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Will 2014 be the worst year for IPO filings?

Pipeline leanest since 2004; bankers said to be cautious due to fear of rejection by Sebi

N Sundaresha Subramanian  |  New Delhi 

An investor fills an IPO form

The year 2014 appears set to go down in the record books as the worst for initial public offerings (IPOs). So far this year, only six companies have approached the market regulator with draft offer documents - the fewest in more than a decade for the first nine months of a calendar year.

Filings with the Securities and Exchange Board of India (Sebi) are a key lead indicator of the pipeline of public issues hitting the market over the next few months. While Sebi takes at least one month to clear these documents, it might take months longer in the event of clarifications. After clearance, while a company can hit the market within a few weeks, it has up to a year to do so. If a flurry of new initial public offerings (IPOs) were to hit the market in the last quarter of 2014, as some earlier reports suggested, the documents should already have been sitting in Sebi offices. But there are hardly any.

Business Standard analysed 869 offer documents filed by issuers since 2004, when Sebi started posting these online. The previous lowest (seven filings) was seen in 2004. Since then, the first nine months (till September 17) have seen double-digit numbers every year - ranging from a low 16 in 2009 to a high 132 in 2006.

So far in 2014, four IPOs - of Wonderla Holidays, Snowman Logistics, Sharda Cropchem and Shemaroo Entertainment - have hit the national bourses. Filings for all of these, except Sharda Cropchem, were made with the market regulator in 2013. That implies, of the six filings made this year, only five - by Ortel Communications, Monte Carlo Fashions, Lavasa Corporation, Adlabs Entertainment and GMR Energy - could be expected to lead to IPOs. Besides, there might be at best a few more filings from last year translating into issues.

Apart from these, analysts hope there could be a bunch of filings before September 30. The audited financials for the period ended March 31 will be not be valid from October 1 onwards, as Sebi rules say filings cannot have audited numbers that are more than six months old.

However, data show that only in two of the previous 10 years, the filings in the last three months have been better than those clocked in the first nine. In what could be a ray of hope, these two years also happen to be election years, like the current one. In 2004, while first nine months saw seven filings, the last three saw 22 offer documents. Similarly, 2009 saw thrice as many filings towards the fag end of the year, compared with 16 till September 17.

Like in those years, emergence of a stable government has kindled the spirits in the secondary market. The BSE Sensex has gained 5,461 points or 25.8 per cent this year. The index closed at 26,631 points on Wednesday. Since May, it has increased its value by about a fifth.

Yet, in the four months since the general election results became public, only four companies have filed offer documents - excluding Sharda Cropchem and GMR Infra from those that have applied in 2014.

Experts say a revival after a long lull is usually gradual. "Companies become serious about IPOs only after seeing two-three months of stability in the secondary market. When revival begins, it is for the bravehearts to venture first," says Prime Database Chairman Prithvi Haldea, a primary market veteran.

Haldea says the market is at the beginning of its first stage of revival, where only good companies, confident about their fundamentals, bring issues at reasonable valuations. "People are not very aggressive in the beginning of the first phase," Haldea adds. Investor frenzy, greedy pricing and euphoria come much later.

Bankers say that an increased burden of due diligence and fears of rejection by Sebi have made merchant bankers spend more time in preparation of offer documents.

Sebi has tightened disclosure requirements following the 2011 scam, when several companies were found to be misusing money raised through IPOs. The regulator has also empowered itself to reject the documents it sees as inadequate. Bankers are wary of reputational loss that might come with such rejections, and are playing safe.

Filings have dwindled following the new regulations. The year 2012 saw only 27, while it dropped to 20 last year.

This is also seen as a reason for the absence of filings. According to estimates by Prime Database, 50-60 companies are said to have hired merchant bankers and could be in various stages of preparation. However, not many of these might hit the market before 2015. Jagannadham Thunuguntla, head of research at SMC Capital, says it takes up to six months for companies to go from appointment of directors to getting Sebi's clearance and being market ready. "Once they get Sebi's clearance, they will have one year during which they can time it," he adds.

While issuers and bankers are playing it safe, investors have been bidding aggressively. Two recent issues, Snowman Logistics and Sharda Cropchem, have seen frenzied bidding, with record subscription levels. This had made many believe that a slew of IPOs might be in the offing.

While institutional investors have access to other instruments like qualified institutional placement of shares and preferential allotments, which are popular among corporations raising capital, public issues are the primary source of fresh paper for small investors.

Thunuguntla also says that there is not much to worry, as the revival in the IPO market is only 15 days old. "Technically, revival in the IPO market picked up only after the offer of Snowman Logistics. You will see more action in the coming days," he said.

First Published: Thu, September 18 2014. 00:58 IST
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