ECB issues witness sharp jump in 2011

An age-old proverb says that ‘it is a sin to be in debt’, but when companies needed funds for their businesses in 2011, they were largely seen knocking on the doors of creditors, that too mostly abroad.

But in an ironic turns of events, once-attractive-looking foreign debt instruments proved to be the nemesis of Indian companies, which did not find local equity markets and domestic loan avenues attractive enough to raise funds in 2011.

As the year draws to an end, they are finding themselves burdened with huge foreign debt overruns due to a hardened US dollar and tough economic conditions in India and abroad.

Primary market

Going by the statistics, there was a lull in the primary stock market — where the companies raise funds through the sale of shares via instruments like IPOs — and it was mostly ECBs (External Commercial Borrowings) or foreign debt that was leveraged to meet the funding requirements of businesses during 2011.

Nevertheless, the total of Rs 1,80,000 crore worth of fresh capital raised by the Indian companies from equity and debt markets during 2011 was way below the record level of over Rs 3 lakh crore in 2010.

As a stock market downslide made it difficult to raise funds through the sale of shares, capital was mostly mopped up via debt and the trend could impact the business expansion plans of companies, as well as the industrial production and GDP numbers of the country, experts say.

Equity market

A total of just about Rs 22,690 crore has been raised from the equity market this year, which is little above one-tenth of the record fund-raising of Rs 2 lakh crore in 2010.

Weakness was seen across segments, including Initial Public Offers (IPOs), Follow-on Public Offers (FPOs), Qualified Institutional Placement (QIPs) and foreign depository receipts (ADRs/GDRs).

Even in overseas debt markets, Foreign Currency Convertible Bonds (FCCBs) did not find many takers, as these are linked to the equity markets.

External Commercial Borrowings

ECBs provided the only silver-lining and the funds raised through these instruments, as well as the number of these issues, witnessed a sharp jump in 2011.

The year has seen an estimated 810 ECB offerings so far this year against 672 in 2010, while the amount of debt raised through these instruments rose to Rs 1,58,150 crore ($30 billion) from $22 billion in 2010.

“The market was badly hurt in the last six months of 2011, so many companies preferred the ECB route to raise funds for expansion plans,” CNI Research CMD, Mr Kishor Ostwal, said.

“Looking ahead, I feel that the primary market will remain under pressure, until the secondary market stabilises.

Indian companies may look toward debt instruments for fund-raising activities in the year 2012 as well,” he added.

There were only 39 public issues in 2011, comprising 37 IPOs and two FPOs. The funds raised through public issues totalled about Rs 14,112 crore.

Interestingly, FPOs by Tata Steel and Power Finance Corp accounted for the major chunk of the funds raised, mopping up a little more than Rs 8,000 crore.

Public offers

For public offers, 2011 could very well be called a ‘big year of small issues’, as 17 offerings had a size less than Rs 100 crore and just three were above Rs 1,000 crore.

On the other hand, at least 28 IPOs (looking to raise more than Rs 32,000 crore) were cancelled by the respective companies due to sluggish market conditions.

Even those IPOs that managed to hit the market mostly turned out to be a wealth destroyer for investors as the shares of only nine such companies are trading above their issue prices. The other 30 stocks sold to the public, are trading below their issue prices.

Overall, the public issue market in 2011 has seen a wealth erosion of over Rs 4,000 crore, representing a mark-to-market or notional loss of 29 per cent.

“Such wealth erosion have made investors shy away from the public issue market, leading to shelving of several IPOs, including the government PSU disinvestment plans,” SMC Global Securities Strategist and Head of Research, Mr Jagannadham Thunuguntla, said.

“This huge wealth erosion may be attributable to the tendencies of high pricing in public issues and their low quality,” he added.

The entire year saw just one PSU offering, that is a follow-on offer by PFC, which also happens to be the biggest public offer of the year with a size of Rs 4,660 crore. This underlines the government’s continued challenge in meeting its disinvestment targets, experts say.

The year was also lacklustre vis-a-vis the sharp revival seen in the Indian primary market during 2010, when a total of 70 public issues (62 IPOs and eight FPOs) together raised about Rs 71,114 crore.

A major chunk of this amount, about Rs 50,000 crore, was raised through the government’s divestment in the public sector. State-run Coal India came out with the largest-ever public issue in 2010 and raised more than Rs 15,000 crore.

Things were no better in the secondary market either and there were not many takers for QIPs or Qualified Institutional Placements, where already-listed companies sell shares to select institutional investors.

Qualified Institutional Placements

A total of eight companies together raised about Rs 3,451 crore during 2011 through QIPs, which was little over one-third of the Rs 28,339 crore raised in 2010.

There were no ADR issues, although some action was seen in the area of fund-raising through GDRs. During 2011, there were 12 GDR issuances, which raised Rs 1,156 crore ($220 million). This was almost 75 per cent lower than the funds raised through GDR issues in 2010.

Another sour point in the fund-raising space was that of FCCBs. During 2011, a total of about Rs 441 crore ($80 million) was mopped up through 10 FCCB issues. This was lower than the FCCB activity seen in 2010, when 13 FCCBs raised $1.55 billion.

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