Dash for Cash
What a difference a few months can make in a world of globalised money. About seven months ago, businessmen all over the world were crying about the liquidity crunch. To deal with that, quantitative easing came to be the buzzword among central bankers, as they flooded the banking systems with billions of dollars. Now, the pendulum has swung to the other extreme. Following almost a 100% rise in the Sensex between 6th March and 10th June, a flood of money has hit the Indian markets from a variety of sources, most notably from abroad. Businessmen are gleeful at the prospect of raising new money. Initial public offerings (IPOs) and qualified institutional placements (QIP) are being ardently explored. Fund-raising is not limited to private-sector players. The dramatic improvement in market sentiment, following a surprisingly strong mandate for the Congress party, has encouraged market-players to believe that this government will make a series of big-ticket disinvestments. If we add up the IPOs, QIPs and disinvestment plus continuing foreign direct investment (FDI), we are suddenly talking of Rs120,000 crore being poured into businesses and government from a variety of sources over 12 months starting March 2009. Sounds incredible? Look at this math:
• Since April, foreign institutional investors (FIIs) have pumped over Rs30,000 crore into the Indian market.

• Oil India and National Hydroelectric Power Company are sitting on clearances to make IPOs. That would mean another Rs4,000 crore raised from the market.

• Disinvestment in public sector units (PSUs) can easily fetch Rs30,000 crore, if the government chooses to sell a 10% stake in just a few of the listed companies where it holds more than 90% of the equity.

• QIP is a quick route to raise money from large institutional investors. Over the past two months, a rash of companies (mainly real-estate companies) has raised about Rs8,000 crore by this route. Many more QIPs are in the pipeline. Then there are IPOs which have not even started hitting the market as yet. According to an estimate by Goldman Sachs, share sales by Indian companies may increase to $13 billion this fiscal year. That is another Rs60,000 crore. Of this, another $5 billion - $7 billion would come through share placements over the next few months!

What would this flood of money mean for the markets and for you? Will it change the very contours of the economy with the huge fiscal deficit turning irrelevant, as happened in 2004? At that time, galloping government revenues pared down deficits, changed the economic fundamentals and brought more FIIs into India. Will the same thing happen this time as well? Is this what the market is anticipating? Let’s look at each of these segments starting with the segment from where money has already come in – the FIIs.

Foreign fund managers are buying Indian shares as if they are going out of stock. Overseas funds pumped in Rs7,384 crore in April, Rs20,607 crore in May and Rs4,602 crore in the first 10 days of June. The investment in May was the biggest investment since May 2007.

Arguments that had lost currency for the past year-and-a-half are popular again. Scenarios of India’s superb growth prospects, fuelled by the huge market of 1.1 billion consumers and billions of dollars needed to improve Indian infrastructure are back in currency, as are the dubious merits of India -- such as rule of law, familiarity with the English language and our democratic system. Stephen Roach, chairman of Morgan Stanley Asia, has even said that India may outperform China and other countries in the Asia-Pacific region in terms of economic growth. The Indian economy has done fairly well in the first quarter, recording a 5.8% growth. Nobody has the time to see that it was a sleight of hand by Indian statisticians (See Random Numbers). Growth of China’s GDP slowed to 6.1% from 6.8% over the same period.

FIIs can invest in a variety of ways in India. One of them is QIPs which have become something of a rage. Property developers, including DLF, Unitech and Indiabulls Real Estate, have raised more than Rs8,000 crore in share sales since April. The other route to raise money is placement of shares with private equity investors. On 11th June, Parsvnath Developers, a Delhi-based real estate company, announced that it has raised Rs90 crore by selling an 18% stake in a premium housing project to global real-estate private equity fund, Red Fort Capital.

Apart from real-estate companies, among those raising money would be media and retailing who have glamorous businesses to run but hardly make any money and are perennially short of funds. For instance, at the time of writing this piece, Network 18 Media & Investments said it would raise Rs119.63 crore in one or more tranches by issuing shares on a preferential basis to SAIF III Mauritius Company, a private equity fund.

Nilesh Shah, deputy managing director, ICICI Prudential Asset Management Co Ltd argues that “if the government can convince overseas investors, who are getting close to 0% return on their investment in the developed countries, about the economic reforms in India, then there would be much more flow from FIIs and QIPs.”

First Day, First ShowAfter QIPs, come the IPOs. IPOs are an extremely cumbersome process that can stretch capital-raising over six months. But if the market continues to remain firm, IPOs will be back any day now, after almost two years of drought. Ads would be splashed across television screens, newspapers and hoardings. The ‘first day, first show’ phenomenon – huge pop for the stock on the first day of trading that feeds further frenzy – would be a popular topic on the front pages of newspapers and on business TV, and will form the hottest topic of discussion – engaging everyone from businessmen to corporate executives to housewives. Goldman Sachs estimates that Indian companies could raise as much as $4 billion- $6 billion (or Rs19,000 crore-Rs28,000 crore) from IPOs in the 12 months ending 31 March 2010. As of now, Adani Power has filed an IPO prospectus to raise Rs2,000 crore and Sterlite Energy is rumoured to be planning to raise about Rs5,000 crore. Mahindra Holidays too is waiting in the wings. But we expect the queue to be pretty long. IPOs are a peculiarly bull-market phenomenon. Whether it is companies entering the bourses for the first time or existing ones hitting the market with a fresh offer, a persistent rise in stock prices has always attracted a flood of IPOs – as we witnessed in 1988, 1994, 2000 and 2007. The frenzy faded away after the disastrous issue of Reliance Power in January 2008 and the subsequent market crash. Indeed, if the Sensex stays around the current levels, expect a flood of IPOs to hit the market.

There is one other source of money – FDI. India attracted FDI worth $33.6 billion in 2008-09, just about 2% down from the year before. Portfolio investors are convinced that emerging markets like India are the place where they can earn fat returns. This realisation is yet to percolate widely among businessmen. Even when they are convinced, India’s maddening rules, regulations and erratic policies put them off. This is why a large number of Fortune 500 or Fortune 1000 multinationals are either un-invested or under-invested in India. But India continues to remain high on their list and, therefore, we can expect that FDI flows will continue whether through new investments or takeovers. The market expects relaxation in foreign ownership in sectors like insurance, banking, civil aviation, real estate, retailing, etc, which will be followed by greater FDI flows. In early June, Norwest Venture Partners, a California-based investment firm, agreed to pick up a 2.11% stake in the National Stock Exchange.

Selling Family Silver If the private sector is raising money, the government cannot be left behind. And nothing excites the market more than disinvestment of government’s stakes in PSUs. Dr Manmohan Singh’s announcement in late May was appropriately bland: “Fiscal deficit and disinvestment of public sector units — all these issues will be tackled by the finance minister in the Budget,” said Dr Singh. It triggered headlines like “Disinvestment process likely to begin soon” followed by reports like “There’s some good news for whoever expected the newly elected UPA government to go full throttle on divestment of government companies. The forthcoming budget is likely to announce some stake sale in PSUs, as well as steps that would give a boost to economic reforms.”

While this enthusiasm has been somewhat dampened by subsequent wishy-washy talk by finance minister Pranab Mukherjee, the media and markets have concluded that there will be major disinvestment over the next couple of years. After all, National Hydroelectric Power Corporation (NHPC) and Oil India’s mega IPOs are expected to hit the market by September. In 2007, the Cabinet had approved a sale of 10% government stake in OIL and 5% in NHPC through IPOs. A big boost to the market’s confidence came from the Presidential Address of Pratibha Patil to the joint session of Parliament: “Our fellow citizens have every right to own part of the shares of public sector companies, while the government retains majority shareholding and control.’’ She added that “My government will develop a roadmap for listing and people-ownership of public sector undertakings while ensuring that government equity does not fall below 51%.’’

Anonymous officials have been quoted in the media as saying that the government has targeted Rs10,000 crore from disinvestment over 12 months starting July 2009 – more than what the previous UPA government achieved during its entire five-year tenure. For this, key ministries have been asked to submit a list of companies. In its entire five years, the UPA government had raised about Rs8,500 crore through disinvestment, while the Vajpayee-led NDA government had raised Rs28,000 crore. Since the start of the liberalisation process in 1991, the central government has raised Rs53,423 crore from stake sales in State-owned companies, partly through the sale of minority stakes and partly through strategic sales.

A target of raising Rs10,000 crore from stake sale in PUSs is peanuts. There are dozens of extremely valuable companies, selling just 10% of which would fetch huge revenues for the government. These include: Bharat Sanchar Nigam, Bharat Oman Refineries, UTI Asset Management, Manganese Ore, Rail India Technical and Economic Services (RITES), Rashtriya Ispat Nigam, Coal India, Housing and Urban Development Corporation (HUDCO), Air India, Export Credit Guarantee Corporation, Indian Railway Finance Corporation and many power companies like North East Electric Power Corporation. A disinvestment of just 10% in BSNL alone could fetch around Rs20,000 crore.

But any talk of disinvestment gets bogged down in discussions about the cumbersome process of making IPOs in India or the opposition of labour unions and even the sensitivity of state governments if such states are ruled by coalition partners. Besides, the telecom and aviation ministers are really not interested in seeing BSNL and Air India getting listed. This is where follow-on offers are important. The media and broking companies are speculating about already listed PSUs that can make follow-on offers. One estimate says that the government can easily raise Rs30,000 crore if it offloads 1%-10% stake in listed PSUs in which it has a 90%-99% stake. There are 13 such companies, which remain listed – in violation of the norms that all listed companies must have a minimum floating stock of 10% of total equity. So, the disinvestment in these companies could also be justified as complying with SEBI regulations.

Separately, the government is keen to sell Indian Telephone Industries (ITI) in parts. The communications ministry has invited expressions of interest (EoI) from equipment manufacturers and investors to invest in three of the six manufacturing plants run by ITI. The telecom secretary, Siddharth Behura, is clear that each of the six units operated by ITI can be separated and given to investors who can either enter into a joint venture or buy out the unit. ITI, plagued by poor management, recorded a net loss of Rs191 crore in the quarter-ended March 2009. ITI, in which the government has a 92.87% stake, is listed and its shares have been shooting up in expectation of divestment.

So, money is flooding in and the pipeline is really wide. What does it mean for the economy, markets and you? Nilesh Shah, says that fund flows from FIIs and QIP would help the economy. FII inflow has been great for portfolio investment and mutual funds; QIPs have helped real estate projects to restart. All this means more growth, higher revenues for the government and a brighter job scene. However, there is a dark cloud to this sunny scenario and that is IPOs. Every bull market since 1991 has seen companies come, collect public money at extremely high prices and then underperform. It is a pattern. So, examine the IPOs very carefully before taking the plunge in the new round of IPO mania that may hit the market shortly. Better still, avoid them unless you merely want to play the first-day pop of newly-listed shares in a bull market.

This is because raising capital has little to do with providing returns. In fact, IPO booms and subsequent returns are often negatively correlated. Remember the showpieces of the 2006-07 IPO scene -- DLF, the biggest name in the Indian real estate industry? And Reliance Power which managed to raise Rs11,600-crore in 60 seconds from an issue that was oversubscribed 10.55 times, by creating an investor frenzy to buy shares of a shell company? When the real-estate companies had launched their IPOs, we advised investors to stay away.

In the Moneylife issue of 14 September 2006, we had said: “If the IPO market picks up, expect aggressive pricing from all players. Which ones should get your attention? Stay away from the realty-construction plays because there are just too many issues of management and accounting about them – prices of land acquisition, management quality, private partnerships, investment companies and long gestation periods could trap even the savviest of investors.” Real estate stocks, like DLF, simply collapsed, many of them going down by as much as 90%. Fund raising by companies or government is great for everybody as long as the money does not go from your pocket!

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