India gets follow-on boost as shares surge

Less than six months into 2017, Indian corporations have already raised more from follow-on offerings than in the whole of 2016. Banks have played a vital role.

India's equity capital market is on course for another outstanding year.

Two equity follow-up offerings this week – worth a combined $2.8 billion – have pushed total secondary fundraising for the year to date to $7.2 billion, according to Dealogic, beating the total for the whole of 2016.

And unlike previous bumper years for the market, this year's secondary action is driven more by banks' push for regulatory capital rather than government divestments – though government stake sales may further bolster the total in the months ahead.

The latest deals were a Rp150 billion ($2.33 billion) qualified institutional placement (QIP) from State Bank of India and the $490 million selldown of shares in state-owned gas distributor Petronet LNG on Thursday.

The two transactions pushed total follow-on volume above the $5.6 billion mark for 2016 and indicate the full-year volume could get closer to the 2015 total of $17.1 billion, India's best since 2010.

The follow-on boom is partly a result of a rally that in India’s stock market since the beginning of the year which has encouraged companies to take the opportunity to raise capital and encouraged shareholders to cash out at a high level.

India’s benchmark Sensex has been on a steady uptick since the start of the year and is now trading at an all-time high near the 31,000-point mark, up 17% this year.

French gas company GDF International was a typical example; it sold its entire 10% stake in Petronet LNG with the stock at Rp440, just 1.7% below its all-time high of Rp448. The 75 million-share sale was eventually sealed at Rp421 to reflect a deal discount of 4.3% on Thursday. 

Similarly, Hindalco Industries’ $500 million qualified institutional placement in March was also completed on a high note, as the shares were sold just 7.4% below the stock’s record level.

Basel III implications

Historically, India’s secondary equity fundraising hinges on the level of government divestment. In 2015, for instance, the government sold stakes in Coal India and Indian Oil  worth $5 billion, representing nearly 30% of the total follow-on volume that year.

This year, however, Indian banks have emerged as the biggest source of equity fundraising so far as they raise funds ahead of stricter requirements on bank capital effective in 2019.

Since the beginning of the year, State Bank of India, Kotak Mahindra Bank and Yes Bank have raised nearly $4 billion from new share sales, accounting for more than half of the total follow-on volume so far this year. Other lenders such as Bank of India and Central Bank of India have also announced their intention to raise new capital through the QIP route.

Commercial banks are raising capital to beef up their balance sheet in order to comply with the Basel III capital regulations, which will be fully implemented by the end of March 2019. By then, these banks will be required to meet a total capital adequacy ratio of 11.5% against 9% now.

Moody’s has estimated that India’s public sector banks will require as much as $14.6 billion in new capital in order to meet Basel III requirements by 2019.

Government Divestment

Hopes are also high that the government will support the country’s equity capital market this year, particularly given the Narendra Modi administration has announced that its biggest ever divestment plan will come to fruition in the current 2017/18 financial year.

Despite repeated failures to meet its divestment targets in recent years, the Indian government is targeting proceeds of as much as $11.2 billion from selling stakes in government-owned businesses for the financial year that ends March next year.

According to the Department of Investment and Public Asset Management, the government plans to divest 10% stakes in state-backed utilities businesses including NTPC, NHPC and Power Finance Corp. Other divestment plans include the sale of a 15% stake in NLC, 10% in Steel Corporation of India, 5% in Rural Electrification Corp and another 3% in Indian Oil Corp.

Besides selling down stakes in listed companies, the government also plans to raise capital by listing a number of state-backed insurance companies, potentially giving a boost to the local market for initial public offerings.

Investment bankers are expecting New India Assurance and General Insurance Corporation to list in the near future, followed by National Insurance, Oriental Insurance and United India Insurance.

Two months after entering into the new financial year, the government has only raised about 1.6% of its divestment target from the 10% sale of National Aluminium Co for $186 million in late April. 

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