Pre-IPO placements back in vogue

The recovering IPO market is set to breathe life into pre-IPO placements, which were virtually dead for the past one-and-a-half years. Sources said a number of companies slated to hit markets soon were scouting for strategic investors to benchmark their public issues.

Pre-IPO placements, that is, allotment of a certain portion of an IPO to strategic investors just before the offer opens, were a favourite with companies that went for IPOs in 2007. Such placements give confidence to retail investors and act as a valuation benchmark.

Adani Power recently allotted 9.14 million shares at Rs 81.42 to 3i Power and Investments, a steep discount of 23 per cent from the upper limit of the IPO price band of Rs 90-100.

Sources said others such as Godrej Properties, Jaiprakash Power Ventures and Sterlite Power were also looking for strategic investors before their IPOs. Reliance Life is also said to be scouting for strategic investors.

Experts said the primary market was on the verge of recovery, with two large issues lined up. Mahindra Holidays’ issue, which came soon after the secondary market shot up, received a good response. The stock was listed at 5 per cent premium to the issue price. Adani Power’s public issue is open, while the mega issue of public sector undertaking NHPC is opening in August.

“Companies will look at pre-IPO placements once there are clear signs of the revival of IPO market. While there are early signs, a lot will depend on the success of NHPC and Oil India public issues. In case of good issues, pre-IPO placements are a great way to get the company’s shares at a discount. A lot of private equity investors who have remained on the sidelines during the recent market rally will look at investing,” said an investment banker with a large foreign bank who did not wish to be named.

However, there’s view that the recently-introduced concept of anchor investor may discourage players, as there is a lesser lock-in period for anchor investors. Pre-IPO placements come with a lock-in of one year, whereas anchor investors have to stay invested for a minimum of only a month.

“With so much uncertainty and volatility in the market, investors have become wary of lock-ins. The concept of anchor investor opened an attractive window for QIBs (qualified institutional buyers). There will be a number of investors who will want to come through this route rather than the pre-IPO placement,” said Jagannadham Thunuguntla, CEO, SMC Capitals.

However, experts say there is no confirmed allotment under the anchor investor scheme. Under the Securities and Exchange Board of India norms, only 30 per cent of the QIB portion can be offered to anchor investors. There is confirmed allotment in pre-IPO deals.

“Pre-IPO investment will remain favourable from the private equity perspective, where the motive is not just quick profits but also adding substantial value to the company”, said Mahesh Chhabria, partner, 3i Private Equity India.