on whether the market is on a downward trend or an upward trend at the time of taking a decision to launch QIP. Since the changes have come, the market has been on a downward trend and the two-week average is higher than the current market price. Once the market starts moving upwards, the two-week average would be lower than the market price, allowing deals to be done,” said Ravi Kapoor, managing director and head of capital markets origination at Citi in India
Other issuance such as ADRs and GDRs come under the purview of the ministry of Finance so the final outcome on pricing such issues remains to be seen. The Ministry had issued a consultative paper, proposing to make the floor price the higher of two-month average or two-week average.
In addition to changes on the regulatory front, there is some hope that disinvestments by the government could lead to a stock market revival – as has been the case in the past.
The two major IPOs that could hit the market within the next two to three months are Oil India and National Hydroelectric Power’s US$400m–$500m float. Also in the works is Special Undertaking of UTI’s selldown of Axis Bank, which is valued at about US$1.2bn.
However, these deals and others in the pipeline need stability to launch. "We want to see more stability in the market and if the index can be maintained around the 15,000 levels. We are also waiting for concerns on oil prices, interest rate and inflation to subside. There is a healthy pipeline including some new and interesting products which is just waiting to hit the market,” said Atul Mehra, co-CEO of JM Financial.
While IPO and QIP issuance has hit a virtual standstill, rights issues have proven popular instrument for companies that really need to raise funds. And for the first time in many years an underwritten rights issue is expected to hit India’s capital markets.
Hindalco Industries’ rights issue, which is expected to open mid-September, will likely be the first rights issue to be underwritten in many years. The company will raise US$1.2bn in a three-for-seven rights issue. It has mandated Citi, Deutsche Bank, Merrill Lynch, RBS and SBI Caps to handle the deal. Proceeds will be used to repay a bridge loan that matures in November.
A second rights issue by Tata Motors to raise about US$1bn is expected to hit the market later this year – but it is not clear if it will be underwritten at this stage.
Although underwriting of equity deals is common around the world, in India most equity deals are done on a best-efforts basis. Rights issues have become popular in rocky markets because it is an optimal way for promoters to raise money without diluting their holding in the company.
Sebi has also proposed a shorter timeline for a rights issue to remain open, down to a minimum of 15 days from a minimum of 30 days previously – which will also help underwriters manage the risk.
“In these volatile markets, we could see more underwriting of deals, given that in some instances, issuers need to be sure of raising the capital, specifically when the amounts are needed to rollover bridges or to meet non deferrable capital expenditure…If you need capital, as of a certain date, in volatile market environment, then underwriting is an option to explore,” said Kapoor. “But the trend could fade, if QIPs come back.”