Are small IPOs dying a slow death in India?

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Are small IPOs dying a slow death in India?

In an interview on CNBC-TV18’s show, Your World @10, Harish HV, Partner-National Management of Grant Thornton India and Prithvi Haldea, MD of Prime Database spoke about the market structural changes emerging, with retail investors focusing more on investing in medium to large companies rather than small players.

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Excerpts from Your World at 10 on CNBC-TV18 Watch the full show » RELATED NEWS 2009 a year of fitter, leaner SMEs, says Chanda Kochhar What do experts, brokerages say about Gujarat Pipavav IPO? Avantha Power IPO to open on October 11 Should microfinance institutions go public?

Recently consultancy firm Grant Thornton put out a report, which spoke of a trend over the last decade of investors favouring large initial public offerings (IPOs). As a result of which, small and medium sized companies are apparently losing out on adequate access to capital via the equity markets. According to the report, recent trends observed in the US show small IPOs being left out of the big boys market and India slowly seems to be leaning towards this development.

In an interview on CNBC-TV18's show, Your World @10, Harish HV, Partner-National Management of Grant Thornton India and Prithvi Haldea, MD of Prime Database spoke about the market structural changes emerging with retail investors focusing more on investing in medium to large companies rather than small players.

Below is a verbatim transcript of the interview. Also watch the accompanying videos.

Q: State your case as to why do you believe that the primary market in India has become a big boys market that small IPOs are all, but dead from Indian market?

Harish HV: This report is based on the report that our US firm has bought out; where they argue that the US market has predominantly become a big boys market. Based on this report, we looked at the Indian market and we are seeing some signs of this happening both in the primary and the secondary market, where the focus is predominantly on the large companies.

If you look at, for e.g., would an  Infosys be able to make an IPO with Rs 10-15 crore issue in today's market and get the kind of coverage? The answer is it is becoming difficult to do so. It is important that we have a very healthy primary market.

If you look at private equity, they have invested probably in about 1,000 companies in the last five-six years. If they start looking for exits through IPOs, at the rate we are going, it will take them 20 years to exit every one of those companies. We are setting up all the private equity companies for all the merger and acquisition (M&A) or being acquired by large boys. We are not saying that the market has completely become large, but it is tending to that. Therefore we need to look at this.

Q: Would you agree with the argument that Harish is making, the small IPO market is dying a slow death in India and that it could take private equity companies 20 years to be able to exit their investments at the rate at which small IPOs are happening in this country?

Haldea: What I have just heard is a statement of fact. In terms of the amount mobilised, the top ten issuers, for e.g., in a year would mop up 75-80% of the amount and that's a statement of fact. What is more important is to understand why this is happening. It is not because there are no investors or retail investors or other investors in the market.

I think three things have happened in the last ten years. One is that the market structure has changed and the entire process of book building, which basically ensures that 50-60% of an IPO subscribed by institutional investors, edges out entrepreneurs or smaller companies because institutional investors would typically look at medium to large companies. That's been a major development in the Indian market where we are encouraging, in a sense, only institutional supported IPOs rather than the market as a whole supported IPOs.

Secondly, the research on the medium and small IPOs is very limited. Therefore, there is not enough interest which is generated in these kinds of issues.

Finally, we are seeing such a dramatic change in the merchant banking industry where from 1,500 merchant bankers we are down to 50. Unless we create a new body of merchant bankers, we look at small and medium enterprise (SME) exchange afresh because the kind of guidelines, which have been issued for SME exchange, are so restrictive that I do not think one year down the line, we would achieved anything. I do not think it's going to be very easy for any company to raise money, through SME exchange whenever it comes.

Q: You not only agree with Harish's diagnosis, that there definitely is a problem here, with regards to small IPOs, but you also agree, that the time has come for us to work harder on an SME exchange, a concept that we have debated in this country and operationalised or at least attempted to, several times before, but has definitely not been a success?

Haldea: There are many issues with the SME guidelines and I have concerns on several of them. One is that it requires underwriting. With the capitalization of small merchant bankers it's going to become very difficult for merchant bankers to underwrite or take a stake in the IPO that they come up with.

Secondly, we have requirement of market making for three years, given that market making as a mechanism not taking off in India for a variety of reasons. If we have compulsory market making and compulsory underwriting, I think small IPOs are going to have tough time. That's the reason why we have not seen any activity on that front.