Secondary share sales continue to dominate IPOs with 80% of proceeds

While such a sale provides exits to PE investors and encourages promoters to list, it only results in change of equity ownership and doesn't really create new manufacturing or service capacity

Secondary share sales continue to dominate the initial public offering (IPO) market, with the share of such sales in the total IPO proceeds coming in at above 80 per cent for the third straight financial year (FY20).

In fact, the pie of secondary share sales has grown every year since FY15, from 41 per cent to 88 per cent for the just concluded financial year.

A high share of secondary sales isn’t a negative as it provides exits to private equity (PE) investors, thus freeing up capital to be invested in newer companies. It also helps promoters liquidate some of their holdings, thus incentivising them to list.

However, the lopsided nature of the IPO market — with only secondary share sales dominating — is a sign of worry, say experts. This is because it results only in change of ownership of the equity. More importantly, it signals that the equity markets are being used less and less for expansion and setting up of new manufacturing units.

Market players say fewer entities are entering the market from capital-intensive sectors.

“Over the last few years, large issuances were being done by insurance and finance players, who were well-capitalised and did not necessarily need large primary capital. The primary-secondary mix in an IPO is a function of funding requirements of the company and whether existing investors want to monetise. Public market investors would want investee firms to be well-capitalised. If you raise primary requirements far in excess of company needs, it will depress the return on equity (RoE),” said Nipun Goel, head (investment banking), IIFL Securities.

 

 

Experts say Indian markets have turned averse towards entities that require loads of capital to sustain the business. Therefore, firms from the real estate, infrastructure, power, and large-scale manufacturing sectors have barely been able to tap the equity capital markets since many years now.

“This trend underlines the nature of companies that the markets appreciate. A decade back, we had infra firms, which were asset-rich and in need of funds, getting listed. The way things are looking, there is no investment happening in the economy. Hence, this trend is likely to continue until the cycle turns,” said Pranjal Srivastava, an independent capital markets professional.

Experts say that to a certain extent, PE investors are doing the job that IPOs used to do 10-15 years ago. However, there is a downside to this.

“PE has been investing more and more in new-age firms that don’t require huge amount of capital and have high return on equity (RoE). This rules out the companies considered to be critical to support the core of the economy, such as roads and other big infra projects. Eventually, these companies come to the IPO market,” said an i-banker.
 

Experts said that for infra and manufacturing companies to find favour in the markets, they will first have to improve their financial track record.

While the IPO pipeline for the next financial year looks healthy, the ‘fresh issue’ component may continue lagging. Most of the firms that have filed for IPOs continue to have a high share of secondary sales.

“We will see more primary capital being raised when the capex cycle and primary investments start turning positive,” said Ajay Saraf, executive director of ICICI Securities.