There appears to be a scramble to get as many IPOs done before the financial year ends. Issuances worth Rs15,000 crore have already been announced this month and a couple more, such as Lemon Tree Hotels, are in the pipeline, according to bankers.
In the process, IPOs worth Rs82,500 crore are expected to be completed in FY18, double the previous record in FY08. The number of SME IPOs this month is also set to be twice the levels seen in the past few months.
One reason for the unusual rush this March is the backlog that was created owing to the wobble in the markets in February. Satyen Shah, head of investment banking at Edelweiss Securities, says, “While it does appear that there is a sudden rush, it bears keeping in mind that there were only two issues in February, owing to the volatility in the market.”
While investors remain edgy, markets have been relatively stable this month. Evidently, issuing companies and their bankers are taking advantage of this relative calm.
News reports even suggest that ICICI Bank Ltd is settling for a sizeable haircut on its valuation expectations for its subsidiary ICICI Securities Ltd’s IPO this month.
For some investors, such as ICICI Bank, getting the issuance done before March makes sense as it avoids the possibility of a long-term capital gains tax (LTCG). “Since LTCG will be applicable from 1 April, anybody who sells in an IPO now will be exempt from paying LTCG tax,” says Shah.
According to a banker, in some cases, investments by foreign institutions are exempt because of double tax avoidance treaties.
Some analysts are worried that the bunching up of IPOs in the last two weeks of the month can create a cash crunch, as far as the non-institutional segments go.
“It’s the second fortnight of March, when the final instalment of advance tax needs to be made, and people are going to face a cash crunch,” says Arun Kejriwal, director of Kejriwal Research and Investment Services Pvt. Ltd. According to him, investors have a number of issues to choose from, which can affect demand for some issues.
Demand from institutional investors is expected to remain high, especially with domestic institutions flush with liquidity. Institutions lapped up a $1.4 billion block deal in Tata Consultancy Services Ltd shares this week; and HDFC Bank Ltd is expected to raise $2.5 billion in a placement to institutions. But none of this is expected to dent demand, as is evident from the over-subscription in the institutional portion of Bandhan Bank’s IPO.
It’s worthwhile noting here that three of the eight issues this month are from government companies. These are driven by the need to shore up the government’s balance sheet, and the LTCG factor has no role to play here.
There are also instances, such as with Barbeque Nation, where companies are waiting for better market conditions with a view to selling at higher valuations.