The fiscal year ended 31 March was exceptional for the Indian capital markets. Primary equity issuances provided record levels of capital, and secondary market issues reached new highs. International capital inflows were also at record levels.
However, Indian markets have not been immune to the volatility in the global financial markets in fiscal 2012, triggered primarily by concerns over the economic outlook for the United States and Europe. The SENSEX fell 23% from its 52-week high of 21,108.64 on 5 November 2010 to a low of 16,141.67 on 19 August 2011.
Increased market volatility has had an adverse impact on investor demand for equity investments in emerging markets. Many large Indian initial public offerings (IPOs) expected to take place late in fiscal 2011 or early in fiscal 2012 have been delayed or cancelled. This was despite Indian IPO deal volume remaining stable in the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012 versus the same period in the prior year – the six months ended 30 June saw a total of 59 IPOs compared to 58 in the same period in 2010. Notably, there has been a significant decline in qualified institutions placements (QIPs), which fell from 58 in fiscal 2010 to 41 in fiscal 2011.
Despite this, the government of India’s (GoI) need to finance the development of infrastructure and other capital expenditure plans has not diminished. Further, recent amendments to the Securities Contracts (Regulation) Rules, 1957, (2010 Amendments) requiring listed companies to maintain a public shareholding of at least 25%, may also necessitate many companies to sell equity or risk losing their listing. The tension between recent market developments and these two factors make for interesting times for Indian capital markets.
The GoI’s disinvestment programme – through which it has partially financed its capital expenditure programmes – raised approximately ₹221.44 billion (US$4.79 billion) in fiscal 2011, including the US$3.4 billion raised from the Coal India IPO, which was India’s largest ever IPO. Other successful disinvestments include offerings by Power Finance Corporation, MOIL and Power Grid Corporation. As would be expected, international investors provided significant amounts of the capital in these offerings.
The GoI’s divestment target for fiscal 2012 has been reported to be approximately ₹400 billion, which is 80% more than in fiscal 2011. Major listed public sector enterprises (PSEs), including the Steel Authority of India (SAIL) and Oil and Natural Gas Corporation (ONGC) are reportedly working on large public follow on offerings, while Rashtriya Ispat Nigam Limited Minerals (RINL) and National Buildings Construction Corporation (NBCC), among others, have been reported to be planning IPOs. These transactions will require significant support by international investors to meet the GoI’s objectives.
The 2010 Amendments require all companies listed in India to have a minimum public float of 25%. Companies that do not meet this threshold must increase their public holding each year by a minimum of 5%, until the 25% requirement is satisfied. To do this they would need to sell shares and this will depend on retail demand for equity investments.
The public float requirement was amended in August 2010 to provide that listed companies are not required to go to the market immediately for an additional 5% public holding, but still must comply with the 25% public float requirement within three years. The public shareholding requirement for PSEs was reduced to 10%, which must also be achieved within three years. While these amendments may temporarily ease the pressure on some listed companies impacted by the regulations, the benefit will be relatively short-lived.
Influence on markets
There was a rush of capital to Indian companies in fiscal 2011, but fiscal 2012 may be different. While most forecasts of GDP growth have continued to hover around 8%, many of the economies of countries where the large institutional investors that invest in emerging market opportunities are located have been adversely impacted. This has resulted in a downturn in capital markets activity in many emerging markets.
Therefore, a large group of PSEs and privately owned companies will all compete for what is currently a declining supply of international investors and capital for market attention. Companies that are unable to attract sufficient investor support may see their plans being adversely affected if they are cannot raise the funds necessary. It will be interesting to see how these market dynamics play out during the remainder of fiscal 2012.
Stephen Peepels, a partner in the corporate group in Hong Kong, heads the US capital markets team for Asia. DLA Piper is the world’s largest legal practice with more than 4,200 lawyers in 76 offices across 30 countries.
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