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Weak markets and rupee cut off fund raising sources

The corporate sector is squeezed for money as the secondary market, which is now in a bear hug is making fund raising through domestic sources unattractive, while the weakening rupee has shut the doors on foreign sources of funding, too. With the equity markets touching the ebb over the last few days, companies are keeping away from public offerings.

B.S. Srinivasalu Reddy | October 10, 2011 | Updated 11:11 IST

The corporate sector is squeezed for money as the secondary market, which is now in a bear hug is making fund raising through domestic sources unattractive, while the weakening rupee has shut the doors on foreign sources of funding, too. With the equity markets touching the ebb over the last few days, companies are keeping away from public offerings (POs), through which they raise funds, by issuing fresh shares.

While issues of Rs 1,000 crore or above have become a rare instance in 2011, about 22 firms that were armed with the regulatory approvals have called off their public offering plans. Companies are in a position to raise more funds when the valuations are high during bull phases (when market expectations are positive) than they can do during bearish times (negative sentiment).

PERSPECTIVE: Why all the fuss over rupee depreciation?

"Times are tough. Participation in equity offerings in general is very low, mainly due to investors constantly losing their money invested in public offerings over the last two years. Thus, corporates have to look for alternative means to source funds," said Shailendra Jindal, chief executive officer (CEO), Continental Capital Advisors.

Going down-under

  • Firms keep away from public offerings as market is declining
  • Out of 102 issues that raised funds via public offerings since Jan 2010, 60 were in the red against issue prices, 19 were in black
  • Some experts said there is a need for a mechanism to control pricing of public offerings
Out of 102 issues that have raise funds through POs since January 2010, 60 were in the red, compared to their issue prices. About 19 were in black and of the remaining 23 more than half were follow-on offerings. In this context, Jindal suggested a mechanism through which the pricing of public offerings could be controlled, like in the era of Controller of Capital Issues (CCI), when investors were making money by investing in POs. "There should be a mechanism to ensure benefit to investors," Jindal added.

With equities at their lows, raising funds through qualified institutional placements (QIPs) and rights issues have suffered over the last nine months. Though syndicated loans and bond issues are tied up, they are carrying unsustainably high interest rates. Public issues have seen lukewarm subscription levels from qualified institutional buyers (QIBs) category. Of the 28 public issues since January 2011, about 17 pubilc issues (61 per cent of the total) have not even seen one time subscription under the QIB category.

"This clearly reflects lack of conviction and confidence in the QIB circles about the IPOs during this period," said Jagannadham Thunuguntla, head of research of SMC Global Securities.

Companies have raised a meagre Rs 14,033.28 crore through 40 public offerings till September 2011 against Rs 69,111.90 crore raised during the whole of 2010, according to PRIME Database, a database on various Indian markets. In case of IPOs, they had raised Rs 5,978 crore till September this year, compared to Rs 37,534.65 crore raised in the entire 2010. Foreign sourcing of funds, which was very attractive for Indian companies six months back, has become risky with the rupee weakening against the US dollar.

External commercial borrowings (ECBs) were available at an attractive interest rate of three to four per cent. However, the rupee weakening by about 12 per cent in the last two months has spoiled the party. Firms that have to repay their loans now or in the next few months have to shell out 12 per cent more rupees for repaying their dollar loans.

"Rupee has the potential to weaken further in the coming months, increasing the risks. Thus, Indian companies are caught in a cleft," said Jindal of Continental Capital.

Courtesy: Mail Today 

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