The Indian government announced in April that it wanted to raise $6bn from divestments in this financial year and a further $9bn next year. But as yet, it has failed to launch anything.
You cannot really blame the ministers in charge ― the country’s equity market slumped after February and only started to recover in the summer months. The country’s macro outlook is not looking good either; ratings agencies Fitch and Standard & Poor’s have it on ratings downgrade watch.
India’s ECM volumes reflect this lack of government divestments ―they are at their lowest for more than eight years, with just $7.12bn raised so far this year, according to Dealogic. That is a far cry from highs of $26.4bn and $22.8bn during the same periods in 2010 in 2007, respectively.
But foreign investment flows have told a slightly different story. Around $11.5bn has been invested in India already this year ― higher volumes for the first six months than in either 2007 or 2010, according to one senior capital markets banker in Mumbai.
It's true that about 35%-40% of this has flowed into the country through exchange traded funds ― vehicles that are symptomatic of volatile times and risk-averse investors without conviction. But it is still a positive sign that investors have money they want to put to work in the country. They just don’t have specific opportunities — and this is where the government can step in.
There has been supply in India this year. It has come mostly in the form of secondary sell-downs in well sought-after financial stocks such as ICICI Bank or Axis Bank. ECM bankers say that financial names could be sold easily now but that there won’t be any real supply until next year, when the banks themselves will need to raise equity.
Other sectors that actually need to raise cash, such as infrastructure and utilities, will find it harder. Government policy on land acquisitions to build roads, coal allocations, oil and gas subsidies and so on are the real bugbear of these sectors. And while the government might not be able immediately to resolve these policy issues ― although it should nonetheless try ― it could encourage the ECM sector in other areas.
Premiums should be rare
Unfortunately, the government’s last attempt at using the equity markets was a near disaster. It pushed a Rs124.05bn ($2.524bn) sale of Oil and Natural Gas Corp stock across the finish line at the eleventh hour when Life Insurance Corporation of India, the country’s largest insurance group, bought up the vast majority of the deal.
Some bankers blamed a new structure — the offer for sale (OFS), introduced to help companies increase their freefloat — for the deal’s lack of demand. But it was widely agreed that the offer’s premium pricing was to blame. Shares were sold for a 2.3% premium to the stock’s price when the deal was announced.
Premium pricing is only justified for rare, illiquid stocks with scarcity value. ONGC is not one of those and given the lack of clarity over subsidies in the oil and gas sector, the deal was a step too far for many investors. Lead bankers said that only one international account participated.
This year's successful deals have all offered discounts, even the popular financial companies. A June block in Axis Bank was sold at a 4.5% discount and a Yes Bank block went for a 3.5% discount. Earlier in the year a block of Housing Development Finance Corp was sold for as little as a 6.5% discount.
The government has mandates out for a $1.5bn share sale in Steel Authority of India (SAIL) and $315m in Hindustan Copper and while these are from the not-too-loved commodities sector, they are cyclical companies and could find demand at the right price, say ECM bankers.
It is widely agreed across the ECM banking community in Mumbai that one big liquid deal of perhaps $400m-$600m would do a great deal to revive the country’s ECM market. If this jumbo deal prices well and — perhaps more importantly — trades well in the aftermarket, investors will see opportunity in India again.
Even SEBI, the country's market regulator, has played its part, making some alterations to the offer for sale structure to help the process run more smoothly. But by June 2013 all companies will need to have a minimum public free float of 25%. That will require a big sales effort. The government should do all it can to create the conditions to allow that to happen. Realistic pricing on some trophy deals would be a good start.