We simply won’t stop gushing about how fantastic 2017 has been as far as initial public offerings (IPOs) are concerned.
Take a look at the chart alongside. Money raised through IPOs till November this year is the highest in at least the last 10 years. This, of course, reflects the general buoyant mood in the Indian stock markets.
But a close look at the break-up of the aggregate IPOs in 2017 shows the scenario isn’t all that encouraging. That’s because fresh capital is only 17% of the total money raised whereas the remaining 83% is contributed through the offer for sale (OFS) mechanism.
In an OFS, existing shareholders (including promoters, private equity investors, venture capital funds) of a company are looking to sell their stake and this money does not make it to the firm’s kitty and by that logic, companies cannot use these funds. On the other hand, money raised through fresh capital is typically used for investing in new projects or for capital expansion. Clearly, the trends for this year show that is not happening. As you can see in the chart, contribution from fresh capital in the overall money raised through IPOs is the lowest since 2007.
In fact, according to an analysis by Prime Database on the use of proceeds by companies that raised money in 2017, 21% of the fresh issue funds were meant to be used for prepayment or repayment of debt and 9% for issue- related expenses. This further lowers the contribution of fresh funds to be spent on other purposes such as strategic investments/acquisitions; capital expenditure—current and future requirements; working capital requirements; general corporate purposes; and so on.
What does this tell us? In a nutshell: companies aren’t feeling confident enough about demand picking up rapidly enough to warrant adding capacity.