Bull run?

IPOs have returned with a bang, but are they a true indicator of an improved economy? Gautam Kagalwala looks at the reasons for the revival of primary markets and the role of the regulator

The current financial year is one of the best for initial public offerings (IPOs) in India, with ₹491 billion (US$7.6 billion) raised in the first seven months of the year according to a recent State Bank of India research report. This amount has surpassed Ernst & Young’s estimate of US$5 billion for the year, and is already greater than the total capital raised between the 2012 and 2016 financial years.

There has been increased interest among retail and strategic investors for IPOs, and companies in response have sought to attract capital in order to fund expansion plans.

The insurance sector has been a significant driver of this trend with large issues by General Insurance Corporation of India (GIC Re, US$1.7 billion), New India Assurance Company (NIACL, US$1.4 billion), SBI Life Insurance (US$1.3 billion), HDFC Standard Life Insurance (HDFC Life, US$1.3 billion) and ICICI Lombard GIC (US$838 million).

The general insurance business has been growing at a healthy rate, with US$17 billion in premiums in the 2017 financial year. Market penetration remains low, with only 3.4% of the population having a general insurance policy, so the potential for growth is high. The sector is projected to reach US$350-400 billion by 2020. The IPOs should serve as a shot in the arm for insurance companies, but the stocks of the insurance companies suffered mixed fates upon listing. The share prices of GIC Re and NIACL went on a decline immediately upon listing owing to disagreements about their valuations, while HDFC Life and ICICI Lombard performed well. For the companies it is desirable to see strong performances in the secondary markets due to the impact on additional stock issues, future credit prospects and prestige.

REGULATORY CHANGES

The primary market had seen a relative lull following the 2010 and 2011 financial years, when US$7.1 billion and US$7.6 billion were raised, respectively. On the other hand, the BSE Sensex has been on the rise since December 2011. The ability of the insurance companies to opt for IPOs can be traced back to recent regulatory changes. “The Insurance Laws (Amendment) Act, 2015, allowed for a composite foreign investment – foreign direct investment and foreign portfolio investment – limit of 49% of the paid-up equity capital of an Indian insurance company. It further clarified that indirect foreign investment of banks – which often are the Indian promoters of insurance companies – will not be taken into account for the 49% limit,” says Gaurav Gupte, a partner from the capital markets practice of Cyril Amarchand Mangaldas.

The 2015 amendments also changed the General Insurance Business (Nationalization) Act, 1972, and allowed government-owned general insurance companies to raise capital. Gupte worked on the IPOs by GIC Re and ICICI Lombard and ICICI Prudential Life Insurance Company, and each was the first in its sub-sector to go public. “Being the first, each was a unique, exciting and learning experience,” he says.

BIGGEST IPOS IN 2017

*List price as per NSE