An analysis of new issues: 1990-91

Dr N Balakumar

November 1992

Preamble

A serious problem faced by the developing nations like India, is the existence of scare long-tem capital that is needed for the industrial development of these nations. For a long period, almost all the new projects were depending on government agencies debt financing in India.

In recent years, India’s stock markets are growing at a faster rate and the Indian corporate sector would have to largely rely upon the capital market in future to finance its long-term capital needs, especially, with the shift in the structural changes taking place in the economy.

Various financial institutions and mutual funds – who have massive funds – play a vital role in making a new issue (Initial Public Offering or IPO) success. Also, participation by other shareholding groups, such as, promoters, foreign collaborators, non-resident Indians, employees and public too play an equivalent important function. In this context, an attempt – which was only preliminary in nature – has been undertaken to enquire into the distribution of shareholding pattern by the various categories of players in the primary market, in India. Also, an attempt was made to analyse the public issues, instrument-wise.

Data Base

Relevant data have been extracted from the prospectus issued by the companies at the time of their public issue, for the period of April 1990 to March 1991. Data were collected for all the 141 companies (for both new and already existing companies) that entered primary market during the above-mentioned period.

Observations

Out of 141 companies that entered into the primary market during April 1990 to March 1991, 57 companies (40.43 per cent) were new companies and 84 were already existing companies.

Out of the total number of 141 issues, 68 issues (48.23 per cent) had foreign collaborative arrangements. In this, 29 were by new companies and 39 were by existing firms.

In the case of new companies, only nine companies had technical as well as financial collaborations; and 20 had only technical collaborations. In the case of existing companies, 30 companies had only technical collaborations; and nine had technical and financial collaborations. In short, only in 18 companies foreign collaborators have invested their funds, which are only 6.43 per cent to the total issue size of these 18 companies, during the period of study.

The type of collaborative agreements and the type of floating units are independent, according to the chi-square test conducted, where chi-square is equal to 0.54. As far as foreign collaboration is concerned, a foreign collaborative firm does not distinguish between whether their Indian collaborative company is a new one or existing one. The criteria for a foreign firm to enter into a collaborative agreement (whether it is only technical or technical as well as financial) is that the project should yield them attractive rewards.

Since existing companies have track record (both fundamental and technical), it becomes easier for them to market their fixed and quasi- income securities in the primary market, which is not the event in the case of new companies. Thus, new companies rely more on equity shares than debt instruments for their capital needs compared to existing companies. Though funds mobilized through equity shares forms 33.66 per cent (both new and existing companies put together) to total, 92.18 per cent of the funds were collected through equity issues by the new companies, where as it was only 17.43 per cent in the case of existing companies.

66.17 per cent of the capital requirements of the existing companies were met by partly convertible and fully convertible debentures, the percentage being 31.41 and 34.76 respectively.

Out of the total public issue of Rs 2924.05 crore during April 1990 to March 1991, 78.30 per cent of the amount was mobilized by the already existing companies and the balance of 21.70 per cent by the new companies.

Out of 84 existing companies, 17 companies (20.24 per cent) offered their instrument at a premium. The highest premium was 200 per cent (Rs 20.00 per a paid up share of Rs 10.00 by Kriloskar Pneumatic Co. Ltd.) and the lowest was 20 per cent (Rs 2.00 per a paid up share of Rs 10.00 by Harita Finance Ltd.)

It should be noted that cumulative convertible preference share as an instrument played a negligible role in the case of both new and existing companies (0.27 per cent and 0.20 per cent respectively) during the period of study;’ and only two companies have issued this instrument. Since the ceiling on the rate of dividend has been prescribed by the government (which is 10 per cent during study period) for this instrument, it fails to attract the primary market players.

It is found that the promoters retain 42.95 per cent of the issue amount and net offered to Indian public is 40.34 per cent. The rest 16.71 per cent has gone to the other primary market participants – foreign collaborators (0.73 per cent), financial institutions (7.3 per cent), foreign financial institutions (0.23 per cent), non-resident Indians (4.11 per cent), and employees (4.34 per cent). New companies offered 42.76 per cent and existing companies offered 39.68 per cent of the total volume of issues to Indian public.

It is interesting to note that the promoters stake in the public issue is only 26.94 per cent in the case of new companies, where as it amounts to 47.38 per cent in the case of existing companies. The reason is that, the history of the existing companies, which re-enter into the primary market are known and their past financial as well as market performance are available. And this is the case not with the new companies, where even the business risk is clear not in most of the cases. The employed chi-square test gives a result of 15826.52, rejecting the null hypothesis – floating units and allotment to primary market players are independent.

As far as the basis of allotment is concerned, 41.72 per cent of allotment is done by the mode of firm allotment and only 17.94 per cent is made by the way of preferential allotment. It should be noted that the new companies have not allotted anything to its employees and existing companies to non-resident Indians on firm allotment basis. Foreign collaborators have received not any preferential allotment. The conducted chi-square test leads to a finding that the basis of allotment and types of issuing units are not independent, chi-square value being 494.96, rejecting the null hypothesis.