Private placements to remain favourite route

Feb 29, 2008
Gaurav Pai & Ashish Rukhaiyar
Even as the market regulator is laying the ground for reviving the corporate debt market in India, private placement of bonds remains the most popular option for companies looking to raise funds in India, says the Economic Survey. Markets experts say that this trend is likely to continue, considering the comfort that this route brings along with it, namely opacity. The regulator is hoping that the proposed platform for electronic issuance and trading of corporate bonds will soon make the private placement route redundant.

Over the last few years, private placements — as in selling bonds to a select group of large, bulge bracket investors — has emerged as the preferred way, as the issuance can be closed in just a couple of days that too with investors one is familiar with. However, the regulator has always objected to the process due to its lack of transparency.

“The current system is opaque with the issuer dependant on few arrangers and going ahead one might see e-issuance gaining popularity due to its more transparent mechanism,” says Srinivasa Raghavan, head (treasury) at IDBI Gilts. He does not feel there will be any change in the number of issues and the quantum of mobilisation through this method, though. “It is mandatory for pension funds and insurance companies that are flush with funds to subscribe to such issuances,” he reasons.

Deepak Koyane, director at SPA Capital, a financial advisory firm says that an electronic issuance is always desirable as there is always a chance that a few investors “corner all the bonds issued” and then keep the prices “protected” in the future.

The total amount of the capital raised through different instruments in the primary market was 31.5% higher in 2007 as compared to 2006, says the survey. Component-wise, private placement at Rs 1, 11,838 crore (up to November 2007) accounted for the major share during the calendar year 2007.

According to a recent release by PRIME database, the major reason for this substantial increase was the continuing large mobilisation by all-India financial institutions and banks besides the private sector. On an industrywise basis, the financial services sector continued to dominate the market, raising almost 90% of the total amount. Power ranked second with a 7% share, followed by roads & highways.

Nationalised banks (who take this route to for raise Tier 2 capital for meeting capital adequacy requirements) and other financial institutions like PFC and Nabard are the usual suspects in the game.

Standard Chartered Bank’s managing director & regional head (South Asia Capital Markets) Prakash Subramanian KV says irrespective of the route taken by companies to sell their bonds (ie to raise money) - the number will only go up in the coming years. “The market will only grow bigger in size especially since RBI has blocked the external commercial borrowings route for raising funds,” he says.

RBI has not allowed companies to raise funds through the ECB route since a year, the incoming dollar was sending the rupee higher.

Sebi to tweak F&O rules to check swings

Meets Brokers, Exchange Delegations
Feb 13, 2008
Ashish Rukhaiyar & Gaurav Pai

IN A move to check wild stock swings, markets regulator Securities and Exchange Board of India (Sebi) is planning to overhaul the derivatives segment. The proposals under consideration include circuit filters on stocks traded in the futures and options (F&O) segment, possible changes in the marketwide position limits and review of the margining system, a person familiar with the development said.

It is believed that the swift and massive fall on January 22 shook Sebi into action. Trading was halted within minutes of opening, as indices hit the downward limits on very low volumes. Sebi has also received several suggestions from market intermediaries on how the loopholes in the current system can be plugged.

Apart from the margining system, the large number of stocks in the F&O segment was also said to have contributed to the indices going into a free fall. “Sebi officials had a long discussion with many market players, including BSE and NSE representatives,” says the source. “There were suggestions to overhaul the derivatives segment to counter speculative activity. One of the proposals was introduction of circuit filters on stocks available in the F&O segment,” he added. Currently, stocks in which futures are available have no circuit filters on the cash side.

Circuit filter for stocks in F&O segment to be a first

The logic is that a person who has an opposite view to the ongoing trend in the cash segment, could simply exercise his opinion in the F&O market. Simply put, if a trader felt that a share was zooming without any reason behind it, he could just short-sell its futures. However, market players pointed out to Sebi that in recently, speculative activity had zoomed, causing many shares (Essar Steel and Ispat, for instance) to rise 40-45% in one session.

Interestingly, such a system, if introduced, will be the first of its kind in the world. “The idea is not to disturb the trading habits of investors and speculators,” says the source. He added that the circuit filter, if implemented, will be high enough to be hit only on days of extreme movement like on January 22. “It is unlikely that a 20% filter (positive or negative) will be hit on normal days,” he adds.

Many delegations from the broking community are learned to have made presentations to NSE and Sebi officials. The majority has been rooting for introduction of physical settlement (delivery of shares against contracts). But a section warns this delivery should be delayed by a day, enabling both players who want to take delivery and those who do not, without disrupting the operations of the market. “This will also curb the ramping (up or down) of shares on the last day of expiry,” says a broker.

Some brokers have called for providing an easier margining system to those trades which are in opposite directions, and therefore reduces risk: for instance, buying Nifty futures and selling stock futures against it. There is a feeling that high gross exposure margins (a second line of defence unique to India) are distorting the market. There is a also a debate among players whether market makers — big players who give quotes both ways — should be introduced.

IPO investors could be in for a bumpy ride

With Change In Sentiment, Borrowing Money To Invest In IPOs May Not Pay Off

Feb 02, 2008
Gaurav Pai & Ashish Rukhaiyar

TILL a few days ago, it appeared that people with little or no understanding of equities could more than double their money in two weeks by investing in IPOs, thanks to the exorbitant prices at which these issues got listed on bourses. Some investors even decided to get ‘upgrade’ by borrowing money and investing through the non-institutional investors category in public issues, rather than through the retail portion.

But if the listing price of Future Capital Holdings is anything to go by, there is not much good news in the short term for leveraged investors, as several issues prepare listing. Brokers say that people who are planning to invest or have invested in the forthcoming issues should brace themselves for a bumpy ride ahead.

Future Capital Holding shares on Friday closed at Rs 909.80 on NSE, a premium of Rs 144.80 or 19% to the issue price of Rs 765 per share. The stock listed at Rs 1,081 and touched Rs 1,100 briefly. Based on the number of times the issue was subscribed, the funding cost works out to roughly Rs 291 per share. All those investors who had borrowed money to subscribe, and sold on listing, would have incurred a loss unless they managed to exit above Rs 1,056. Financiers charge roughly 15% for lending money towards IPO transactions. This rate is even higher if the issue is expected to do well, and there is more demand for funds.

Future Capital Holdings issue received applications for shares more than 76 times that was being offered by the company. The IPO is backed by the promoters of Pantaloon Retail, a stock that has delivered eye-popping returns to investors in the last few years.

“When the secondary market has corrected more than 20% since the issue opened three weeks back, a dip of similar proportions in the premium in the IPO market is natural,” says a fund manager with Birla Sun Life Mutual Fund. His fund house invested in the issue only for listing gains. The other big issue to get listed in the coming days is Reliance Power. Brokers say Reliance Power shares are currently quoting at a premium of Rs 150 in the grey market, about a third of what they were quoting at about a month ago.

Here too, leveraged investors are likely to be in for a disappointment. The non-institutional investor segment — reserved for high net worth individuals and corporates — has been subscribed nearly 160 times. In short, it means that these investors will get only one share for every 160 that they have applied for. However, they will have to bear an interest cost on the entire 160 shares they had bid for.

“Reliance Power IPO may well see a repeat of what happened with the Future Capital IPO,” says Rahul Rege of Centrum Broking. “With tide having turned for equities, everybody is expecting panic selling on the first day of listing,” he added. Investors seemed to have realised the price of being complacent.

Reliance Power seeks Sebi nod for early allotment to QIBs

But Move Unlikely To Be Approved As Retail Investors Are Not Covered

Jan 24, 2008
Ashish Rukhaiyar
MUMBAI

AT a time when liquidity is of primary importance Reliance Power has proposed to make available $10 billion to institutional investors for the secondary market. According to a source, the company has written a letter to the Securities and Exchange Board of India (Sebi) on Wednesday to allow them to make an early allotment of equity shares to qualified institutional buyers (QIBs). If allowed, the move will see refunds of over Rs 40,000 crore making its way to other investment avenues.

However, Sebi sources said it will not be approved since it is anti-retail investor. “Why should only QIBs be given the chance to take advantage of the recovery in the market. Reliance may be doing it just to ensure that the QIBs don’t back out,” said a source with the stock market regulator.

The QIB portion of the recently-concluded public issue was subscribed nearly 83 times with a little less than 500 entities submitting their bids. The total value of bids was pegged at Rs 5,08,486 crore. As institutional investors are required to pay 10% upfront, Rs 50,848 crore has already been collected as against the QIB portion of Rs 6,156 crore.

“The excess application money (to be refunded) is around Rs 40,000 crore or $10 billion,” said a source. “The recent fall in the secondary market has provided investors with an excellent buying opportunity and if the whole refund process is completed faster, the secondary market will also benefit. That’s the reason for the letter,” he added. Meanwhile, company officials declined to comment on the issue.

According to market buzz, the move will also enable foreign institutional investors entering through the participatory notes (PNs) route to take further exposure as the IPO had exhausted their existing limits.

Incidentally, Sebi had recently amended the guidelines related to the investment through PN route. Each FII can issue PNs amounting to only 40% of its total assets under custody (AUC). It is believed that around $30-40 billion worth of bids has come through PNs.

Importantly, the letter only aims at an early allotment to the institutional bidders. It is believed that retail investors and HNIs will get the allotment after the institutional ones. According to Sebi guidelines, allotment of equity shares has to be done within a maximum of 15 days after the issue closes for subscription.

R-Power faces stop payment crisis

Reliance lights up investors, analysts see tripping point

R-Power IPO Sop

R-Power faces stop payment crisis

Banks face stop-payment calls; IPOs Lose Sheen Due To Fall In Grey Market Premium, Value Picks In Market

Jan 23, 2008
Ashish Rukhaiyar, Himanshu Darji
& RR Goswami
MUMBAI/AHMEDABAD

The public issue of Reliance Power closed for subscription last week. However, the buzz around it is far from over. According to bankers who are associated with the deal, there have been quite a few withdrawals in the non-institutional segment, which is also popularly known as the HNI (for high net worth individual) category.

Market players said the withdrawals have been on account of two factors: the huge oversubscription and a steady decline in the grey market premium. The massive fall in the secondary market has also played a major role, they said.

“There are enough reasons to believe that many HNIs have issued stop-payment instructions,” said a banker on conditions of anonymity. “It happened in the case of Cairn and now it is happening in R-Power. The huge oversubscription (in the HNI category) will lead to small allotments, which will make life difficult for people who have leverage to invest in the issue,” he added.

The number of people issuing such instructions could not be ascertained. Nor could the value be obtained. An official who works with one of banks involved in collection of escrow amounts said there have been stop-payment instructions for bids worth around Rs 4 crore. An RPower official declined to comment on an email questionnaire on this issue.

HNIs typically borrow money at 17-20% to invest in public issues. So, the number of shares allotted and the listing gains play an important role. If both go down, it becomes a loss-making proposition, as the cost of borrowing money or leveraging becomes more than the listing gains.

R-Power’s public issue closed on Friday last week and the HNI category was subscribed more than 190 times. This means an investor bidding for 10 lakh shares would get a little over 5,200 shares. The low allotment is a big blow to HNIs who have borrowed money for one lakh shares.

Such investors could still manage high gains if the stock lists at a massive premium to the issue price, which in this case is Rs 450. If the grey market premium is anything to go by, then the stock is likely to list at a premium of around Rs 200. This is much below the earlier projections of more than Rs 500.

A section of market players are of the view that the recent massive fall could also have triggered a lot of withdrawals, as investors would have preferred to buy stocks at lower levels. In the last one week, the Sensex has lost more than 3,500 points, or 17.4%. Most large-cap stocks have lost anything between 10% and 20%, which provides an excellent buying opportunity with much less risks involved.

Investors looking for a share of RPower can now may look at Reliance Energy, say dealers. “The stock has fallen by nearly 30% in the last one week and provides excellent buying opportunity,” said a dealer.

Some banks in Ahmedabad are believed to have received calls asking for stop-payment on Reliance Power. Tentative estimates peg the amount of stoppayment cheques at over Rs 100 crore. The final figure would be available by January 23. A few co-operative and public sector banks in Gujarat said that that their branches received instructions for stop-payment for cheques issued in favour of Reliance Power.

Reliance lights up investors, analysts see tripping point

R-Power IPO Sop

Reliance lights up investors, analysts see tripping point

Broking houses advise caution

Jan 16, 2008

Ashish Rukhaiyar
MUMBAI

NEVER mix business with pleasure, goes the saying. And that is just what the broking fraternity did. Notwithstanding the bonhomie evident at the company’s brokers’ meet, brokerages appear to have dug their heels in, crying “caution” on the ongoing Reliance Power issue. A far cry from when ‘mere papa ka sapna,’ and every mention of the word ‘Reliance’ was met with applause.

The reports on Rel Power come with a caveat, with one even recommending an “avoid”. The bottomline being “subscribe for listing gains”. Most brokerages have identified absence of operating history, implementation delays, long gestation period, fuel availability and expensive valuation as the key concerns.

So, even as Emkay has advised its clients to “subscribe for listing gains”, Religare said “investors can subscribe to the IPO purely on the promoter group’s track record and execution capabilities”. It is reasonable to assume gains on listing, it goes on to add.

Indian Capital Markets has also advised its clients to subscribe to the issue only to cash in on listing gains. But that’s not all. Equitymaster has come out with an ‘avoid’ citing execution risks and expensive valuations as some of the many reasons.

According to Emkay, unavailability of fuel could be a simmering issue. “Most of the projects do not have coal linkages, while availability of gas is not yet certain,” it says. The brokerage is also of the view that implementation delays are one of the biggest risks for the company. “We recommend investors to subscribe with the objective of booking listing gains in this stock,” sums the report.

Incidentally, the market has already been abuzz with talk that most retail investors are leveraging to invest in the issue, only to exit on day one. If the grey market premium is anything to go by, then investors are certainly expecting the stock to list at around Rs 900 levels.

Indiabulls on its part believes the company may face difficulties in procuring the required coal supplies for a majority of the projects at commercially acceptable terms. “The group company, RNRL does not hold any rights to coal resources of its own, and is in fact, in litigation with respect to gas reserves of Reliance Industries. Such conditions, if they continue, can have an adverse impact on the operations and finances of the company,” it says. Indiabulls has recommended a ‘subscribe’ to the issue.

R-Power IPO Sop

IPOs are like that only Nothing ‘public’ about ’em

Promoters Seen Offering More Shares
To Institutions During IPOs

Jan 10, 2008
Ashish Rukhaiyar
MUMBAI

PUBLIC issues, it seems, are not quite meant for the ‘public’ anymore. At a time when more and more retail investors are looking to hop on to the equity bandwagon, promoters have taken refuge in a decade-old regulation that allows them to dole out more shares to institutional bidders at the cost of retail ones. And the sad part is that this is perfectly legal and only an initiative from the market regulator can create a more level-playing field for small investors.

According to capital market regulations, if promoters dilute more than 25% during an initial public offer (IPO), retail investors can be allotted 35% of the issue, while institutional category and HNI segment commands 50% and 15%, respectively. However, promoters are nowadays diluting less than 25%, as this allows them to cap the retail portion at a maximum of 30%. The institutional portion in such cases go up by 10%. For small investors, this 5% difference can be substantial when the issue size is large.

Interestingly, this special clause — Rule 19(2)(b) — was introduced by the Securities and Exchange Board of India (Sebi) in 1999 for technology companies wherein promoters were allowed to dilute 10% if the issue size was more than Rs 100 crore. This also meant that QIBs could be allotted 60%, while HNI and retail portion was capped at 10% and 30%, respectively. While initially the special clause was applicable only to technology companies, it was subsequently extended to all sectors.

Meanwhile, two of the most high-profile issues in recent times — Reliance Power and Future Capital — that are about to hit the market shortly are also using this age-old clause (by diluting only around 10-12%) to allocate more to the institutional investors. For instance, Reliance Power, where 22.8 crore shares are on offer, retail investors can bid for only 6.84 crore shares.

While this trend has been on an upswing for quite some time now, the recent past has seen a near complete disappearance of issues where retail investors were offered 35% of the total issue. Industry watchers say this trend is killing the very concept of ‘public holding’ in a publicly listed company.

“The clause was valid when it was introduced,” said Prithvi Haldea of Prime Database, adding that now times have changed and there is an urgent need to revisit it. “Maybe increasing the Rs 100 crore limit to Rs 300 crore or Rs 500 crore could be a practical option as there is enough depth in the market to absorb such an issue,” he said.

The effect of this clause can be gauged from the shareholding pattern of some of the companies that turned ‘public’ last year. The retail holding in Puravankara Projects is a lowly 0.8%. In the case of Motilal Oswal Securities and Omaxe, the retail stake is 3.43% and 3%, respectively. After the mega-sized public issue of DLF, retail investors have only a 2.25% stake in the real estate major. In Vishal Retail, public stake is less than 5%.

However, merchant bankers, quite expectedly, are happy as it allows them to allocate more shares to institutional investors. “Promoters want more institutional investors as their shareholders,” said an investment banker on condition of anonymity. “Ultimately, it is the name of the foreign or domestic institutional entities that will attract more investors,” he added.

Some bankers are also of the view that promoters like to leave some room for a follow-on offering or a qualified institutional placement and so decide against a dilution of around 25%. However, bankers remain tight-lipped when questioned about the importance of the law in the current scenario.