The headlines in the pink papers have been reminiscent of 2008 and even 2003, with all-time highs for Nifty and Sensex benchmark indices, and most stocks trading at record levels, with many looking at stock splits to make their stocks affordable to retail investors. But, there is a big difference in the headlines of today and of the bygone era.There is very little talk of companies rushing for initial public offerings to take advantage of the high indices. Bitten by the crash in 2008-09, the retail investor still remains away from investing in equity markets and has fallen back on safer investments such as deposits, postal savings and insurance.

A good investment bet
The recent revised growth projections (which many consider ambitious) have pegged Indiaas one of the best investment bets across the globe. This is also seen in the huge amounts of foreign inflows into Indian equity and debt, with government debt quotas being completely used up.

SEBI & internal research data shows a direct correlation between GDP growth and the total funds raised in the country. This clearly indicates that GDP growth receives a fillip from fund raising and cyclically gives a fillip to such capital raising.The data tracks a total of capital raised via initial public offering, rights issue, follow-on public offerings, qualified institutional placements and institutional placement programmes.A look at the data shows that in years since 2010, equity fund raising fell sharply, which led to a direct dip in the GDP growth over the next five years.

In January, total investments through Participatory-notes including equity, debt and derivatives as underlying stood at 2.68 trillion Rupees, up over 13% from the previous month's 2.37 trillion Rupees, according to data from the Securities and Exchange Board of India. This quantum of investments through the P-notes medium is at a seven-year high, and is the highest since February 2008, when the capital market saw inflows of 3.23 trillion Rupees through this route.Participatory notes allow overseas investors, particularly hedge funds and high net worth individuals, to invest in Indian markets without being registered with the Securities and Exchange Board of India.

Not losing out

With growth projections indicating greater spurt going ahead, it is imperative that more companies tap equity markets to raise funds for the next phase of growth, as banks continue to remain wary of lending following their own asset quality problems. If there is no regulatory push for equity issuances in the coming months and governmental support on the policy front, it is likely that India may have to look back at this phase in its history as a lost growth opportunity.

For example, banks remain strained for equity, with even state-owned banks not getting adequate capital support from the government, as higher Basel III norms kick in. With internal accruals muted due to the bad loan issue, banks have been forced to go cautious on credit growth, which has had a domino effect on other key sectors, especially the capital-intensive infrastructure sector. The recent increase in equity markets has presented an opportunity for many of these lenders to tap equity markets, but few have done so, with the exception of better-run private sector banks.

Need of the hour
India needs capital creation, and a pick up in investments similar to the 2003 period, when many companies tapped equity markets and raised capital, which culminated in them achieving business and equity market peaks in 2008-09. However, the ensuing global financial crisis has spooked many of these players and there has been hardly any serious capital creation over the last 6-7 years. The initial public offerings have dried up, and even the divestment programmes of the government have seen public sector entities bailing them out despite being attractively priced. With the government promising reforms, it is expected that infrastructure creation will receive a boost, which will lead to greater demand from sectors such as petrochemicals, power, telecom and so on. These sectors need to see investment now to enable them to harness the growth opportunities that will come up as growth in the economy takes off. The capital raising that happened in 2008-09 was just a reflection of the demand that picked up from 2003 onwards and translated into 7-9% growth in the ensuing years.

Bloomberg research shows that equity raising by banking and financial services dominated the fund raising trend from 2000-15, hitting a peak of INR 38,463 crore in 2007 but easing to INR 23,451crore in 2014. This was followed closely by energy projects that raised equity worth INR 22,928 crore in 2010, but eased off over the last few years before rising to INR 22,613 crore in 2014. Utilities raised equity worth INR 19,870 crore in 2013, the highest after INR 19,769 crore in 2008. Infrastructure entities lagged in capital raising and the highest equity raised stood at just INR 8,393 crore in 2007, but have since remained muted with a high of INR 5,066 crore in 2014.

This phase of capital creation has supported the growth over the last decade, but India must continue to take policy steps to ensure that it does not limit itself to the current growth trend, or worse, slip back towards the pre-liberalisation rate of growth of 2-3% per annum. Unfortunately, capital raising via equity markets especially through primary issuances has been dismal since 2011-12, which has raised questions on how future potential growth will be funded. While secondary equity markets have returned to peak levels since 2013, the primary market issuances remain stagnant.

Not limiting growth
Many of the existing projects that are named as stalled projects are stuck mostly due to capital constraints and cost overruns and it is necessary to support these projects with capital to enable them to quickly come online and spur future growth. While greenfield projects will take time to take off, it is necessary to raise capital to boost existing projects in the pipeline and also kick off brownfield expansion. The future growth trend and consumption projections indicate that there needs to be a build up in capacity in the country, and this can only be done through capital creation.

A sector-wise look at equity capital fund raising by Bloomberg, shows that infrastructure companies raised equity capital between 2004-2008 and then again from 2009-2011. After that, equity capital raising for infrastructure projects have plateaued out to levels similar to 2000-03. 

However, over the last two years, there is an indication that infrastructure companies are again aggressively looking at equity markets as a means to meet their growth requirements. Equity capital raising by the energy sector, closely linked to infrastructure, followed a similar trajectory till 2008 but has seen sharp spikes in 2009, 2012 and 2014.

India is growing and all the sectors in the economy will find themselves growing at a faster clip. Be it banks, warehousing, infrastructure, roads, ports, airports, power, logistics, oil and gas, telecom, or any other sector, there are clear growth opportunities in the offing and it is essential that they look at raising capital from equity markets at this juncture to remain capitalised for this growth. So far, the country continues to have a weak corporate bond market and a small private equity segment, and most of the fresh investments are driven through bank loans and through capital raised from equity markets. If India aspires for 9% and eventually double-digit growth, as recently indicated by even the Reserve Bank of India Governor RaghuramRajan, then there is a dire need for funds.

In conclusion
With growth in mind, the government needs to increase spends on productive sectors such as infrastructure, especially roads and power, along with creating supportive policies for investment and removing regulatory bottlenecks. Creative regulatory moves such as introduction of REITS (real estate investment trusts) and InvIT (Infrastructure Investment Trusts), can lead to capital creation without promoters losing management control. Markets tend to front-run actual happenings, and if the recent trend in equity markets is anything to go by, then the markets believe that the government will unleash a new set of reforms that will help India achieve its true growth potential.


Avdhoot Deshpande

Avdhoot Deshpande heads the Equity Capital Markets and Broking Business of IL&FS Financial Services Ltd in his capacity of a CEO of IL&FS Capital Advisors Limited. Avdhoot is a seasoned investment banker with over 20 years of experience in Equity Capital Market and has led many marquee and successful capital market transactions across the sectors.



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