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India's IPO market is about to go big

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India's popular budget airline IndiGo is set to jump on the IPO bandwagon.   © Reuters

MUMBAI -- Pratul Dalal is spending a lot of time shuttling between New Delhi and his company's headquarters here to get ready for an expected boom in initial public offerings.

     "We have seen enough booms and busts in IPO markets over the past dozen years," said Dalal, executive director of Western Press, a leader in IPO prospectus printing. "And two months back, when I noticed signs of IPO market revival yet again, I decided to strike. I am launching India's first virtual data room in the next few months, and I am in a hurry to ride the ensuing IPO boom."

     The virtual data room would be an online repository for documents required for financial due diligence -- and a good indicator of the confidence emerging in India that share offerings are back on the agenda after three moribund years.

     Another indicator: Bankers specializing in IPOs report record levels of inquiries from companies.

     Srinivasan Ramesh, joint managing director of Kotak Investment Banking, said there has been "a sharp turnaround in sentiment" since the election victory in May of Narendra Modi's Bharatiya Janata Party. He noted there was just one major IPO in the 12 months through March.

     "The activity levels in the merchant banking industry and in our firms have heightened reasonably," he said. "I believe that trend is here to stay."

     About a dozen companies are already on their way to listing on the market, including Inox Wind, a power generator, and Lavasa, a unit of Hindustan Construction, which is building a new hilltop resort city about three hours from Mumbai. Waiting in the wings are well-known names like Amalgamated Bean Coffee Trading, parent company of Cafe Coffee Day, India's biggest coffee shop chain, and InterGlobe Aviation, owner of IndiGo, the biggest domestic airline, which has hired banks for a $400 million share sale.

     This enthusiasm is in marked contrast to the market gloom that has prevailed for several years. Fresh equity sales fell sharply in 2013 to 564 billion rupees ($9.27 billion), from 900 billion rupees in 2012 -- well below the record $1.86 trillion level -- as slowing economic growth, corruption scandals and delays in project approvals battered sentiment.

     In the year to date, seven IPOs have raised about 60 billion rupees, but only one -- Just Dial, a search engine group -- listed on one of the main bourses, the Bombay Stock Exchange or the National Stock Exchange.

     The stock market began rallying early in the year as expectations grew of the Bharatiya Janata Party's election victory. The benchmark Sensex index is up more than 20% since the beginning of the year.

     "What we have seen is that the institution of an expected stable government at the center has brought in hope of a stronger economy and better corporate results, which in turn has fired the secondary market," said Prithvi Haldea, founder of Prime Database, a market information consultancy.

      "Money has started flowing into equities as an asset class from real estate, commodities, gold, etc., which in turn is fueling further inflation of the secondary markets," said Gopal Jain, founder and managing partner of Gaja Capital.

      The Securities and Exchange Board of India added to the confidence by announcing a slew of reforms at the end of June. Bankers have particularly welcomed a move to raise the minimum share offering size for all companies to 40 billion rupees or 25% of equity, whichever is lower. Some companies had previously been allowed to come to the market with a public float of only 10% of their shares.

     The exchange board said anchor investors can now take stakes of up to 60% in IPO offerings, double the previous maximum. This offers companies more assurance of a successful flotation.

     Separately, the board announced in August that new guidelines will be introduced so real estate and infrastructure investment trusts can raise money through IPOs. This could facilitate investor inflows worth up to $20 billion from domestic and overseas sources, according to industry experts.

     In addition to private companies looking for capital, the coming IPO revival will be welcomed by private equity funds seeking an exit from investments, and by the government, which wants to sell $10 billion worth of equity in state-run companies.

     The board's reforms also include expanding a system for secondary share offerings directly through the two main exchanges. The system, created two years ago, had been open to sales only by the controlling shareholders of the 100 largest companies by market capitalization; eligibility has now been extended to all holders of stakes of at least 10% in the 200 largest market cap companies.

     Based on India's past IPO booms and busts, some worry that pent-up demand could overwhelm investors.

     "Ultimately," Jain said, "markets are all about demand, and the huge amount of IPOs, should that so happen, could have a negative impact on the IPO market."

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