There are some important messages from the recently released data on primary markets. Last year (2010-11) a sum of Rs.46,267 crore was raised through public equity issues. The mobilisation was roughly the same as that of the previous year. According to Prime Database, one of India's oldest and most reliable purveyors of capital market data, the mobilisation last year — incidentally the third highest ever — could have been even more but for the fact that some public sector undertakings (PSUs) deferred their planned large public offerings. One of the reasons for the postponement was the volatility in the secondary markets that had set in during the last quarter of 2010-11. Indeed, continuing volatility poses daunting challenges to primary market issuers, especially in timing the issue and price discovery. When iconic PSUs are involved, the issue price can never remain outside the pale of controversy, no matter what method is used to discover the price.
In 2010-11, a total of 57 public issues entered the market, compared to 44 the previous year. Of these, 52 were initial offerings and the remaining five follow-on offers. The average deal size was Rs.811 crore. Ten issues were for Rs.1,000 crore and above. At the other end, there were six issues of less than Rs.50 crore and none below Rs.10 crore. The important message here is that India's primary market remains tilted towards large companies. The ongoing efforts of the government and the regulator, SEBI, to encourage small and medium enterprises to seek funds from the capital market instead of depending solely on bank finance have not been successful. Dedicated exchanges for small share offerings have not taken off. The OTC exchange, which goes back to the early 1990s, was well conceptualised but it found few takers. Public issue of shares continues to be an expensive affair. The system, derived from regulatory rules as well as deeply ingrained market practices, favours the larger issuers over the small. Irrespective of the issue size, there are certain fixed costs such as advertising and publicity that the issuer has to incur. That, in many cases, raises the bar for the smaller issues. While there is absolutely no doubt that a public listing of shares confers many advantages to a corporate, the small and medium enterprises (SMEs) will have to weigh the costs involved against the advantages. Many SMEs therefore depend on outside equity support from venture capital, private equity and many categories of institutional investors.
Keywords: Capital market, public equity issues
It is correct to say that public is tilted towards big and well known companies when it comes to primary market.One of the reasons for such biasing is ongoing scandals which involves lot of small big companies. DB Reality which had shown a dramatic progress but is now facing charges of money laudering and involvement in 2G scam!. So public chooses companies to be at the safer side.
I would like to raise two questions in this regard - 1) Is the situation in any other country any different from what we see in India? I doubt it. SMEs all over the world face constraints not only for raising capital, but also for recruiting experts, transacting with vendors and customers, etc. This is just a part and parcel of SME operations. There is little that can be done about it. I feel the MSME industry is already doing that by means of training, technology upgradation and credit availability.
2) One key reason behind investors shying away from SMEs is the opacity in accounting and corporate governance. It is not so easy to trust a relatively unknown name. The auditors and IPO managers for SMEs are also not so well known. Before settling these issues, isn't it too much to expect out of the markets ?
There are many reasons for SMEs' for not willing to enter capital markets. 1. These are mainly family owned business. There is naturally a fear of losing control. 2. Tax issues and compliance, both direct and indirect. Fear of scrutiny and accountability, if they go public. A few suggestions are:
a. They can be encouraged to invite Fixed deposits, after getting a certification, from SEBI, of their standing and financial stability. b. They can be exempted from the rigors of SEBI compliance, if they tap the Primary markets. c. They should promise, a legally binding one, of assured returns to the investors, if they go for IPO. SEBI can come out with practical suggestions, to improve the capital of these companies.
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