IPOs are booming but who's making the money?

Eighty four per cent of the Rs 42,000 crore raised in financial year 2017-18 has come in via Offer For Sale, the highest for any financial year.

The record fund-raising through initial public offerings (IPOs) has not bumped up fresh capital formation in the country significantly.

The reason?

More than four-fifths of the amount has been garnered through offer for sale (OFS).

Eighty four per cent of the Rs 42,000 crore raised in financial year 2017-18 has come in via OFS, the highest for any financial year, data collated from Prime Database shows.

The figures are set to balloon further as big-ticket offerings from insurers New India Assurance and HDFC Life will comprise share sales by existing promoters.

In an OFS, promoters, private equity or venture capital players offload or dilute their stake, effectively leading to a change in the ownership of shares.

These shares are bought by retail, high net worth individuals and institutional investors, and in the process the company is listed on the bourses.

"It is a worrying trend as we are not seeing too much fresh capital being raised for new projects, plants, expansion or diversification. It's just private equity or venture capital or promoters cashing out," said Pranav Haldea, managing director, Prime Database.

The steady run-up in the market has encouraged private equity and venture capital players to use the IPO window to make an exit.

"The secondary markets have been buoyant in the last couple of years and it is only natural to see private equity players that have stayed invested for five-seven years opting for exits through the IPO route. What has also helped these offerings is the robust investor demand and healthy post listing gains," said Gautam Gupte, Group COO, Ambit Pvt Ltd.

Traditionally, companies have raised funds in IPOs in order to fund their capex or organic growth plans. This was the case for companies that tapped the market in 2006 and 2007.

With capex growth remaining muted in the past few years, that's no longer the case.

According to India Ratings and Research, growth capex would be muted over FY18-FY20 and corporates are likely to show an unwillingness to invest in long-term projects due to muted demand and significant leverage, despite a low interest rate environment.

"Capex growth has remained muted for the past few quarters, and until its revival, IPOs could continue to be primarily driven by PE exits or select business models which need cash for growth," said Gupte.

Overall corporate sector investment is likely to grow by Rs 1 lakh crore at a 5-8 per cent CAGR, on the back of moderate consumption demand, global overcapacity and working capital disruptions due to the goods and services tax, observed Ind-Ra.

Corporates registered a four per cent CAGR growth over FY13-FY17, 13 per cent over FY09-FY12 and 49 per cent over FY05-FY08.

One way OFS have helped is in allowing PE players to exit their old investments and invest in other businesses.

"In developed markets, it's generally the angel investors who invest first, followed by venture capital and private equity players. Listing on the bourses is the last stage after the company has matured and typically gone through several rounds of fund-raising," pointed out Haldea.

Photograph: Reuters.