After over a decade, India Inc tunes up IPO route to fund growth

The proceeds raised through the OFS component goes to the selling shareholders and the company does not benefit in terms of getting any part of the issue proceeds.

After a gap of more than a decade, India Inc appears to be raising more money through initial public offers (IPOs) to fund capex and expansion plans rather than just coming to the market to give an exit option for their investors, including the PE/VC community.

In the current year till date, the majority share of the cumulative IPO fund raising has happened through issue of fresh shares with the offer for sale (OFS) component playing second fiddle.

So far, 43 firms have secured around Rs 47,872.31 crore via IPOs; out of this 51.51 percent are from fresh issues—the highest since 2012. Fresh issues alone brought in around Rs 24,657.64 crore, the most in three years while Rs 23,214.67 crore was raised via offer for sale.

The OFS component refers to existing shareholders of the company offloading their shares as part of the public issue. The proceeds raised through the OFS component goes to the selling shareholders and the company does not benefit in terms of getting any part of the issue proceeds.

The current year’s trend assumes significance since this is the first time since 2012 when the quantum of fresh issue has been higher than the OFS component, which clearly shows that companies are bullish in terms of the economic outlook and are putting in place robust expansion strategies.

Pranav Haldea, MD of Prime Database, is of the view that the higher share of fresh capital raising clearly indicates more funds are going towards expansion and diversification rather than to selling shareholders.

Incidentally, the share of fresh issue within the overall IPO fund raising had dipped to just 13 percent in 2020 and has seen a see-saw journey since then. It rose to 36.50 percent in 2021 to again fall to 29.78 percent in 2022 before rising again to nearly 42 percent in 2023.

Analysts are of the view that firms opting for higher fresh issues instead of OFS is a positive sign as fresh issues channel money directly into the company, fuelling clear growth paths. This clearly indicates a robust capex position, strong forward momentum, significant growth potential, abundant orders, and a thriving Indian economy among other things, they add.

Among all the IPOs this year, Ola Electric Mobility had the largest share of fresh issues in absolute terms at Rs 5,500 crore, followed by Bharat Highways Infrastructure and Juniper Hotels which raised around Rs 2,500 crore and Rs 1,800 crore though fresh issue, respectively.

Companies like Go Digit General Insurance, Allied Blenders and Distillers, Adhar Housing, Entero Healthcare Solutions and Jyoti CNC Automation also raised over Rs 1,000 crore each through fresh issue of shares.

Deepak Jasani, head of retail research at HDFC Securities, said PE investors now hold smaller stakes in companies coming to the market and are not in a rush to cash out.

A section of analysts also believes that the trend of issuing new shares is mainly to repay debts. Taking advantage of strong stock markets and peak valuations, these IPOs are timed to make equity cheaper than debt, reflecting a strategic financial move, they say.

There is also a view that fresh issues significantly impact a company's valuation and investor sentiment, each influencing the other. When strategically timed for sustainable long-term growth, they can enhance market value and boost investor confidence.

Analysts, however, also warn that if these issues are seen as opportunistic moves to exploit peak valuations without clear long-term benefits, it can lead to rapid declines in both valuation and investor trust. Thus, the impact of fresh issues is a double-edged sword, dependent on the company’s strategy and communication.

Tarun Singh, MD of Highbrow Securities, stated that the IPO market is buoyant due to new investor participation. High subscription rates show a rush for short-term gains, while long-term investors await better global indicators. Despite this caution, the primary market is expected to see a significant increase in both the number and value of issues year-over-year. Optimism remains strong, with investors eyeing opportunities in the cheaper SME segment, boosting overall market growth and IPO activity.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.