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The Growing Disconnect between IPOs and the Economy
Mon, 3 Apr Pre-Open

IPOs are the flavor of the season these days. With 102% gains for D-mart on its listing date, why wouldn't it be? Such stellar returns have created an IPO frenzy in the market. Half a dozen companies are set to raise Rs 60 billion in March and early April through IPOs.

But is the basic purpose of raising money from the investors being met?

When a firm raises money from the general public, it is assumed that it will use the money towards improving the business. It can use it either to reduce existing debt, which will allow the business to function smoothly by reducing interest costs and improving its credit rating. It can also use this money to expand its capacity which will allow it to improve its sales growth going forward.

But the recent IPOs indicate a worrying trend with the economy in general. According to the data reported in Mint, approx. two-thirds of the money raised through IPOs in 2016 have been offer for sale. Just one third of it was towards capital expansion.

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Since most of the companies are underutilized in terms of capacity due to lower demand, they hardly require fresh funds. Many of them are looking at earnings revival before deploying cash towards capacity expansion. Even Notebandi had hit demand resulting in a downward revision in earnings estimates of India Inc. The sectors which bore the brunt of Notebandi were Realty, Infrastructure, Metals and power. These have not raised any fresh money for capital expansion.

The wave of IPOs hitting the Indian markets has more to do with early investors exiting out of business at attractive levels, rather than fresh funds being raised to be deployed in the business.

Recent developments at the macro level have been positive for the Indian economy. The implementation of GST is seen as the necessary boost needed for the revival of the economy. It is expected to provide a level playing field for the organised sector and spur demand.

With greater efficiency, sales turnover will increase leading to subsequent increase in capacity utilization. If implemented correctly, we might see Indian companies raising money for the right reasons.

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