chapter viii demand and supply conditions in the new...

CHAPTER VIII

DEMAND AND SUPPLY CONDITIONS IN THE NEW ISSUE MARKET: POST-ISSUE TRENDS

8.1 Introduction

Trends in subscription response to public issues made by different firms in the NIM

vary depending on firm-level fundamentals as well as alternative investment

opportunities available to the investor. The determinants of response also vary

between an initial public offering (IPO) made by a new company and a seasonal equity

offering (SEQ) made by an existing company. In the case of SEOs, existing studies of

public response have given high weightage to firm fundamentals and other factors like

past performance, dividend declaration, announcement of annual accounts, general

economic condition, relative performance of contemporary public issues, expectations

about future yields, etc. But, in the case of IPOs, identification of factors that

influence response is a difficult task. These issues being the first ever to be made by a

company, there may not be much by way of past performance which the public can go

by, as in the case of SEOs. For this and other reasons, we are yet to understand the

factors that influence the subscription to a public issue in a developing economy with

high information asymmetry. The focus of this chapter is therefore the identification of

factors which influence the subscription to a public issue, using firm fundamentals1

derived from the information on the firm in the prospectus, which is publicly available.

The aim is to identifY the nature of market psychology (of investors) as reflected in the

response to public issues.

This chapter is divided into two main sections. The first section encompasses

three sub-sections. The first sub-section looks at the demand and supply of capital in

the NIM and would reveal the capital generation capacity of the Indian primary

market. The second sub-section analyses subscription trends across the various

response categories, with respect to different firm characteristics. The third sub

section analyses the influence of various firm-level characteristics and public issue

In this context, firm fundamentals consist of information presented in the prospectus and does not refer to the past performance (sales, and profit) of the company.

Chapter VIII

characteristics on the response generated, usmg correlation results. The second

section of this chapter analyses the effects of a public issue on firm performance, based

on the data provided in their balance sheets. The section compares the pre- and post

issue performance of finns that raised capital from the NIM.

8.2 Responses to Public Issues by Firms in the NIM

Before we take up the analysis of demand and supply of capital in the NIM, we look

into the broad trends in subscription to public issues, during the period when a large

increase in the number of issues was experienced. The analysis is based on 2333 firms

out of a total of 3127 firms in the sample. For the sake of convenience of presentation

and analysis, the responses to issues floated by the finns are divided into seven

response categories, ranging from a response of less than 1 time (under subscription)

to the highest possible response of more than 40 times. 2

8.2.1 CCI and Post-CCI Trends in Responses

Based on the above categorisation of responses, Table 8.1 shows that the number of finns

in the lower response categories, that is, in the first and the second subscription categories,

showed an increase during the 1990s, especially after 1992. The increased number of finns

in the lower subscription category during the post -CCI period, along with an increase in the

participation of £inns indicates that the share of £inns in the over -subscribed categories was

decreasing over the years, in the post-CCI period. This shows that during the post-CCI

period, the total subscription to issues was lower when compared with the CCI period.

Table 8.1: Response to Public Issues of Private Corporate Firms: 1989-95 (Number of finns)

Year < 1 time 1 to 3 3to5 5 to 10 10 to 20 20 to40 >40 Finns Maximum$

1989 # 9 18 4 9 16 12 2 70 81.33

1990 4 9 12 22 17 10 5 79 101.89

1991 3 24 8 25 20 18 5 103 65.26

CCI@ 6.9 20.1 9.6 21.7 21.3 15.8 4.7 252 101.89 1992 13 57 46 64 57 26 6 269 71.54

1993 112 217 40 35 18 14 5 441 97.76

1994 135 199 77 112 150 91 56 820 116.84

1995. 34 127 53 54 38 14 7 327 98.18

Post-CCI@ 13.9 31.3 12.3 15.1 15.0 8.1 4.3 1857 116.84 TOTAL 310 651 240 321 316 185 86 2109 116.84

Note: a) # '-- 1989 value 1s from March 1989to December 19R<J, b)* =the 1995 data 1s only for three months January to March, c) @=Average Percentage share for the Phase. d) $ c: Maximwn times a Issue was subscribed during the year.

Source : Extracted from the sample data.

2 The categorisation is based on PRIME database to have uniformity in analysis with the macro discussion on response in Chapter III.

Chapter VIII

This inverse relationship between increased participation m the NIM and lower

subscription, points to a greater dispersion of relatively scarce investor funds. This led

to a situation wherein the number of instances of low response per firm increased due

to the availability of alternative investment opportunities. However, the dispersion of

capital did not reduce the maximum level of over-subscription of an individual issue

during the liberalised period, as compared with the controlled period. In fact, the

,maximum extent of over-subscription of an issue rose from 101.89 times (1990) in the

CCI period to 116.84 times (1993) in the post-CCI period, suggesting that even with

an increase in share of firms getting under-subscribed due to "overcrowding" of the

NIM, good firms managed to attract overwhelming investor support. This points to

the relevance of firm fundamentals in generating a better response in the market.

Table 8.2: Average Response To Public Issues: 1989-95 (Average

Years <I time I to 3 3 to 5 5 to 10 10 to 20 20 to40 >40 1989# D.67 1.59 4.14 7.16 14.64 32.06 62.03

1990 0.66 2.06 3.96 7.28 13.91 2.5.66 .58.36

1991 0.9.5 1.90 3.77 7.00 14.81 27.57 .54.08

CCI_@ 0.8 1.9 4.0 7.1 14.5 28.4 58.2 1992 0.97 1.81 4.00 7 . .52 14.79 27.14 .56.23

1993 0.97 1.63 4.19 7.01 14.96 29.63 .5.5.62

1994 0.9.5 1.70 3.96 7.46 14.24 29.28 .56.79

1995* 0.90 1.80 3.73 7.00 14.78 28.2.5 .57.02

Post-CCI@ 0.9 1.7 4.0 7.2 14.7 28.6 56.4 Note: I) # = 1989 value ts from March 1989 to December 1989; 2) • =the 1995 data ts only for

three months from January to March, 3) @ = Average time issue were oversubscribed and undersubscribed in India in the 1990s.

Source: Extracted from the sample data.

It is found that even with the increase in number of firms there was no change in the

average extent of subscription within each of the response categories (Table 8.2). In

the lower response categories, subscription was around the same in both the CCI and

post-CCI periods. Despite an increase in the share of firms in the response category of

less than 1 time, from 7 per cent (CCI) to 14 per cent (post-CCI), the average

response within the category increased only marginally from 0.8 to 0.9 times. Hence,

we find that while there was an increase in participation, the average response rate

within the category remained fairly unchanged. The only category that showed a

marked change was the highest response category (above 40 times) that recorded a

decrease from 58.2 times in the CCI period to 56.4 times in the post-CCI period

Thus, in the liberalised phase, there was a decrease in total average subscription, as the

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Chapter VIII

share of firms in the lower response categories increased and that of the higher

categories decreased (Table 8.2).

The results also highlight another important finding. The increase in the

number of under-subscribed firms (that is, firms in the less than one time response

category) implies that there was an increase in the dependence on underwriters by a

larger number of firms in the post-CCI period, as only in the case of a very few issues

was the 'refund' option used. 3 Thus, most of the issues were either fully subscribed or

completed the issue process with the support of underwriters.

8.2.2 Demand and Supply of Capital in the NIM : Analysis of Response Rates 4

While the response analysis points to a decrease in the overall level of subscription

accompanying an increase in the participation of firms in the NIM, figures on demand and

supply of capital points to a reverse situation. During 1989-1995, firms called public issues

worth Rs. 32,979.8 cr-ores and in response to this-demand, a total suppl/ ofRs. 2,33,824.8

crores was offered through the NIM. This staggering surplus6 (six times) ofRs. 2,00,245.1

crores over and above the actual demand shows the increasing spread and interest of

investors in the NIM during 1989-95.

During the 1990s, two years were prominent with respect to surplus amounts

generated. These were 1991, which was during the CCI period, when a 1708.6 per

cent surplus was recorded and 1994, during the post-CCI period, when the surplus of

funds generated was about 1105.0 per cent ofthe actual demand. At a glance, it can

thus be seen that throughout the 1990s, the market experienced an excess of supply

over demand. Although this surplus was more pronounced for issues that were floated

by firms in the manufacturing and service sectors, this phase can be termed as a phase

of excess supply of capital in the NIM, which had a wider spread effect. Hence, it is

3 Only in the case of very few issues 'refund' was used, suggesting that most of the undersubscribed issues completed their public issue process using the underwriters support. See the section on demand and supply in the NIM, Chapter lii.

4 The figures provided in this section will not tally with the respective figures in the previous chapters, as those were based on the sample firms derived from the researcher's database. This section is based on the data eollcctcd from PRIME database. which is the only source providing a comprehensive data on public issues made and the response received on each public issue in India.

5 Total supply is defined as the aggregate, over all sample firms. of the amount called by a firm multiplied by the number oftimes its issue was subscribed.

6 Surplus amount is the difference in the total amount called by firms and the supply in terms of the total amount raised.

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Chapter VIII

clear from the general trends at the national level, that the shortage of capital cannot be

an argument for explaining the decrease in the average response to issues during the

post-CCI period.

Table 8.3 : Demand and Supply of Industrial Capital in the NIM (Rs. in Crores)

Year Amount Called Amount Supplied Surplus over Col. 3. As % to Correlation (fl) Demand Col. I

(I) (2) (3) (4) (5)

1989 2449.9 9112.6 6662.8 503.8 -0.059

1990 1034.5 8278.2 7243.7 751.7 -0.115

1991 1526.1 21610.1 20084.0 1708.6 -0.043

CCI 5010.5 39000.9 33990.5 988.0 # -0.014 1992 4906.1 32976.9 28070.8 817.5 0.394

1993 7387.7 24574.6 17186.9 307.3 0.124

1994 8679.3 104924.2 96244.9 1105.0 -0.333

1995* 6996.2 32348.2 25352.0 447.6 N/A

Post-CCI 27969.3 194823.9 166854.6 669.35 # 0.150 1990s 32979.8 233814.8 200145.1 607.17 -0.013

Note : • = The year of 1995 has only three months data, January to Marot1.; # = Average for the phase; @ Correlation value between swplus funds and number of issues (month-wise trends).

Source : Extracted from PRIME Database.

The month-wise correlation analysis of demand and supply (in amounts) indicates a

high positive correlation of 0.71. Thus, in absolute terms, with an increase in the

demand for capital, the supply also shows a corresponding growth. The trend of

decreasing average subscription to issues was proved by the correlation coefficient

between the per-capita surplus and the number of issues in a month, which showed a

negative value of -0.013. This clearly suggests that an increase in the number of new

issues in a month had a negative influence on the response to public issues. But, the

correlation results between these two variables were positive in the post -CCI period

(0.15). However, the year-wise relationship, except for 1992 and 1993 (1992 was the

year of equity price liberalisation and 1993 was the year immediately thereafter),

showed a negative relationship. This points to the immediate positive effect of price

liberalisation of equities on the response generated, for 1992 and 1993. This

conspicuous effect in 1992 and 1993 (and not in the subsequent years) could be due to

the variation in reaction to policy changes by strong and weak companies. In the years

immediately after the price liberalisation, only good companies came to the NIM with

premium issues, which generated a large response 7 By the time the weaker companies

called for premium issues in the later years, the responses dropped.

7 Also see, average response figures across the response categories in Table 8.2. which show a higher response of 0.90 in the post-CCI phase compared to 0.80 in the CCI period.

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Chapter VIII

Table 8.4 : Response to Public Issues in tenns of Number and Amount of issues: Correlation Results for Month-wise Trends8

(correlation values) Correlation value Subscription Ranges

<1 1 to 3 3 to 5 5to 10 lOto 20 20 to 40

Between Amounts called during a month and Re!.-ponse Public issues 0.179 0.471 0.236 -0.051 -0.098 -0.082

Right issues 0.205 0.287 0.392 0.038 -0.001 -0.102

Total 0.159 0.446 0.276 -0.058 -0.140 -0.167

Between Nwnber of issues during a month and Response Public issues 0.313 0.491 0.252 0.0363 -0.040 -0.115

Right issues 0.373 0.436 0.284 0.0978 -0.058 -0.179

Total 0.277 0.478 0.223 0.0097 -0.114 -0.200

Note : Ammmt and nwnber correlated Wlth percentage share of Issues belongmg to each category. Source : PRIME Annual Report.

>40

-0.097

-0.071

-O.ll8

0.032

-0.173

-0.025

Table 8.4 reveals the correlation results between the distribution of response across

categories and the number of issues per month. The results are provided both in terms

of amounts called and participation in the NIM. It is found that both the number of

issues and the amounts called had negative influences on response, in the categories

above I 0 times. This suggests that an increase in demand for capital from the N1M can

have a negative influence on the overall performance of issues, and reduce the average

per capita surplus. Another observation that can be made is that there was no negative

effect on resource generation capacity in this phase, as most of the companies managed

to complete the public issue process (either through full/oversubcription or through

underwriters' support).

Figure 8.1 : Month-wise Trends in Amount Called and Surplus Generated

250

200 j e

[ -x-l'bofFmm I 800.0

700.0 -Per Capita Surplus X -·--------· = z

150 j 600.0

500.0

100

50

X I 400.0

X XX .J.\ )( ...: X X .J u 300.0 r.1 xx x ·= X XX XX X ..- 200.0 , ><x ><x I ~

X xx 100.0

0 0.0 -.:t r- 0 -.:t r- 0 -~ ~ ~ ~ ~ ~

0

00 00 00 ~ ~

..,. r- 0 0 ..,. r- 0 0

..,. r- 0 oMonth 0 0 0 0 0 ;;; 0 0 N N N N M M M ":t ..,. ..,. ..,. .,.. 0\ 0\ 0\ 0\ 0\ 0\ 0\ 0\ 0\ 0\ 0\ 0\ 0\

Note: The per-capita surplus in crores of Rupees is represented on Y axis on the right hand side and the nurnhcr offinns is represented on the left hand side.

8 The data used is from the PRIME reports. As this sample includes only firms which made public issues, only this part of the information would be used for further analysis.

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Chnptcr VIII

From Figure 8.1 which shows the trend in per capita surplus and the number of

participating firms between 1989 and 1995, two distinct phases can be identified in the

NIM. The first phase from July 1990 to November 1992 is the phase when the per

capita surplus for issues was high, but, volatile. The second phase is the period from

December 1992 onwards when the per-capita surplus for issues in the market showed a

decreasing trend. The figure also shows that towards the end of the equity boom (i.e.,

from October 1994 to March 1995), the number of firms in the NIM still showed a

rising trend despite the sharp drop in per-capita surplus from issues. This could be due

to the fact that during the years of the boom, market conditions were misread, leading

to an uncontrolled rush for capital issues. Such uncontrolled growth resulted in a fall

in confidence even in good companies in the market. The decline in the response to

issues during this rush discouraged firms from opting for public issues in the

subsequent years. For example, during 1997 and 1998 (from January to July of 1998),

there was a large drop in the number of public issues in the NIM. 9

Thus, although NIM showed a large increase in the participation of private

firms in the liberalised phase, the response showed a decreasing trend both in terms of

a general movement to lower response categories and in terms of the average surplus

generated. Four broad conclusions regarding market behaviour during the nineties can

be derived from these trends. First, even with a decrease in response, the market

showed buoyancy in terms of participation of firms. Second, capital was being

pumped into the market during this phase, resulting in a large increase in the amount of

total surplus funds generated by over-subscription. Third, increased participation of

firms in a month was accompanied by a decrease in average subscription of issues

during that month. Finally, the variation ill! the trends in response across firms

suggested that firm characteristics had a significant say in the response generated.

8.2.3 Characteristics of Firms and Responses to Issues

Objectives of Investments and Market Response

The analysis conducted earlier had revealed that a majority of firms went to the NIM

to raise capital with three main objectives : expansion; creation of new projects; and

mobilisation of working capital. The first two objectives directly contribute to capital

9 Refer Annual Reports on public and rights issues by PRIME.

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Chapter VIII

formation and hence should evoke a similar response pattern from the market.

However, the response to firms, particularly financial service companies, turning to the

market with the objective of mobilising working capital, needs more careful scrutiny,

especially because these firms have an increasing presence during the 1990s .

. A comparison of objectives in the response category of less than time,

suggests that firms with expansion objectives ( 14.3 per cent) had a better response

than those with new projects (16.6 per cent). More surprising was the even better

performance shown by firms with the working capital objective. There were only 13.2

per cent firms with this objective under the category of less than I time response,

suggesting that nearl~ 87 per cent of issues with working capital objectives were

oversubscribed during the 1990s (see Table 8.5). This corroborates the evidence noted

earlier of a flow of funds towards non-productive channels of investments in the

liberalised market.

Table 8.5 : Objectives of Firms and Response Trends In percen_ta.ges)

OBJECTIVE <1 1 to 3 3 to5 5 to 10 10 to 20 20 to40 > 40 times Total St.Dev. Diversification 11.9 26.2 8.3 19.0 17.9 13.1 3.6 14 7.46

Expansion 14.3 31.2 11.7 15.5 14.5 8.5 4.3 937 8.44 LTWC 11.1 61.1 ~.6 11.1 11.1 0.0 0.0 II 21.24

Modernisation 11.0 29.7 1B 13.1 22.1 4.8 3.4 14~ 9.33

New Projects 16.6 31.9 10.3 14.1 13.8 9.8 3.4 715 8.85 Offer for Sale 0.0 21.6 21.4 14.3 21.4 7.1 7.1 14 1.67

Workin2 Capital 13.2 29.2 11.1 17.3 16.0 7.8 5.3 243 7.84 Capital Adequacy 0.0 33.3 0.0 0.0 33.3 33.3 0.0 3 18.24

Others 18.2 36.4 18.2 9.1 9.1 9.1 0.0 11 11.58

Total 14.5 31.2 11.4 15.1 15.1 8.8 4.0 2170 8.48


Besides the dominant objectives, objectives like 'Offer For Sale' 10(0FS), that

characterised issues by 14 finns, were responded to well. All these issues were over

subscribed and nearly 72 per cent got over-subs,cribed more than 3 times. The offers

for sale were from promoters of reputed companies (mostly private companies), who

diluted their share in existing paid-up-capital for getting listed at the stock exchange.

As these are generally sold only to a limited number of investors who are well informed

about the firms, they evoked a better response. Other objectives like modernisation,

diversification and long tenn working capital also showed a better response. Around

90 per cent ofthe issues with these objectives got over-subscribed. Capital adequacy,

I 0 Offer For Sale is a channel used by finns to announce public issues to a limited few and these arc financial institutions, banks, and brokers. Thus has a limited spread effect in the shares of the company.

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Chapter VIII

which was the objective of only three firms showed the best response with none under

subscribed. Two of these issues were from old and well established private banks

which under the banking sector reforms were compelled to equitise, to meet the

revised capital adequacy norms. 11 Hence, all these public issues were received well in

the market.

The results across objectives indicate that existing companies which came to

the market for expansion, working capital requirements, modernisation, capital

adequacy, diversification, etc., showed a better response when compared to the

companies which resorted to issues for starting new projects. This suggests a higher

response to existing companies already in operation which come to the market for

additional capital, and a greater advantage for them in attracting funds compared to

new projects.

Table 8.6 :Response to Expansion of Firms : 1989-95 (In percentage

OBJECTIVE <1 1to3 3 to 5 5 to 10 10 to 20 20 to40 >40 Total 1989 # 23.5 23.5 0.0 17.6 11.8 11.8 11.8 17

1990 9.7 9.7 6.5 25.8 32.3 6.5 9.7 31

1991 0.0 21.9 9.4 21.9 28.1 12.5 6.3 32

CCI period 11.1 18.4 5.3 21.8 24.0 10.2 9.2 80 1992 5.6 21.7 21.7 25.2 16.8 7.7 1.4 143

1993 22.6 52.8 7.2 9.2 4.6 2.6 1.0 195

1994 1S.8 23.8 9.8 13.2 17.6 12.7 7.2 387

1995. 10.6 39.4 16.7 16.7 10.6 S.3 0.8 132

Post-CCI period 13.6 34.4 13.8 16.1 124 7.1 26 857 1989 to 1995 (Avg.) 12.5 27.5 10.2 18.5 17.4 8.4 5.4 937 Note: 1) # = 1989 value IS from Man:h 1989 to December 1989; 2) • =The 1995 data IS only for three months

January to March. Source : Extracted from the sample data.

There was an increase in the participation of existing companies with expansiOn

objectives during the post-CCI period, which was accompanied by an increase in the

number of under-subscribed issues. The share of firms that went under-subscribed

showed a marginal increase of 2.5 percentage points, but the largest increase in share

was in the 1 to 3 times category where the increase in share was nearly 16 percentage

points (294 firms). There was a sharp decrease in the share of firms which were over

subscribed more than 3 times. Their share fell from 65.2 per cent in the CCI period to

38.2 per cent in the post-CCI period. This indicated an inverse relationship between

participation of firms with expansion objectives and their over-subscription.

II For example, The Nedungadi Bank Ltd and The United Western Bank Ltd.

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Chapter VIII

Table 8. 7 : Response to New Projects of Firms (In percentage)

Categories <1 1 to 3 3 to 5 5 to 10 10 to 20 20 to40 > 40 Total 1989 13.~ 27.0 10.1 I. I 11.9 21.6 0.0 37

1990 3.7 20.4 14.1 24.1 16.7 16.7 3.7 ~

1991 0.0 uo 1.1 19.1 22.1 20.6 2.9

CCI period 5.7 24.1 l1.5 17.1 19.2 19.6 2.2 159 1992 2.6 16.7 10.3 U6 29.~ IU 3.1 71

1993 29.1 46.6 10.1 H 2.6 4.2 1.6 119

1994 24.0 27.9 7.7 12.~ 14.9 7.7 ~.3 201

199S 4.9 31.3 16.0 II.~ 11.1 7.4 3.7 II

Post-CCI Period 15.2 32.3 11.0 15.6 14.5 7.7 3.6 556 Total AvemJ{e 11.1 28.8 IJ.2 16.3 16.5 12.8 3.0 715 Source : Extracted from the sample data.

While it is evident from earlier results that new projects were also undertaken mostly

by existing companies 12, these issues received a relatively lower response compared to

firms that went in for expansion. Comparison of trends in the under -subscribed

category in Tables 8.6. and 8.7 shows a higher share for new projects (15.2 per cent)

in comparison to that for firms with the expansion objective (13.6 per cent), during the

post-CCI period. The results again highlight the bias in the NIM towards expansion of

existing finns. In the more than 5 times subscription category, firms with expansion

objectives showed a drop in response from 65.2 per cent to 38.1 per cent, but in the

case of new projects also, there was a drop (58.1 per cent to 41.4 per cent). The

results, thus, suggest that firms with expansion objective showed a better performance

in terms of lower under-subscription of issues, but a considerable loss was seen in the

higher subscription categories. This could be largely due to the fact that in the case of

companies that went for expansion through transformation of private limited

companies into public limited companies, investors had adequate information about

their past and future performance, and this led to good response being generated for

such issues. On the other hand, for new projects that were started by existing public

limited companies, investors had limited inform~tion regarding the future retUrns of the

projects which adversely affected their response.

Another important objective of NIM participants was working capital finance.

During the CCI period, issues with this objective received a lower response when

compared to new projects and expansion, as no issue with the former objective was

subscribed above the level of 20 times (Table 8. 8). However, during the post-CCI

phase, with an increase in the participation of these firms, response trends similar to

12 Due to the restriction put by the SEBI on public issues, issues for new projects had high participation by existing public limited companies.

267

Chapter VIII

those in new issues aimed at expansion and new projects, is noticed in the under

subscribed category. The share of issues that were under-subscribed increased from

6.7 per cent to 16.8 per cent. But, the higher response categories under these

objectives also showed an increase in over-subscribed issues in the liberalised phase.

While the increase in under-subscription can be explained by the large increase in the

number of small NBFCs in the 1990s, the huge increase in over-subscription can be

explained by the participation of reputed public sector DFis and private banks.

Table 8. 8: Response to Working Capital Objective of the Firms: 1989-95 _{In percentage

Years less than 1 1 -3 3-5 5- 10 10- 20 20-40 >40 Total 1989 # 0.0 66.7 0.0 16.7 16.7 0.0 0.0 6 1990 0.0 SO.O 50.0 0.0 0.0 0.0 0.0 2 1991 20.0 20.0 0.0 40.0 20.0 0.0 0.0 5

CCI period 6.7 45.6 16.7 18.9 12.2 0.0 0.0 13 1992 IH 21.1 S.3 21.1 IS.I IH S.3 19

1993 26.7 46.7 6.7 6.7 6.7 6.7 0.0 IS

1994 10.9 21.1 9.1 17.3 20.0 12.7 8.2 110

199S * 14.0 34.9 16.3 17.4 12.1 1.2 3.S 16

post-CCI period 16.8 31.1 9.3 15.6 13.8 9.1 4.2 230 Total averaRe 12.9 30.1 10.9 17.6 16,0 7.4 5.1 256 Source : Extracted from the sample data.

The yearly analysis showed that there was a movement towards lower response zones

as the participation in the NIM increased in the individual objective categories. (Table

8. 5). When the number of firms participating with similar objectives increased, it

provided the investor with a larger number of alternative investment opportunities.

The increase in the number of firms in the market with similar objectives and

characteristics led to a dispersal of investment by the investors. This in tum, increased

the number of firms that received lower response.

Firm Size, Age and Market Response

The results of the size-wise analysis had shown that in the 1990s there was substantial

participation of very small firms and young firms 13, although the mobilisation was in

favour of mega projects. This pointed to an increased role for small companies in the

NIM, which went contrary to the existing belief that the stock market is an institution

for medium and large companies. The question which arises immediately is what the

size-wise response pattern of the issues floated in NIM was. Due to the small presence

of large firms in the NIM, the medium and large categories are clubbed into a single

group for the analysis in this section.

13 Very small firms are those with an investment ofless than 5 crores and small firms are defined to include all firms with an investment of 5 to 10 crorcs (post issue paid-up<apital). along with very small firms.

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Chapter Vll1

Table 8.9: Response to Small Firms Issuing in the NIM :Yearly Trends (In percentage

Phases <1 1 to 3 3to5 5 to 10 10 to 20 20 to 40 >40 Total 1989 15.2 25.8 4.5 13.6 24.2 13.6 3.0 66 1990 10.5 9.2 15.8 25.0 21.1 11.8 6.6 76 1991 2.4 22.4 9.4 24.7 20.0 17.6 3.5 85

CCI 9.3 19.1 9.9 21.1 21.8 14.4 4.4 227 1992 13.6 16.9 15.7 23.1 19.0 9.1 2.5 242 1993 34.8 46.4 7.9 5.8 2.8 u 0.8 394 1994 21.7 24.0 9.5 12.0 16.3 10.3 6.2 682 1995 15.8 35.3 16.1 15.8 12.0 3.8 1.4 292

Post-CCI 21.5 30.7 12.3 14.2 12.5 6.2 2.7 1610 Total Avg 16.3 25.7 l/.3 17.1 16.5 9.7 3.4 /837


During the CCI period, 40.6 per cent of the small firms were subscribed above 10 times,

while during the post -CCI period only 21.4 per cent of them had the same level of

subscription (Table 8. 9). This was accompanied by a large increase in the small finns which

were under-subscribed, from 9.3 per cent to 21.5 per cent. However, with liberalisation,

there was a decrease in response to issues by small firms. The share of finns with a lower

response (upto 5 times) increased significantly during the post -CCI period and those with a

higher response (more than 5 times) showed a drastic decrease. Overall, however, the

trends indicate that the proportions of firms that received a subscription of below 5 times

increased from 38.3 per cent to 64.5 per cent. Thus, small finns had a better response rate

in the CCI period when compared to the post -CCI period. This was largely due to the

regulatory controls which existed during the CCI period regarding small issues, that led to a

very few issues in the NIM in that period leading to better response.

In the case of medium and large firms, it can be seen that under -subscnbed firms

increased from 9.1 per cent during the CCI period to 16.5 per cent in the post-CCI period.

However, a comparison with small firms reveals that the medium and large fums showed a

smaller proportionate rise in this share. This indicates that in the post-CCI period, the

medium and large firms were better placed when compared to small finns (Table 8.1 0).

Table 8.10: Response to· Medium and Large firrns Issuing in the NIM: Yearly Trends (In percentage)

Categories <1 1 to 3 3 to 5 5 to 10 10 to 20 20 to40 >40 Total finns 1989 16.7 16.7 16.7 0.0 0.0 50.0 0.0 6 1990 0.0 28.6 0.0 42.9 14.3 14.3 0.0 7 1991 10.5 26.3 0.0 21.1 15.8 15.8 10.5 19 CCI 9.1 23.9 5.6 21.3 10.0 26.7 3.5 32 1992 13.0 29.6 14.8 14.8 20.4 7.4 0.0 54 1993 27.3 34.3 9.1 12.1 7.1 8.1 2.0 99 1994 16.1 19.4 6.7 16.7 21.7 11.7 7.8 180 1995 9.6 46.2 11.5 15.4 5.1! 5.8 5.8 52 Pot~t-CCI 16.5 31.4 10.5 14.8 ll.8 8.3 3.9 385

Total Avg. /3.3 28.7 8.4 /7.6 /2.2 /6.2 3.7 4/7 Note :The sJZe group of 3, 4, 5 and 6 groups are classified as medmm and large mdustnes by the rcsearcht."f. Source : Extracted from the sample data.

269

Chapter VIII

Although large and medium firms showed a decrease in subscription levels, the shift

was from the over-subscription categories of 5 to 40 times (58 per cent) in the CCI

period to the 1 to 20 times (71.5 per cent) range in the post-CCI period. Small firms

however, showed a movement from the 5- 40 times response categories (57.3 per cent

of firms) to the less than I - 5 times categories (64.5 per cent). Of this, nearly 22 per

cent were under-subscribed. This indicates a decrease in over-subscription in the case

of medium and large firms, though they performed better when compared to small

firms in the liberalised phase.

Besides the proliferation of small firms during the post-CCI period, the

dominance of young firms is another factor which contributed towards the lower

subscription levels of small firms. Young firms accounted for 52.3 per cent of the total

number of small firms, as compared with only 36 per cent of the total in the case of

large firms. Thus, it could be said that small firms, besides carrying a size

disadvantage, were also constrained by the large participation of young firms (Table

8.11).

Further, it becomes evident that as we moved up the higher subscription

categories, the share of small firms in the total decreased. The share of small firms

dropped from 88.4 per cent among under-subscribed firms to 76 per cent in the highest

categories of Qver-subscription (above 40 times). The table also shows an increase in

the percentage share of medium and large firms from 9.8 per cent to 20.5 per cent and

1.7 per cent to 3.6 per cent respectively. Hence, the trends suggest that medium and

large firms had a relatively higher extent of over-subscription in India in the NIM when

compared with small firms.

Table 8.11 : Age and Size Cross Analysis of Resp~nse Trends : 1989-95 (In percentage)

Sl. no. Size/Age <I I to 3 3 to 5 5 to 10 10 to 20 20 to 40 above40 Total (no.) a. y~ 10.4 36.3 12.4 13.8 13.5 9.1 4.3 853 b. Middle Aged 8.5 36.2 11.5 15.8 16.6 7.7 3.7 679 c. Old 6.1 33.3 14.1 18.2 18.2 9.1 1.0 99

I Small Total 88.4 82.4 85.0 79.9 80.4 78.1 75.9 1631 8. YOlDI_g 6.8 32.8 9.0 15.8 17.5 12.4 5.6 177 b. Middle Aged 5.0 37.0 10.0 17.0 16.0 11.0 4.0 100 c. Old 0.0 38.7 9.7 16.1 19.4 6.5 9.7 31

II Medium Total 9.8 15.0 12.4 16.4 17.3 19.7 20.5 308 8. Yooog 5.3 36.8 10.5 10.5 15.8 5.3 15.8 19 b. Middle Aged 9.1 27.3 9.1 36.4 9.1 9.1 0.0 22 c. Old 0.0 50.0 16.7 8.3 16.7 !U 0.0 12

III Large Total 1.7 2.7 2.6 3.6 2.3 2.2 3.6 53 IV G. Total 173 715 233 304 306 178 83 1992


270

Ch11pter VIII

Age was not a very important factor in deciding response generation, as both young

and middle-aged firms showed a near similar trend (Table 8.12). The distribution of

response across age groups was similar, with the only difference being that the share of

under-subscribed firms was high for young firms when compared with old firms. The

absence of a clear distinction between the responses to the issues of young and old

firms could be due to the fact that while new projects (young) were being promoted by

existing public limited companies, expansions were being undertaken by old private

companies, as well. Thus, age provided no clear idea of the goodwill for a firm going

in for an issue. Besides that, the high shares of small firms in the under-subscribed and

over-subscribed categories for both the young and old firms could have counteracted

the influence of age.

Table 8.12: Age of firms and the Response From the NIM: 1989-95 (In percenta_Ee)

Sl.no. Age of Finns <I I to 3 3 to 5 5 to 10 10 to 20 20 to40 >40 Total ftnns a. Small 10.4 36.3 12.4 13.8 13.5 9.1 4.3 853 b. Medium 6.8 32.8 9.0 15.8 17.5 12.4 5.6 177 c. Large 5.3 36.8 10.5 10.5 15.8 5.3 15.8 19

I Youn~ 59.0 52.4 53.2 48.7 48.7 56.7 60.2 1049 a. Small 8.5 36.2 11.5 15.8 16.6 7.7 3.7 679 b. Medium 5.0 37.0 10.0 17.0 16.0 11.0 4.0 100 c. Large 9.1 27.3 9.1 36.4 9.1 9.1 0.0 22

II Middle a~ed 37.6 40.4 38.6 43.4 42.8 36.5 34.9 801 a. Small 6.1 33.3 14.1 18.2 18.2 9.1 1.0 99 b. Medium 0.0 38.7 9.7 16.1 19.4 6.5 9.7 31 c. Large 0.0 50.0 16.7 8.3 16.7 8.3 0.0 12

m Old finns 3.5 7.1 8.2 7.9 8.5 6.7 4.8 142 IV Troll (I+Il+III) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1992

v Youn~ 9.7 35.7 11.8 14.1 14.2 9.6 4.8 100.0 VI Middle age 8.1 36.1 11.2 16.5 16.4 8.1 3.6 100.0 VII Old 4.2 35.9 13.4 16.9 18.3 8.5 2.8 100.0 Source: Extracted from the sample data.

Also, investors in small firms are generally from a limited geographical area (local in

nature). Hence, with overcrowding of issues by these firms in a specific region like

Gujarat, Delhi or Maharashtra, the response to the issues in these regions would also

decrease. A further analysis of small firms across various age and objective categories

is carried out in Table 8.13. The distribution of firms shows that of the 2431 small

firms, 42.7 percent required capital for expansion projects, followed by 28.2 percent

for new projects and 18.3 per cent for working capital requirements. Of the firms

which had expansion objectives, nearly 22 per cent firms were middle-aged. However,

in the case of new projects 22.5 per cent of the firms were young and of the 18.3 per

cent small firms with working capital objectives, 67.2 per cent firms were young ( 12.3

per cent). This clearly suggests that a large proportion of the small firms were young,

271

Chapter VIII

and 35 per cent (850 firms) had objectives (new projects and working capital

financing) in which the investors had little confidence.

Table 8.13: Distribution of Small Finns According to Age and Objective of Issue: 1989-95 (In pere<.."llta e)

Objective of bsue You~ Middle aged Old Total (•!. age) Total Small Finns Capital Adequacy 0.0 0.0 0.0 0.0 I

Diversification 0.8 2.3 0.3 3.4 83

Expansion 17.9 21.8 3.1 42.7 1038 Long Term Working Capital 0.0 0.4 0.1 O.S 13

Modernisation 1.1 3.7 1.2 6.0 146 Part Finance 22.5 5.5 0.2 28.2 685 Offer for Sale 0.1 0.3 0.2 0.6 IS

Working Capital 12.3 5.6 0.4 18.3 446 Others 0.0 0.1 0.0 0.2 4

Total small Finns ( % age) 54.8 39.7 5.6 100.0 -Total Small Finns 1331 965 135 2431 2431


Thus, it is clear that there was a bias against small fir;ms in the market, but this bias

could be due to reasons like: a) size and age ofthe firms; b) the fact that a majority of

the large firms were existing firms resorting to further issues, which had an edge over

firms resorting to IPOs; and c) the possibility that local concentration of investors of

small firms makes it difficult to generate adequate response in case of overcrowding.

All these suggest that the small firms drained the funds of a large number of

underwriters in India since very few cases of refund have been reported. 14

Financial Instruments and Market Response

The preference of the market for various financial instruments is presented in Table

8. 14, to analyse the influence of the nature of the financial instrument on response

generated. Broadly, it is found that debentures and premium issues had better

response when compared to equities. Out ofthe 2169 issues analysed, 1987 issues (92

per cent) were in the form of equity issues15, while debenture issues were only 154 (7.1

per cent). However, the response rate for debentures was much higher than that for

equity issues. Three probable reasons could be cited for this trend : a) debentures had

a fixed return agreement; b) the overwhelming presence of equity issues in the NIM

restricted the portfolio choice of investors, and thus, the small number of debentures

got very high responses; and c) as observed from the earlier analysis, debenture issues

were mostly from the existing large companies, prompting better responses. It can

14 Refer Prime Annual reports and the summary of information in Chapter Ill. 15 Equity issues here include even the premium issues.

272

ChHptcr VIII

also be seen that between equity and premium issues, the latter had a better response in

the NIM. The high over-subscription of premium issues was due to the use of these

instruments largely by large firms and existing companies16, which had better good

will compared to firms that were small and were issuing equities.

T bl 814 M k R a e . . ar et espouse to ID80Cia nstruments . F' ·u Sl no. Categories <I I to 3 3to5 5 to 10 10 to 20

I Equity# 15.2 31.2 a) Equity (only) 17.9 31.0

b) Premium 8.5 31.5

II Debenture 7.8 32.5 a) FCD 7.4 35.8

b) NCD 14.3 14.3

c) Hybrid 7.7 28.8

III Others 0.0 25.0

Note : # = Includes prenuum Issues also. Source : Extracted from the sample data.

11.3 14.9 14.5 11.3 14.2 12.7

11.3 16.9 19.2

12.3 15.6 21.4 13.7 17.9 23.2

14.3 14.3 28.6

9.6 11.5 17.3

10.7 25.0 21.4

20 to 40 > 40 Finns

8.7 4.1 1987 9.4 3.5 1431

7.0 5.6 556

7.1 3.2 154 1.1 1.1 95

14.3 0.0 7

17.3 7.7 52

17.9 00 28

Considering that in terms of numbers equity was the most prominent financial

instrument used by firms for public issues, an analysis of the response to equity issues

between the CCI and post-CCI periods is carried out. It was found that the maximum

number of times an issue got over-subscribed did not change significantly during the

two periods, even when the number and amount called showed massive increases.

This suggests that firms with a 'good issue' did get over-subscribed even in the

liberalised phase, when the general response to equities showed a movement towards

lower response zones.

Table 8.15: Response to Equity Issues During 1989-95

YEARS <I 1 to 3 3 to 5 1989 13.8 24.1 5.2 1990 5.0 11.3 13.8 1991 3.0 22.8 7.9

CCI period 7.3 19.4 8.9 1992 4.6 21.2 17.8 1993 26.8 50.0 8.7 1994 17.2 24.7 9.1 1995 10.2 39.0 16.9

lpost-CCI 14.7 33.7 13.1 Note: • = Maxnnum across the range. Source : Extracted from the sample data.

5 to 10 10 to 20 20 to 40 12.1 20.7 20.7 27.5 22.5· 13.8 23.8 19.8 17.8

2l.l 21.0 17.4 24.1 20.3 9.5

7.0 3.4 2.9 13.3 17.9 11.0 16.9 11.5 3.5

15.3 13.3 6.7

(In percentag~_ >40 Max*

3.4 81.33 6.3 101.89 5.0 65.26

4.9 101.89 2.5 71.54 1.2 97.76 6.7 116.84 1.9 98.18

3.1 116.84

As found in the case of small and young firms, there was a general shift in the response

to equity issues to lower subscription categories. Thus, it is seen from Table 8.15 that

over-subscription offirms ofmore than 20 times decreased in terms of share from 22.3

per cent (CCI period) to 9.8 per cent (post-CCI). This was followed by a large

16 As also evident from the earlier analysis on the existing companies' sources of finance and the earlier analysis on the size of firms and response generated.

')71

Chapter VIII

increase in the under-subscribed issues from 7.3 per cent to 14.7 per cent during the

same period. There was a massive increase in the share of lower response categories

(less than 3 times) from 26.7 per cent to 48.4 per cent. These trends were due to a

large increase in the equity issues from both young and small firms and due to the

limited resource base of the market, when analysed from a regional point of view.

Industry-wise Trends in Response to Issues

Industry-wise trends in the response to issues floated by firms in the NIM are analysed

in this section for eight industries which were identified as having the maximum

coverage in the sample (Table 8.16). Only industries that had a prominent role in the

growth of new issues in the NIM were taken up for analysis, to examine the effect of

the increasing participation of firms from these industries on response.

Table 8.16 : Industry-wise Response to Firms in the NIM (In percentage)

Industry Phase. <1 1 to 3 3to 5 5 to 10 10 to 20 20 to 40 >40 Nwnber Max Financial services CCI 0.0 80.6 0.0 19.4 0.0 0.0 0.0 9 9.7

post -CCI 16.2 32.7 7.8 16.4 13.3 10.2 3.4 228 116.6

Food CCI 3.7 18.8 13.2 31.0 26.6 3.3 3.3 26 48.98

Products post -CCI 16.4 32.3 12.9 13.0 14.9 8.4 2.1 248 61.62

Cotton Textiles CCI 4.8 25.7 4.8 33.3 11.4 13.3 6.7 15 65.26

post -CCI 12.0 37.2 14.4 16.6 16.4 2.4 0.9 143 46.76

Chemical CCI 3.9 20.6 4.5 25.5 21.6 21.4 2.4 47 41.26

!products post -CCI 11.1 29.7 13.0 16.4 17.1 9.1 3.7 331 116.84

Basic Metal CCI 2.0 23.5 13.0 24.7 25.9 6.7 4.2 39 81.33

post -CCI 20.5 43.5 8.5 16.1 5.5 5.1 0.8 166 52.85

Electrical machinery CCI 0.0 18.7 10.1 21.7 20.3 23.6 5.6 45 64.26

post -CCI 9.3 24.7 15.9 18.5 16.6 10.0 5.1 115 83.16

Consultancy' CCI 24.2 26.7 10.8 4.2 26.7 4.2 3.3 22 61.41

construction & others post -CCI 12.6 37.9 18.0 14.9 8.0 4.6 4.0 126 97.76

Non-metallic mineral CCI 25.7 24.5 6.7 3.3 20.6 19.2 0.0 25 39.80

!products post -CCI 13.3 40.0 20.7 11.8 7.1 3.5 3.6 96 50.00


It was found that of the eight industries, except for consultancy, construction and other

services and non-metallic mineral products, all the other industries showed a

decreasing trend in response. Both these industries showed a better performance in the

post-CCI period, as their respective shares of the under-subscribed firms showed a

decrease. Financial services also improved their subscription levels, as the share of

these firms in the lower response category (I to 3 times) decreased from 80.6 per cent

to 32.7 percent. The resulting difference led to movements in both the directions : the

higher response categories absorbed nearly 31.9 per cent of these firms, and the under

subscribed category absorbed 16 per cent. Thus, the share of issues from the financial

services industry which was over-subscribed by more than 3 times. was comparatively

274

Chapter VIII

more than the share of under-subscribed firms. A similar trend was noticed in the

construction. consultancy and other services 17 and non-metallic mineral industries, as

both these industry groups showed a drop in under-subscribed issues from 24.2 to 12.6

per cent and 25.7 to 13.3 per cent respectively, between the CCI and post-CCI

periods. These decreases were very significant when compared to the sharp increases

in the shares of issues which were under-subscribed in the other industrial categories

during the post-CCI period. Thus, the movement in the above mentioned three

industries showed that there was an increasing preference for these industries on the

part of investors, in the 1990s.

These trends in industry-wise response can be attributed to factors like : a) the

proportion of young and small firms in an industry; b) the urbanisation effect on

investments in the NIM and the location of industries (which can be cited as a reason

for the better performance of service sector firms); and c) the low presence of a

specific industry in an otherwise overcrowded region like Maharastra or Gujarat. The

response to all the service sector industries from the market was better in the 1990s.

when compared to manufacturing industries.

State-wise and Region-wise Trends in Response to Issues

To examine the effects of over -crowding of firms in states and to understand the

regional influence on subscription rates, a state-wise and region-wise analysis is carried

out in this sub-section. A set of eleven states was identified based on their dominance

in NIM. using an index similar to that used in the case of industries.

Although the state-wise· analysis of response does not highlight any strong

trend in the shifts besides the existing trend of movement towards the lower response

categories with increasing public issues, these variations highlight the existence of

disparity in terms of industrial development and investment climate across the states.

Most developed states like Maharastra, Gujarat, and Tamil Nadu showed 45 per cent

share of total firms having an over-subscription of more than 10 times in the CCI

period. However, this share dropped to nearly 25 per cent in the post-CCI period,

suggesting a marked decrease in the performance of firms in these states, largely due to

an increase in the participation of firms.

17 These include hospital, medical care, holiday resort health clubs and recreation parks.

275

Chapter VIII

Table 8.17 : State-wise Trends in Response to Issues (In :>ercentage)

States <1 1 to 3 <3 3to5 5 to 10 3 to 10 10 to 20 20 to40 >40 > 10 TOTAL

An<llra Pndaih CCI 12.5 36.1 48.6 6.9 20.8 27.7 18.1 H 0.0 23.7 28 P-CCI 17.8 37.9 55.7 10.6 12.7 23.3 9.7 9.4 1.9 21.0 179

Oujarat CCI H 21.9 27.0 9.1 23.6 32.7 18.2 18.2 3.9 40.3 51 P-CCI 16.8 30.4 47.2 13.9 15.5 29.4 11.8 7.9 3.7 23.4 298

Harayana CCI 0.0 16.7 16.7 25.0 33.3 58.3 0.0 25.0 0.0 25.0 12 P-CCI 12.6 38.0 50.6 10.2 20.3 30.5 14.1 4.8 0.0 18.9 71

Maharuhtra CCI 10.6 22.1 32.7 4.7 13.4 18.1 30.7 13.7 4.7 49.1 63 P-CCI 12.4 32.3 44.7 I 1.4 17.4 28.8 15.5 6.1 4.9 26.5 366

Madhya Pndaih CCI 5.6 44.4 50.0 0.0 27.8 27.8 16.7 0.0 5.6 22.3 12 P-CCI 20.4 40.3 60.7 14.2 8.2 22.4 11.6 4.5 0.7 16.8 120

Delhi CCI 0.0 33.3 33.3 11.1 22.2 33.3 11.1 0.0 22.2 33.3 7 P-CCI 13.8 32.6 46.4 .5.9 21.4 27.3 16.3 7.2 2.8 26.3 103

Punjab CCI 7.4 32.6 40.0 10.4 28.1 38.5 17.8 3.7 0.0 21.5 23 P-CCI 14.0 28.4 42.4 20.6 14.4 35.0 9.9 9.7 2.9 22.5 62

Tamil Nadu CCI 6.7 21.3 28.0 8.3 19.8 28.1 20.4 15.5 8.1 44.0 32 P-CCI 9.7 32.7 42.4 15.7 17.0 32.7 17.8 4.4 2.7 24.9 158

UUar Praderlh CCI 1.9 21.7 23.6 5.6 32.5 38.1 26.2 10.3 1.9 38.4 28 P-CCI 14.0 35.0 49.0 12.0 14.5 26.5 16.7 5.8 2.0 24.5 129

WcstBatpl CCI 0.0 0.0 0.0 33.3 16.7 50.0 25.0 16.7 8.3 50.0 10 P-CCI .5.0 37.1 42.1 14.8 1.5.1 29.9 11.2 12.3 4.6 28.1 70

Rajuthan CCI 0.0 6.7 6.7 11.1 11.1 22.2 13.3 24.4 0.0 37.7 8 P-CCI 16.8 40.7 57.5 11.7 13.3 25.0 7.6 8.8 1.2 17.6 84

Total (11 states) CCI 4 . .5 23.3 27.8 11.4 22.7 34.1 17.9 12.1 5.0 35.0 274

P-CCI 13.9 35.0 48.9 12.8 1.5.4 28.2 12.9 7.4 2 . .5 22.8 1640

·Somce : Extracted from the sample data.

States that showed large under-subscription in the post-CCI period were Madhya

Pradesh (20.4 per cent), Andhra Pradesh (17.8 per cent), and Gujarat and Rajasthan at

16.8 per cent each. The states that showed better responses with respect to under

subscription were West Bengal (5.0 per cent) and Tamil Nadu (9. 7 per cent). The

good perfo~ce of West Bengal and Tamil Nadu could also be seen from the

dominant share of firms from these states in the middle and higher response categories

at 58 per cent and 72.1 per cent respectively. Two factors could have helped generate

these results : first, being historically developed states with high urbanisation; and,

second, a relatively lower degree of participation compared with other developed

states.

In the southern region, the better performance by developed states like Andhra

Pradesh and Tamilnadu led to a deterioration in the response to issues in Karnataka

and Kerala. A similar trend can be seen in the western region in the case of Rajasthan,

Daman and Diu and Madhya Pradesh. The relatively high participation from the more

industrially developed neighbouring states like Gujarat and Maharastra led to low

response in the other states in this region. In the case of eastern region, the influence

of West Bengal can be seen in the low response for issues from Orissa and Bihar.

Haryana and Utter Pradesh showed a similar trend in the northern region. These states

showed poor performance in terms of issues which collected an over-subscription of

276

Chapter VIII

more than 1 0 times. Some of the lowest shares in the more than ten times response

category were recorded in Madhya Pradesh (16.8 per cent), Haryana (18.9 per cent)

and Rajasthan (17.6 per cent).

Thus, it can be concluded that the competition between economically strong

and weak states in a region could lead to a lower response to issues from a

neighbouring weak state in the region. This indicates that there is a high influence of

state-level development indicators on the performance of issues floated by firms in the

NIM.

Table 8.18 :Region-wise Response to Issues (In percentage

REGIONS <I I - 3 <3 3-5 5-10 3-10 10-20 20-40 >40 > 10 St.Dev. Total NORTII CCI 3.4 30.4 33.8 9.8 22.4 32.2 11.6 15.6 6.7 34.0 9.4 14

Poat-CCI 17.5 32.7 50.2 11.7 13.9 25.6 13.5 6.7 4.0 24.2 9.3 502

Total 10.5 31.6 42.0 10.7 18.2 28.9 125 11.1 5.4 29.1 8.5 586 SOUTII CCI 3.4 16.5 19.9 6.0 13.0 19.0 36.3 22.9 1.9 61.0 12.3 73

P081-CCI 8.8 31.4 40.1 11.5 13.7 25.2 21.4 8.3 4.9 34.6 9.2 439

Total 6.1 23.9 30.0 8.8 13.4 221 28.9 15.6 3.4 47.8 9.3 512 EAST CCI 25.0 25.0 50.0 7.5 13.3 20.8 21.7 5.0 2.5 29.2 9.6 15

P081-CCI 15.6 33.6 49.3 17.6 17.0 34.7 7.1 7.2 1.8 16.1 10.4 Ill

Total 20.3 29.3 49.6 12.6 15.2 27.7 14.4 6.1 2.1 22.6 9.0 126 WEST CCI 3.0 14.0 16.9 19.3 26.1 45.3 17.8 18.2 1.8 37.7 8.9 124

P081-CCI 18.1 35.4 53.5 10.3 13.0 23.3 12.1 6.4 4.7 23.2 10.3 796

Total 11.4 25.9 37.2 14.3 18.8 33.1 14.6 11.6 3.4 29.7 6.9 920 Source: Extracted from the sample data.

When the regional performance of response rates is compared between the CCI and

post-CCI periods, it emerges that in the latter period, the southern region accounted

for the lowest (30.0 per cent) share of issues that received a subscription ofless than 3

times, followed by the western region at 37.2 per cent, the northern at 42.0 per cent,

and the eastern region at 49.6 per cent. Thus, during the post-CCI period, the

southern region performed better compared to the other regions. During the post-CCI

period, the over-subscription of above 10 times was also the highest for this region

(34.6 per cent) compared to other regions.

The eastern region showed the most dismal performance m terms of the

number of issues that were under-subscribed. Even with the lowest level of

participation and amounts called, this region showed the lowest performance m

subscription to issues. This result reflects the under-development of this region

In terms of under-subscribed issues, the western region had the lowest

performance with a 15 percentage point increase in the post-CCI period share

277

Chapter VIII

compared to that in the CCI period. 18 It was followed by the northern region which

showed a rise of 14. 1 percentage points. These two regions demonstrate clearly the effect

of an increase in the participation of firms during the period following liberaJisation (Table

8.18). The eastern region showed the opposite trend. With an increase in participation

during the post-CCI period, the share of under-subscribed issues fell from 25.0 per cent in

the CCI period to 15.6 per cent in the post-CCI period. This could be due to a better

performance of firms with working capitaJ objectives from the financiaJ services companies

in this region (concentrated in Ca1cutta). 19

While issues from the western region performed well during the CCI period,

they performed very poorly during the post-CCI period. The low performance of the

western region is due to an increased demand resulting from the rise in number of

issues from this region from 124 issues in the CCI period to 796 issues in the post-CCI

period. Another probable reason for the comparatively low performance of the

western region could be the lower share of financial services and consultancy,

construction and other services in this region, as compared with firms from the

manufacturing sector. It should be noted that service sector firms showed overall

better over-subscription during the 1990s compared to manufacturing sector firms.

The region-wise analysis of response to public issues, thus, establishes that the

southern region was the best in terms of response to issues in the early 1990s. It was

followed by the western region, and the northern region and lastly by the eastern

region. This indicates a high regional disparity in terms of the response to issues with a

bias towards issues being floated by firms from the southern states.

Broadly, the analysis of the characteristics of firms reveals that there were large

variations in trends of subscription depending on various characteristics. But, it can be

concluded that with an increase in number of firms there was a movement to lower

response categories, thus indicating an overaJl lower response to issues, during the post

CCI period.

8.2.3 Firm Fundamentals and Their Influence on Response to Public Issues

Having seen how firms in the NIM fared in terms of their ability to raise funds, let us

now look at the firm fundamentals which influenced these trends in the NIM. The

18 When compared in tenns of capital called this region showed a large disparity. The region had the highest amount of capital called at 36 per cent in the CCI period and 60.0 per cent in the post CCI period.

19 The eastern region had very few issues and thus was dominated by the issues of financial service companies from Calcutta.

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primary market is the place where an investor makes his investment decision based on

the information available to him. This information is primarily based on the past

performance of the firm and on the details of the new investment projects, depending

on which, the investor projects the future earnings and risks associated with the

investment. Although various other factors like the macro-economic environment and

alternate investment opportunities also influence the ultimate investment decision, the

core factor to any investor is the expected earnings from a particular investment.

The availability of data depends on the nature of the issuing firms (existing or

new) and the type and maturity of the market (NIM and stock exchange). In the case

of existing companies (SEO), details of both past performance and new investments

are available, but for a new project (IPO), only the latter is available. Thus, the SEOs

may have an advantage over the IPOs20 for two reason.s : first, information about their

past performance gives them an edge regarding future earnings; and second, they may

have better goodwill and thus, a better probability of over-subscription. Thus, in the

case of IPOs and SEOs, the prospectus becomes a very vital document that influences

the response to issues. In the Indian case, where the vast majority of the investors are

inadequately acquainted with industry trends and the market21, the influence of the

prospectus is all the greater. This trend becomes more prominent with the growth of

small investors in the market. In an attempt to capture the effect of this on investor

behaviour, an analysis of some of the fundamental characteristics of firms that would

influence the response pattern in the NIM was undertaken.

8.2.4 Financial Instruments and Their Influence on Response to Public Issues

The analysis of the role of various financial instruments22

in influencing subscriptions

in the NIM at firm-level, revealed that the nature of the instruments did have an effect

on subscription levels.

20 Other wise known as initial issues. these are the first public issues of private limited companies which go public, or the first public issue of a new company. In India, the second case is applicable only when an existing company takes the initiative of starting a new company under its name.

21 Many Indian investors are unaware of the financial investment options and technical details of the market. A majority of Indian middle class investors are yet to be exposed to the investment alternatives in the primary market as banks and other government saving schemes have been predominant investment alternatives for this section over the years.

22 Amount called under each financial instrument and the respective response generated is taken for the correlation analysis in this section. The results are based on a firm-wise analysis of the relationship.

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Chapter VIII

Table 8.19: Correlation Results of Response and Financial Instruments in the NIM (correlation values

Sino Correlation To Response Si2D I Amount Called {at firm-level) -0.01007 Ne2ative (weak) II Broad Equity Issues· -0.00506 Ne2ative (weak)

I. Premiwn issues -0.03159 Negative (weakl 2. !Equity 0.01954 Positive (weak)

Ill Debenture issues -0.07898 Negative (weak) I. FCD -0.13053 Negative (strong) 2. NCD -0.05690 Negative (weak) 3. PCD -0.08335 Negative (weak)

IV Hybrid issues -0.25078 Ne2ative (stron2) I. EODW -0.27784 Negative (strong) 2. Preferential Share -0.27828 Negative (strong) 3. Hybrid Bonds -0.15460 Negative (strong) 4. Equi-Warrants (EW) -0.30647 Negative (strong)


The results from Table 8.19 represent the instrument-wise correlation ofthe amount of

public issue of a firm to the response generated by it (in terms of number of times

subscribed). As the correlation of the amount of issue called to the response generated

at firm-level shows a value of -0.01, it becomes evident that larger issues received a

lower response rate when compared to smaller public issues. Further, it can be seen

that during the 1990s, equity issues fared better when compared with debentures and

hybrid instruments that showed a negative relationship of -0.07 and -0.25 respectively.

That is, all equity issues generated a good response from the market when compared to

the other instruments. The positive correlation coefficient of equity and response rate

(0.01954) also suggests that an increase in the size of equity issues had a positive

effect on their response rates. This could be because of the fact that while premium

issues were issued by existing companies which preferred this instrument in order to

avoid underpricing of their shares, pure equities were generally issued by new

companies started by existing profit generating companies. These new firms depended

solely on the NIM for funds (and very rarely on other financing sources like banks),

and hence, they generally came out with large issues. As investors got these issues at

par value and the prevailing secondary market boom generated high expectations

regarding capital gains, this could have contributed to the positive response.

Within debentures, there was variation across the three main types, as FCDs

showed a high negative correlation of -0.13159 when compared to NCDs (-0.0569)

and PCDs (-0.08335). The high negative correlation of larger FCDs to the response

generated from the market is similar to the negative results of premium issues23 It

was found that premiums were charged by most of the firms that went for public issues

23 Following equity price liberalisation in 1992. FCDs also had a premium charged at conversion to equity (later from the issue date), thus these issues were similar to premium issues.

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Chapter VIII

after the liberalisation of pricing of equities in 1992. In both premium issues and FCDs, a

large part of the investors' money was utilised by the firms as premiums. In premium

issues, out of the total money invested by an investor, only the par value generates dividend

and therefore, the premiums make good sense to the investor only if the firms could be

expected to show an appreciation in the market value of their shares to neutralise the

premium charged. 24 Thus, capital gains was an important factor here. Hence, overpricing

in the case of many FCDs and premium issues could have led to a lower response rate for

these issues in the 1990s, as compared to equities at par value.

Another aspect to be noted is that hybrid instruments showed the worst response

(Table 8.19). This suggests that the Indian primary market was averse to these new

financial instruments, which were a combination of equity, debentures, and warrants. This

could be due to a lack of awareness of technical information, combined with the

information asymmetry prevalent in the stock market. Further, all the hybrid issues were

made through the rights issues channe~ which had a lower response when compared to

public issues.

Underwriting Agreements and Influence on Response

The influence of market intennediaries in promoting the subscription levels of issues floated

by the firms in the NIM, is another area of interest. Some prominent market intermediaries

are underwriters, stock exchanges, merchant bankers and brokers.

In India:, underwriters are of three kinds : I) banks and financial institutions; 2)

brokers and 3) contingent underwriters25. Being largely government-owned, banks and

financial institutions are symbols of safety and security, and therefore, these institutions are

given a higher status in comparison with brokers. It follows that if an investor prioritises

his choices, he would go for an issue that has a large share underwritten by financial

institutions and banks. After the underwriting commission was pre-fixed in 1989, any

institution that was registered with the CCI would not hesitate to take part in underwriting.

Thus, the 1990s saw a massive growth in underwriting in India, with very few shares

getting devolved, 26 and even the lowest response category showing an average subscription

rate of0.9.

24 Ex post, it can be seen that, the secondary market prices of such issues did show a dismal performance in terms of capital gains, after listing. The Currency and Finance Reports from 1996-97 to 1998-99. The secondary market showed a dismal performance when compared to the pre-libera1isation period.

25 In the case of preferential allotments like employees mutual funds, etc. 26 With only 6 issues that were devolved in 1992 and 25 issues devolved in 1993. the data indicated

that underwriting came to the rescue only in these 31 issues during March 1989 to March 1995. In 1993, 3 issues were returned as they were not able to get any response from the public.

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Cbaptcr VIII

The results ofthe analysis in Table 8.20 on correlation between the amo~nt of a

public issue underwritten (as a percentage to the total amount of issue) and the

response generated by that issue, show that the total underwritten part27

of a public

issue had a weak positive effect (0.00575) on the response to public issues.

Underwriting was generally carried out in most of the public issues as an obligatory

requirement at the time of issue, until the government restriction on public issues with

less than 90 percent underwriting was removed in 1994. Thus, the weak effect was

due to this regulatory compulsion for every issue, which remove differential effects

across firms. As on an average every issue had a high underwritten share, that share

was not a significant determinant of response.

When the total underwritten part is broken down into components based on the

institutions underwriting the issue, the results show a significant variation in the sign of

influence. It was found that the underwritten share of. banks and financial institutions

had a positive influence on the response rate to public issues, even though the

correlation value was very low (0.03705). This suggested that a high share of

underwriting by banks and financial institutions had a positive influence on investors'

perception about those firms' strength and performance. But, the correlation value for

brokers was -0.06960 suggesting that as the share of brokers in the total underwritten

amount of an issue increased, it had a negative influence on subscription to that issue.

Thus, issues having a higher share underwritten by banks and financial institutions

received a better response than those with a high stake for brokers. This shows that

investors preferred firms in which banks and financial institutions had a higher

commitment. This points to the greater confidence of the investors in the ability of

these institutions to evaluate projects better than stock brokers.

Table 8.20 : Underwriting and Public Response to Issues: Correlation Results

Institutions To Respo_nse Sign Total underwritten amount as% to Total public issue 0.00575 Positive (very weak) Banks and Financial Institutions 0.03705 Positive (weak) Brokers -0.06960 Negative (weak)

Contingent Underwriters211 0.05691 Positive (weak)

Note: Percentage share of each of the underwriters man 1ssue IS correlated wtth the response generated to that issue, to arrive at the results.


Besides underwriting of public issues, marketing is another factor which influences the

27 Taken as percentage share of the total amount of the issue. 28 Contingent underwriting is underwriting done for firm and preferential allotments to mutual

funds, shareholders and employees, etc .. and these are underwritten like the normal underwriting process.

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Chapter VIII

generation of a better response. Better response can be achieved by a company by

listing its issue in more than one stock exchange and hiring more than one lead

manager to promote the issue. If the issue is listed in more than a single stock

exchange, investors are ensured of higher liquidity because of trading convenience and

scope for larger trading. The merchant bankers (lead managers) perform the task of

advertising and collection of investments using their branches and network. All these

marketing methods lead to a wider geographical coverage of the public issues.

Table 8.21 : Stock Market Intermediaries and Response to Public Issues of Firms Correlation Anal sis

Note : In the case of lead managers and stock exchange listed, the absolute number is correlated to response generated.


Besides the above, another strategy in marketing of issues, is through variations in the

'mode of payment', which decides how much money an investor needs to have in order

to invest in a particular issue.29 For the purpose of analysis, 'mode of payment' has

been classified into three broad categories : i) payment of 100 per cent at the time of

application (coded as 1 00)~ ii) payment of upto 50 per cent at the time of application,

(coded as 50); and iii) payment through four easy instalments with an initial payment of

25 per cent (coded as 25). Based on this, a correlation analysis was performed to find

the influence of this payment restriction on the response generated to public issues.

The results (Table 8.21) reveal that all of the above mentioned stock market

intermediaries had a negative correlation to the response generated at the firm level.

Mode of payment proved to be a significant influence on the response pattern. Firms

that offered a more distributed payment structure received a better response, as

indicated by the correlation results that showed a negative value of -0.00 18. On the

other hand, when a firm required complete payment at the time of application for

shares, it was faced with a lower response.

29 Mode of payment is the various choices of payment ofTercd by the firms to invest in shares. Some companies would require the complete payment at first transaction itself. whereas others would give an option of 25 per cent as first instalment and the rest when the shares are allotted. Some others would offer a 50 per cent option. Thus. mode of payment decides how much money is needed to apply for a share in the market.

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Chapter VIII

The above pattern in response to public issues with respect to mode of payment

highlights the role of small investors in the Indian equity boom of the 1990s, as the

household sector plays a crucial role in private corporate investments in lndia.30

.

Household investment is a function of monthly income and small savings, and thus,

their decision to invest in public issues largely depends on the easy payment facilities

offered by companies at the time of a public issue.

Both the other marketing intermediaries, the lead managers and stock exchange

listing showed a correlation of -0.03020 and -0.06040 respectively, with response.

These results suggest that even if a firm listed itself in more than a single stock

exchange, and had more than one lead manager, there was no improvement in the

response generated 31. It should be noted the number of lead managers and stock

exchanges in which shares are listed, increases with the size of the public issues. The

latter is already seen to have a negative influence on response rate32

Sub-channels of Public Issues and Influence on Response

The sub-channels used by a firm for offering public issues in the NIM are other very

important indicators of the financial strength of a company, besides the use of

intermediaries and underwriting agreements, and thus, influences the response

generated by a issue. Table 8.22 provides the results of the analysis carried out on

firms' public issue structure and its influence on the response generated in the NIM.

Three broad types of issue methods are analysed, viz., firm allotmene3 (FA),

preferential allotmene4 (PA) and general public share (GPS).35

A graded scale can be

worked out based on the share of each of these allotments in the total amount issued

by each firm.

30 Evident from L.C. Gupta and et.al., 1994. 31 The qualitative factor of lead manager and stock exchange is not given weightage in this

calculation and is a limitation of this analysis. The ranking of lead managers varied over the years and will lead to a detailed study. As such an analysis is outside the preview of this study. it is avoided.

32 The limitation in this approach is that the stock exchanges and merchant bankers were not graded in considering their role in response generation.

3 3 Firm allotment is the fixed share of allotment based on the requirement of the various insiders. 34 Preferential allotment is done before the allotment to the general public and is issued to existing

share holders, employees, mutual funds. Fils. Fls. etc. The final allottces in such a public issue is thus the general public.

35 The correlation analysis is carried between the percentage share of these categories and subcategories to total project cost and response generated. A firms-wise analysis is carried out.

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Chapter VIII

Table 8.22 : Issue Structure of Firms and Response : Correlation Analysis (correlation value~

Issue Structure Variables Resi>_onse S!.g_n Paid-up-capital after issue -0.012 Nc:&l'tive _{weaU Now offered to public• -0.091 Negative (weak) General public (GPS) -0.098 N 10.1..atln J..wu~

Firm A 1/otments Total Firm Allotments(FA} 0.224 Poaltl-n Promoter Share O.OSI Positive J..weak~ Foreign Collaborator 0.348 Positive Financial institutions 0.063 Positive J..weak~ Non-Resident Indian 0.033 Positive _{weak~ Mutual Funds 0.1Sl Positive Other Corporate Firms 0.214 Positive

Preferential Allotments Preference Allotments (PA) -0.164 Nr&atlvr Employees 0.073 Positive_{weakl Share Holders -0.1 S8 Nc:gative Non Resident Indians -0.099 Negative (weak) Mutual Funds 0.004 Positive (ve!Y weaU Financial institutions -O.OS3 Nc:g_ative J..weak~ Foreign Institutional Investors -0.076 Nc:g_ative_iweak}

Note: • ='Now offered' 1s defined as, Total pubhc Issue- Total Fmn Allotments. Thus, it is the capital offered to general public and preference issues. Source : Extnlcted from the sample data.

The results of the correlation analysis presented in Table 8.22 showthat FA as a share

of the total issues by a firm was positively correlated (0.22) to the response generated.

A large share of firm allotment indicates a higher investment commitment on the part

of insiders like promoters, foreign collaborators, financial institutions, mutual funds,

other corporate bodies, and non-resident Indians. (All these individuals and

institutions are represented here as insiders). Investments with better gains will have a

larger share of the insider in total investment which indicates greater responsibility and

risk sharing by these insiders. The high positive correlation confirms that investors are

more comfortable and confident when the insiders have a larger share of investments,

as this large share is a representation of the responsibility and risk shared by the

promoters. Thus, firms that had a larger share of investment by way of FA channel

had better response from the market. For a firm which offers a larger share to the

general public, risk is shared by outsiders, and hence, the promoter and other insiders

bear a lesser responsibility.

A deeper probe was done to identify the most prominent insiders who had a

high influence on the response generated from the NIM. The degrees of positive

influence by these insiders varied from a high correlation of 0 3 5 in the case of foreign

collaborators, to 0.21 for other corporate firms and 0.15 for mutual funds. Although

the shares of promoters and friends, non-resident Indians and financial institutions also

showed a positive correlation, the relationships were very weak in nature. Thus,

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Chapter VIII

foreign collaborators had the highest influence on respons~, followed by other

corporate firms, mutual funds and financial institutions. Investments by non-resident

Indians through FA had the least influence on responses.

The second group of investors are the Preference Allottees (P A) which

includes employees, existing shareholders and some other players also found in the FA

category. These allotments also have a higher priority over the allotments to the

general public. The share of PAs to total public issue had a negative effect on the

response rates for a firm, indicating that a large share of P A in a public issue cannot

have any promotional effect on subscription. This trend could be due to the non

committed nature of this group of investors as compared to F As, which makes them

similar to the general public. Also, P A shares do not add to the responsibility and risk

sharing functions of these institutions towards the fi~ in any way. Thus, these are

largely seen as investments for purposes of speculation and are taken to be like that by

any other investor in the firm who ultimately takes an outsider's position.

Within PAs, it was further found that only the existing shareholders had a

strong negative influence on response. All the other variables had a weak influence on

the response to issues. Since the effect was found to be positive only in employees and

mutual funds, this can be taken as further confirmation of the role of mutual funds in

generating a better response to public issues in the market. This is so because the

common investor looks at the mutual funds in the same manner as other investors look

at institutional investors like banks and financial institutions which are better informed.

Investment Proposals and Influence on Response

Two important categories of information contained in the prospectus of a firm are the

investment proposed and the sources of financing this investment. To understand the

role of such information in aiding response, various heads under these two categories

were correlated to analyse the effect of these heads on the total response to public

issue (Table 8.23). The information on total project cost was divided into two heads,

fixed asset-creating expenditure, and expenditures carried out on various heads that do

not lead to direct asset creation in the firm.

It was found that the percentage share of total fixed assets in total project cost

had a positive correlation (0.0334) to subscription of firms. This means that those

firms that had higher share of investment in fixed asset-creating expenditure out of the

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Chapter VIII

total project cost, received better response from the market. This can be explained by

the fact that fixed asset investments provide security at the time of bankruptcy and

liquidation, and hence an investor has more faith in them. The main contributors in

the positive response to the share of fixed asset expenditure in total project cost were

imported machinery, technology cost and miscellaneous fixed assets. Thus, it could be

observed that firms which had foreign collaboration of any form had a better

performance in the market compared to firms that were fully indigenous.

Table 8.23 : Proposed Expenditure Patterns and Response to Public Issues

Sl.no Investment Share Response Si2n I Expenau on Total assets 0.033 Positive (weak) I. Land and Building -0.044 Negative {weak) 2. Imported Machinery 0.016 Positive (weak) 3. Indigenous Machinery -0.039 Negative (weak) 4. Technology_ Cost 0.108 Positive S. Miscellaneous Fixed Assets 0.074 Positive (weak) II Other expenses -0.017 Neaatfn (weak) I. Issue expenses -0.147 Negative 2. Preliminary_ Expense -0.039 N~ative (weak) 3. Contingency -0.029 Negative (weak) 4. Working Capital 0.001 Positive (very weak) s. others -0.017 Negative (weak)

Note : Percentage share of each of the vanables to total projeCt cost ts correlated With response generated by each individual finn.


Other expenses, that is, expenses that had no direct link to asset creation included issue

36 1" . 37 • 38 k" . al d h E expenses ~ pre tmtnary expenses contmgency , wor mg captt an ot ers. xcept

for working capital, all the other expenses showed a negative relation to the response

to public issues. This indicates that investors had a strong aversion to issues that had

high share of other expenses, as that head had a negative correlation of -0.0742. The

strongest negative relationship was seen in the case of issue expenses that showed a

high negative value of -0.1471. Although the preliminary and contingency expenses

showed a negative sign, the nature of this influence was weak. Working capital showed

a positive sign, as a large part of the public issues during the I 990s were from the

services sector39. These industries have a low share of fixed assets, as their main form

36 Various charges for listing of finn in stock exchanges, commiSSion to underwriters, lead managers, registrar and brokers. Besides these, it also includes the cost of printing and distribution of prospectus and application at the time of public issues.

37 Expenses incurred from the time of signing of Memoranda of understanding (MOU) to actual production. These expenses include travel, meetings and hotel expenses by the promoter and other board members, etc.

38 Contingency is the fund allocated to meet cost escalation due to delay in production and other unexpected factors.

39 Both financial services ( NBFCs) and consultancy, construction and other services

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Chapter VIII

of capital is short-term and long-term working capital, and hence, a large part of the

total investment in these firms is for working capital requirements.

From these results it was observed that in a purely manufacturing firm,

expenses other than those on fixed assets and technology ~ost can lead to a lower

response to issues in the market. It could therefore, be concluded that investors were

indeed utilising the information given on investments proposed, for making their

investment decisions.

Sources of Financing and Influence on Response

The information given in the prospectus on the sources of finance also has an influence

on the response to issues from the market. Sources of finance include capital raised

from the general public and that raised from a large portfolio of other sources like

promoters, collaborators, financial institutions and banks, public deposits, government

subsidies, as well as internal sources. The use of each of these different sources can

affect the degree of confidence of an investor in an issue differentially, because of the

reputation of these institutions and instruments with respect to minimisation of default.

To analyse the effects of sources of finance on response, they have been divided into

three broad categories, equity sour~s40, debt sources and other sources. It was found

that except for equity sources, the rest of the sources had a positive influence on

response. Among equity sources, ordinary public and premium issues showed a high

negative correlation to firm's subscription, but rights issues and promoter equity issues

showed a positive correlation. Two reasons can be given for this. One is that, a rising

share of promoters and existing share holders increases the level of confidence and

generates a better response from the market. Secondly, firms that had a high share of

promoters' equity and went in for right issues were existing companies that had an

edge over the new firms in response generation. Apart from the above reasons, it can

also be argued that the low response to issues involving high share of public and

premium issues was due to the uncertainties regarding capital gains and dividends (as

compared to debentures, which had a fixed rate of return).

Compared to equities, debt sources showed a high positive correlation to

response generated. From the investors' point of view, this is because these are seen

as short-term investments when compared to equities, and they generate a fixed return.

40 Here, equity sources included financing from general public. right issues, promoter contribution and premiums on equities.

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Chapter VIII

Further, only firms with better earning capacity would go in for debt instruments with

an obligation to pay interest every year, which also tends to prompt better response for

debt issues in the market. However, among debt sources, debentures and lease

financing showed a negative correlation to response. In the case of debentures, this is

possibly because of the 'partial equity' and 'premium' effects. Of the total 671

debenture issues in the market during this period, there were 391 issues in the form of

FCDs, 236 in the form ofPCDs and only 44 issues in the form ofNCDs, which implied

that a majority of debentures were quasi-equity issues, which on a specified date after

the issue, get converted to equities. Also, in most cases, there was an element of

premium charged at the time of conversion of PCDs and FCDs, thus making these

similar to premium issues. Thus, investors discounted for both these factors' effects in

their decisions related to debentures. In the case of lease financing, the negative

influence on response was due to the fact that lease financing 41 created a liability for

the company without any addition in the form of fixed assets.

T bl 8 24 S a e . . ources o mancm2 an esponse to IC ssues . fF' dR Pubr 1 Financial variable Response Sign Equity Sources -0.124 Ne.:atlve Public issues -0.185 Negative Rights issues 0.013 Positive (weak) Promoters' equity 0.085 Positive (weak) Premium -0.008 Ne&ative (very weak) Debt Source• 0.148 Poaltlve Debenture issues -0.197 Negative Term loans ( banks and Fls) 0.147 Positive Public Deposits 0.088 Positive (vea_ weak_l Lease Financing -0.077 Negative (very weak) Non-Convertible Debentures 0.031 Positive (very weak) Unsecured loans 0.003 Positive (very weak) Other Sources 0.086 Poaltln _(_verr_ weak_l Subsidies -0.072 Negative (very weak) Internal Sources 0.054 Positive (very weak) Others 0.127 Positive Project cost ( Amts) -0.008 Negative (very weak)

Note : Percentage share of each of the vanable to total project cost 1s correlated With response generated by each individual finn.


The 'responsibility factor' in the case of banks and financial institutions was well

reflected in the highest positive correlation of 0.1468 in the case of term loans,

suggesting that with the growth in the share of term loans in total project cost, the

response to issues showed an increase. This was also due to a lower dependence on

41 Lease financing is an important source of equipment financing for a manufacturing company. While lease financing is not debt per se, a lease contract embraces an interest rate cost to the lessee and thus, its impact on cash flow for the company is exactly the same as the payment of interest and principal on debt obligations.

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Chapter VIII

the stock market funds for such issues, which ultimately led to a smaller issue size. As

discussed earlier, as the size of an issue falls, it receives a better response in the NIM.

Other sources of financing also showed a positive correlation with response.

Of the other sources, internal funds and others showed a positive correlation while

subsidies had a negative correlation with response generated. In sum, it can be

concluded that a higher share of term loans, promoters' equities, issues to existing

shareholders, NCDs and public deposits ensured a better response to public issues

from the market. On the other hand, issues that had high shares of equity, a larger

share of debentures (FCDs), and higher premiums had a low response from the market,

for the reasons explained above.

8.3 Growth of Private Corporate Firms In India : A Post-Issue Balance Sheet Analysis This section attempts to look at the performance of firms in the post-issue period, to

assess the actual growth in their assets and liabilities using the information from

balance sheets. However, it should be noted that as information from small firms is

difficult to get even in the stock exchanges, this analysis provides results that are

largely true for medium and large firms.

In carrying out the analysis, 1993 was selected as the 'ideal year' for starting

the post-issue analysis, as this provided three years of both pre-issue and post-issue

trends. Although 1993 had 507 firms for which the prospectus data was available from

the earlier analysis, the BSE balance sheet data 42 was available for only 51 companies.

This compelled the researcher to expand the list using data for firms that announced

public issues in 1992. Thus, balance sheet information on 77 firms was analysed which

included 51 firms which issued capital in 1993 and 26 firms which issued capital in

1992. Balance sheet data was collected from the quarterly updates of the Bombay

Stock Exchange Directory upto September 1998. Further, due to the non-availability

of data under various heads taken for analysis, a reduction in the sample of 77 firms is

mentioned under each analysis carried out in this section, depending on the non

availability of data for particular variables.

42 The Bombay Stock Exchange data has many limitations. One of the few affecting this work was the lack of coverage of all firms that had public issues in 1993. and another was that there was no uniformity in the data for 1997.

290

Chapter VIII

It was found that the lack of timely data availability in the Indian stock

exchanges was a major limitation with respect to transparency in the financial matters

of the private corporate sector. Of the total 805 firms that had announced public

issues in 1992 and 1993, only 77 firms (9.5 per cent) had their balance sheets available

for the public in 199843 (refer to Appendix II for the list of companies). With nearly

99 per cent of the private corporate firms listed with the BSE, this trend suggests a

high degree of information asymmetry. 44 In the case of the organisational structure of

the firms, it was found that of the total 77 firms, information on the ownership pattern

was available for only 43 firms (Table 8.23). Of the 43 firms, 88 per cent had foreign

holding and 83 per cent had holding by government and financial institutions. This

could be one of the reasons for the availability of balance sheet information for these

firms in the BSE directory. The stock exchanges in India are characterised by a major

limitation as far as the provision of balance sheet information on listed companies is

concerned.

Table 8.25 : Ownership Pattern of the Private Corporate Companies: Post-issue Analysis

Holding% Foreign- Govt. &Fls holding

No %age No %efje Bdow2S 30 78.9 29 80.6 2Sto SO 6 IS.8 s 13.9 SOto1S 2 S.3 I 2.8 7Sto 100 - I 2.8 T<tal 38 100.0 36 100.0 Note : Data was avatlable for only 43 firms. Source : Extracted from BSE Data.

Corporate Bodies

No %ofje 20 46.S 17 39.S s 11.6 I 2.3

43 100.0

(Nmnber of flrms) Directors Top 50 Share- General public

holders No o/GIIfle No %age No o/aage

39 92.9 41 9S.3 17 39.S 2 4.8 2 4.7 17 39.S I 2.4 - - 7 16.3

- - - - 2 4.7 42 100.0 43 100.0 43 100.0

For a majority of the firms, the individual shares of prominent investors like foreign

holding, government and financial institutions, other corporate bodies, directors and 50

top shareholders were found to be less than 25 per cent of the total PUC. The only

exception was in the case of 17 companies (40 per cent) where 'other corporate

bodies' and the general public individually had a 25 to 50 per cent share in the PUC.

This suggested that inter -corporate investments and general public investments were

important sources of investment in the 1990s. This was also proved by the sample

analysis of the NIM carried out earlier.

43 Of the total firms that issued stocks in 1992 only 8. 7 per cent and of the firms issuing in 1993 only 10 per cent, had made public their respective balance sheets till 1998.

44 The researcher had avoided an analysis of the pre- or post-issue price effects of the issue as it is outside the objective of this study.

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Chapter VIII

Table 8. 26: Financial Instruments Used for Public Issues Nwnber of fmns

Industry I Equity Premiwn Debenture FCD PCD OCD Bond Total Consultancy 4 4 I

Financial !>«Vices ~ 2 I I 7

Food produas 4 2 I I 7

Bewnge & tobacx:o I 2 I I 3

Cotton tex1iJCII 4 4 2 2 10

Paper produds I 3 4

Rubba", plastic & Pdroleum produas I I

Otemical products 2 3 2 I I 7

NCIHDIUIIic mina11l produaa 9 9

Basic mc:tals & alloys 2 3 2 I I 7

Electrical madtinc.-y 3 2 I I 6

Trarurport Equipment 2 2

Other manufacturing I I I

Elcctricity 3 2 I 3

Tc:UI 30 29 16 9 3 2 2 7~

Source : Extracted from the BSE Directory.

An analysis of 75 firms revealed that 30 firms issued equities, 29 issued premium

issues, and 16 issued debentures. Being quasi-equity instruments, most of the debt

instruments under debentures (except for bonds) were non-debt creating in the long

term, as they had only a short-term effect as debt instruments. This high usage of

equities and quasi-equity instruments was due to the large participation from small

(55.5 per cent) and medium-sized (33.3 per cent) firms in the total number of firms

taken up for analysis.

8.4.2 Growth in Finns' Assets : A Post-issue Analysis

On the whole, during the 1990s, firms showed an average annual growth rate of 72.69

per cent in investments in fixed assets, and 66.58 per cent growth in investments in

plant and machinery. In general, investments in all the assets showed a considerable

average annual growth of more than 65 per cent, suggesting that .public issues helped

in asset creating investments across the industries taken up for the study. However,

there were industry-wise variations in growth of investments in assets. High growth of

total assets was observed in industries like paper products (456.19), rubber plastic, and

petroleum products (184.85), and transport equipment (111.55). The common feature

in all these industries is that they require large investments in fixed assets such as land,

building and machinery when compared to firms in other industries.

In fact, industries that recorded a high growth rate in fixed assets were paper

products (319.31 per cent), chemical products ( 139.52) and rubber, plastic, and

?Q?

Chapter VIII

petroleum products (98.30). In the case of current assets45, rubber, plastic, and

petroleum products (271. 94), electrical machinery ( 147. 78) and consultancy,

construction and other services ( 1 03.92 per cent) showed the highest growth rates.

The industries that showed high growth in investments in plant and machinery were

food products (252.26 per cent), followed by financial services, chemical products,

consultancy, construction and other services, and basic metals and alloys, each of

which registered growth rates of more than 100 per cent. These were indeed, the same

industries which had shown large participation in the earlier analysis carried out based

on public issue data. The post-issue analysis further revealed that the high growth in

depreciation was also in those industries that had high growth of investments in plant

and machinery.

Table 8.27: Asset Growth across Industries: Post-issue Trends (Average annual gt!>wth rates)

Sl. Industry No Tot Assets Cur. Assets Fix. Assets P&M Oth. assets Dep. no I Consultancy 9 67.90 103.92 10.43 123.72 113.24 123.97

2 Financial Services 3 76.08 93.64 76.19 164.77 121.13 122.14

3 Food products 7 33.70 60.14 19.31 232.26 24.06 63.30

4 Beverages & Tobacco 4 22.09 13.03 34.41 22.09 49.01 93.41

3 Cotton Textiles 10 33.13 33.27 21.69 34.62 73.36 71.13

6 PIIJ)_er products 4 436.19 34.73 319.31 33.21 32.79 40.31

7 Rubber plastic & _l)_etroleum I 114.13 271.94 91.30 0.66 103.42 30.31

I Chemical products I $7.63 90.01 139.32 137.19 102.24 121.46

9 Non-metallic mineral products 9 26.42 41.01 42.41 11.17 77.1.1 76.49

10 Basic metals & alloys 6 47.23 34.03 70.79 101.34 76.93 114.93

II Non-electrical machinery I 19.71 33.00 33.16 19.97 36.21 32.62

12 Electrical machinery 3 36.17 147.71 46.11 34.64 36.01 166.03

13 Transport equipment 2 111.33 36.43 63.22 S2.69 31.94 39.71

14 Other Manufacturing 1 11.23 23.14 12.34 14.63 39.67 10.41

13 Electricity 3 32.12 36.26 36.61 21.52 65.42 47.13

16 Others I 21.01 13.03 59.04 24.62 31.27 9.20

17 Average 79.37 71.21 72.69 66.51 61.02 77.72

Source : Extracted from BSE balance sheet data, from January to September 1998.

Our earlier analysis had proved that expansion and new projects objectives accounted

for many of the manufacturing industries' large participation in NIM. For most of the

77 firms which were considered in this section also, it was found that expansion,

modernisation and new projects were the dominant objectives, and only four firms had

working capital requirements. The above discussion on post-issue growth in assets

clearly proves that firms did use their public issues to promote the growth of their

production base through investments in assets 46

45 Current assets include cash and bank balance. sundry deposits, inventory and miscellaneous current assets.

46 It should be noted that only 9 percent of the sample was analysed here when compared to the total sample taken up for the pervious analysis.

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Chapter Vlll

9.4.3 Growth in Firms' Liabilities : A Post-issue Analysis

This section looks at the liabilities of private corporate finns in the post-issue period, to

understand the effect of the capital raised on the growth of their liabilities (debt). The

results of the analysis across industries given in Table 8.24 show that total liabilities

recorded an average growth rate of 53.4 per cent. It was found that the correlation value

between total and current liabilities across industries was 0.857, while that between total

and deferred liabilities 47 was just 0.38. Thus, the growth in total liabilities can be attributed

more to a growth in current liabilities at 62.7 per cent, rather than the high average growth

exhibited by deferred liabilities at 147.1 per cent across the industries. Hence, it could be

concluded that for financing their working capital requirements finns still depended on

other sources of finance, mostly banks and financial institutions.

Table 8.28 : Growth in Liabilities across Industries : Post-Issue Trends ( Avera2e annual Rrowth rates)

Industries Total Liabilities Current Liabilities Deferred 1 Consultancy 138.06 127.48 188.50

2 Electrical machinery 112.22 131.96 212.64

3 Financial Service 81.63 87.78 209.05

4 Cotton Textiles 75.95 63.02 93.20

5 Chemical produc:ta 73.85 73.92 108.00

6 Non-metallic mineral products 68.53 73.80 500.06

7 Food produc:ta 47.50 72.52 258.14

8 Non-electrical machinery 46.62 65.34 18.34

9 Basic Metals & alloys 43.28 56.51 19.98

10 Transport equipment 38.91 32.70 283.19

11 Electricity '· 27.95 46.45 80.48

12 Paper produc:ta 26.82 30.58 14.95

13 Other manufacturing 21.80 89.62 . 14 Beverages and tobacco 20.20 21.89 57.89

lS Rubber, plastic, & petroleum produc:ta 13.19 13.19 . 16 Others 17.10 17.11 15.10

17. Avenge aaoss industries 53.4 62.7 147.1

Source : Extracted from the BSE data.

The most prominent industries that showed a high growth in deferred liabilities were non

metallic mineral products, transport equipment, food products, electrical machinery, and

financial services. As these industries were the same industries that had shown a high

growth of plant and machinery (Table 8.26), it could be inferred that finns in these

industries used deferred liabilities (debentures) to finance their fixed asset investments.

Table 8.29 : Share of Current Liabilities and Deferred liabilities across Firms

Uabilities 1990 1991 1992 1993 1994 1995 1996 1997 CWTent 73.38 68.63 64.36 61.02 61.55 57.54 57.41 62.45 Deferred 26.61 31.36 35.63 38.97 37.05 42.02 41.57 30.58 Source: Extracted from BSE data

4 7 Deferred liability includes debenture issues and long term loans.

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Chapter VIII

While the share of current liabilities in total liabilities and the correlation between them

showed that current liabilities had a higher weightage in total liabilities compared to

deferred liabilities, there was a decrease in the share of current liabilities in comparison

to deferred liabilities during the period 1991-96. The increase in the share of deferred

liabilities was due to the increase in long-term loans in the investment financing plans

of firms during this period. This seemed to show a reversal in 1997 when the share of

current liabilities in total liabilities increased again. This may be attributed to two

factors : First, the repayment of deferred liability by the existing firms, and second, the

growing requirements for working capital among new companies, once they started

actual production.

An analysis was carried out to understand the source-wise composition of

investments across industries. The results as shown in Table 8.27 reveal that of the

total of Rs. 7906 crores 48 of investment planned by the firms, about 41 per cent of the

funds was from term loans while debentures accounted for 13 per cent. Thus, more

than half of the total proposed investment was financed by long-term debt-creating

instruments. Equities through the public and rights channels, and premium issues

accounted for only 32 per cent of the total proposed investment. This was also

reflected in the financial instruments used by these firms, as 16 firms (21 per cent)

issued debentures.

9.4.4 Growth in Share Capital of Firms : A Post-Issue Analysis

Although equity issues accounted for only 32 per cent of the total investments, the

trend across industries revealed a growth in share capital and net worth. This was due

to the dominance of young (42.3 per cent ) and middle-aged (44.1 per cent) firms

among the 77 firms taken for analysis, whose dependence on external capital was

greater than that of older firms. Firms belonging to cotton textiles had the highest

post-issue average growth of 637.01 per cent in share capital. This industry was

followed by non-metallic minerals (296 per cent) and rubber, plastic, and petroleum

products (145.5 per cent) industries. De-licensing of these industries and a large

increase in the number of firms that went in for expansion via transformation from

private to public limited companies during the 1990s led to this rise in share capital.

Apart from these three indus&ries, food products and chemical products industries also

48 This is the sum of project C05Cs of the 77 finns taken up for analysis in the post issue section.

295

Chnptcr VIII

showed increase in the share capital. The data on types of financial instruments used

for raising capital from the NIM had in fact shown that all these five industries had the

highest equity and premium issues (Table 8.26). Thus, most of the firms analysed had

increased their paid-up-capital through the NIM.

Table 8.30 : Post-issue Growth of Paid-up-capital Across Industries (Average annual growth rates)

Sl.no Industries Net Worth Share Share Premium Capital ACC's

I Consultancy and others 60.97 31.4 465.08 2 Financial Service 65.22 55.0 59.87 3 Food products 35.45 90.3 3.95 4 Beverages &. tobacco 15.56 13.9 0.38 5 Cotton Textiles 40.24 637.0 24.19 6 Paper products 22.09 26.0 519.54 7 Rubber, plastic &. petroleum products 33.00 145.5 609.65 8 Chemical_products 97.08 73.2 98.83 9 Non-metallic mineral products 270.59 295.5 10.62 10 Basic metals &. alloys 105.01 81.3 33.59 11 Non--electrical machi~CJ}' 32.78 10.0 27.41 12 Electrical machinery 76.51 83.2 561.14 13 Transport equipment 68.19 15.3 97.51 14 Other manufacturing 11.70 15 Electricity 29.72 49.4 465.17 16 Others 52.19 50.6 17.89

Source : Calculated out of data from BSE Directory results.

8.4.5 General Post-Issue Performance of Firms

Any conclusion on the post-issue performance of the firms participating in the NIM

should be derived after taking care of all the external factors like changes in the fiscal

policy of the government, overall growth trends in the economy, inflation trends, and

trade liberalisation which led to external competition for many consumer goods

industries. Table 8.28 shows that regardless of their industrial category, firms

performed well in terms of sales growth till 1992. However, the performance was not

so good after 1992, as sales growth started decreasing, with 1997 recording a negative

growth rate. The decreasing trend in sales is aptly reflected in the negative annual

growth rates in gross profit during the same period. In 1994, for example, growth rate

in gross profit was -33.56 percent and in 1997 it was -19.93 per cent

Sales and profit across the years showed a high role of non-operating surplus

till 1994, but a decrease in the same after 1994. The year 1997 was bad for nearly all

the firms in India, as the annual growth rates in all the profit indicators showed

negative values. What can be concluded from these results is that during the mid-

1990s and after, private corporate firms in India started facing shrinking domestic and

international markets for their products. Although the equity boom ~hrough the

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Chapter VIII

primary market gave them an edge in terms of investments for ~xpansion and creation

of additional production bases, the actual performance of these firms in terms of sales

and gross profit showed a dismal trend across all industries, in the post-issue period.

Table 8.31 : Perfonnance of Firms in the Post-issue years : An Analysis of Balance Sheet Data (Annual Growth)

1991 1992 1993 1994 1995 1996 1997 Average

Sale a 42.65 2358.06 122.07 167.88 130.31 43.41 -20.44 406.28 Gro .. Proftt 94.76 90.94 76.81 -33..!6 -371.!18 26.55 -23.43 -19.93 Dperation Profit -84.SS 130.67 1S.68 239.2S 219.34 183.60 -113.81 84.31 Net Profit 646.37 140.98 278.61 240.3S 173.Sl -72.S8 -31.28 196.S7 Profit Distributed 24.18 134.SO 271.32 198.13 49.20 10.34 -32.28 93.63 Retained Prof'Jt -S773.47 201.69 138.28 14S.41 198.17 2S.30 -12.16 -12S.2S

Trenda In Market Price or Sharea P-hildt 93 36.66 187.S2 -Sl.43 67.98 9.04 -44.47 -70.63 19.24 P-high92 -37.SO 78.97 -39.2S 192.42 -20.00 -49.S9 -Sl.73 10.47 P-low 93 6L6S 112.47 -33.41 S4.28 -0.96 -44.SO -73.66 10.84 P-low 92 46.S1 23.73 -43.28 48.48 80.91 -SS.S1 -SS.28 6.S

Note : 1. P-bigh 93 and P-low 93 is the high and low market pnce of share thattssued capttal m 1993. 2. P-high 92 and P-low 92 is the high and low m.arkct price of share that issued capital in 1992.

Source : Extracted from the BSE data for various years.

Private companies also showed a decrease in the reserves created through operating

income. This shrinking reserve was largely due to the sharp decrease in retained

profits in 1996 and 1997 as seen in the Table 8.28. These deteriorating fundamentals

and lack of declaration of dividends affected the market value of the shares also. The

effect of this was the negative growth in the highest and lowest prices quoted in the

market during 1993 to 1995 as shown in Table 8.28. The only positive reserve was in

'shareholder reserve' that was created through premium issues and sinking funds. The

advantage of the surplus generated via premium issues could not be maximised by

firms and shareholders,.due to the recession faced by the industrial sector in 1996 and

1997. This recession was an important factor that led to the decreasing confidence of

investors in the NIM in the second half of 1990s. This in tum got reflected in the poor

participation of firms in the market especially after 1997.

8.4.5 Debt-Equity Ratio: Pre- and Post-Issue Trends

The result of the analysis on the pre- and post-issue trends in the debt-equity ratio of

private firms in India are presented in two parts in Table 8.33. The first part shows the

results on the total debt-equity ratio and the second part provides the results on the

short-term debt position using the current ratio.

The results show that the expansion of the equity base led to a decrease in total

liabilities and current liabilities in the years immediately after public issues. A

decreasing trend was noticeable in the case of total debt-equity especially after 1993,

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Charter VIII

which highlights that there was an increase in the share of capital. The increase in the

equity stock of firms occurred as most of these firms had issued financial instruments

that were either equities or near equities like FCDs, PCDs and OCDs. This in tum

helped decrease their debt equity ratio. This indicated that the equitisation process in

the private sector did help many firms which had a high total debt-equity ratio during

1992 and 1993, to decrease their respective debt-equity ratios. This decrease was also

shown in terms of maximum and minimum values across the firms. The pre-issue total

debt-equity ratio that was as high as 112.7 times in 1991, fell sharply to nearly half

(67.4 times) during the post-issue phase. Also, considerable variation was found to

exist across the maximum and minimum ratios among the firms. · In 1992, (just before

the public issue) the maximum was 112.7 and the minimum was 0.7, while in the post

issue period the variation dropped to 65.4 and 0.2 in 1997. These results thus indicate

that public issues did improve the fundamentals of firms and led to a general increase in

the financial health of firms that had very high debt.

Table 8.32: Pre- and Post-Issue Trends in Debt-Equity Ratio in Private Firms

1990 1991 1992 1993 1994 1995 1996 1997 PRE POST

Debt I Equity Ratio Maximum# 21.0 97.3 112.7 92.4 67.4 4S.4 46.S 6S.4 112.7 67.4 Minimum# 0.7 0.7 0.7 0.1 0.1 0.1 0.1 0.2 0.1 0.1 Total• 13.9 20.7 19.0 14.2 8.1 1.9 8.6 8.1 11.9 8.7 '93Issue 10.7 16.S 20.3 16.7 7.7 6.1 6.S 7.8 16.1 7.0 '92 Issue 23.6 28.7 16.8 10.2 9.0 11.1 12.6 8.6 19.8 10.3

Current Asset I Current Liabilities Total• 1.21 l.Sl 1.29 1.89 2.66 2.01 1.76 U6 1.31 2.03 '93 Issue 1.23 1.70 1.27 1.48 2.79 2.11 1.83 us 1.42 2.07 '92 Issue 1.13 1.12 1.33 2.S6 2.38 1.82 1.62 U7 1.19 1.99 .. Note: a) I#= muwnum and maxunwn as found across the firms. b) '93 tssue: The average of debt-eqwty rabo

of firms which issued capital in 1993, c) '921ssue: The average of debt-equity ratio offinns which issued capital in 1992, d) • = total of the combined sample of finns that issued in 1993 and 1992.

Source : Extracted from the BSE directory data.

To understand the effect ofpublic issues on firms' debt-equity ratios, the total sample

of 77 firms was broken down based on the year of public issue. The resulting figures

revealed that in the case of firms that went in for an issue in 1993, the debt-equity ratio

which showed a high of 16.7 in 1993, immediately fell after the public issue to 7. 7 in

1994 and stood at 7.8 in 1997. A similar decrease in the debt-equity ratio in the

immediate year after public issue was noticed also for those firms that went in for an

issue in 1992.

The effect of public issues on the short-term debt of firms showed similar

trends to that found in the case of total debt-equity ratio. There was a gradual increase

298

Chapter VIII

in the ratio of current assets to current liabilities. This shows that public issues did

help the private firms to tide over their high short-term debt-equity positions during the

1990s. A study carried out by RBI ( 1998) also showed a sharp drop in the debt-equity

ratio of firms from 81.2 per cent in 1993-94 to 65.5 ( 1994-95), and further to an all

time low of 55.8 per cent. The RBI study further highlighted the growth of short-term

liabilities on inventories from 50.6 per cent to 64.4. per cent, when the total outside

liabilities to net worth showed a decrease from 173.7 per cent to 140.9 per cent49.

The study which was carried out on 700 large public limited companies confirms the

trends observed in our analysis on debt-equity and current ratios.

Another important aspect is that firms went for public issues only when they

had very high debt-equity ratios. Firms which had the highest debt-equity ratio in 1992

(20.3) went in for public issues in 1993, and firms which had the highest debt-equity

ratio (28: 7) in 1991 went in for issues in 1992. It could be said that firms went in for

public issues to tide over the poor debt-equity condition, out of compulsion on their

part to raise money through the best available option of financing. The equity boom

during this period thus provided them with the right opportunity to improve their

fundamentals. But, these fundamentals were soon weakened due to the recession in

the manufacturing sector that followed the boom in the NIM.

Although the years immediately following the public issue saw an improvement

in firms' fundamentals due to equitisation as seen above, there was a weakening of this

effect by 1996 whereby, there was a decrease in the current ratio and an increase in the

debt-equity ratio. While of these two ratios the current ratio reached the pre-issue

levels across firms, the total debt-equity ratio for the firms was much lower during this

period compared to the pre-issue level, suggesting that firms depended less on long

term loans when compared to short-term loans.

9.5 Conclusion

The analysis of post-issue responses has shown that in terms ofthe amount raised there was

a staggering surplus (six times) over and above the demand from the firms which reflected

the growing interest of investors in the NIM during 1989-95. However, the response

analysis reveals that there was a concentration of these surplus funds. This surplus was

49 Company Finance Division of the Reserve bank of India, Reserve bank of India Bulletin, RBI. March, 1998, p. 207 • 245.

299

Chapter VUI

more pronounced for issues that were floated by firms in the services sector. The service

sector dominated the NIM in terms of increase in participation and also in response rates.

Thus, liberalisation of the NIM led to a flow of capital from productive industries to service

sector industries which concentrated on consumption and speculative activities. The better

response rates among firms with working capital objectives, rather than those going in for

expansion and starting of new projects also points towards a movement of investments

away from productive objectives.

The response analysis also indicated a high regional disparity with a bias towards

issues floated by firms from the southern states. Further, the large rush of small firms into

the NIM in the context of an overall rise in participation due to liberalisation, led to a

decrease in the response to their issues compared with large firms. Thus, while the post

CCI period can be termed as a phase of excess supply of capital in the NIM, the response

analysis brought out the concentration of these surplus funds in fewer industries, states and

regions and in large firms.

During the post -CCI period, there was an increase in under-subscribed issues and a

decrease in over-subscribed issues when compared to the CCI period. This decrease in the

share of firms with better response suggests that the increased participation of firms in the

NIM led to a decrease in the average response rate. While there was over~owding of

small firms in the NIM following liberalisation, small firms benefited (barring a few large

firms which were highly over-subscribed) in terms of response generated in the NIM during

the 1990s, as their requirement of capital was lower than that of large firms. Thus, the

decrease in average response means that funds which would have potentially gone into

large firms got scattered among a large number of small firms.

The analysis on mode of payment showed that firms that offered easy, instalment

based modes of payments received a very high response, which points to the presence of

small individual investors in the NIM. Further, with the data on post-issue performance of

issuing firms suggesting low listing and trading activities in stock exchanges especially for

new and small firms50, the spread of surplus funds across small firms points to a situation

wherein a large amount of investments from small investors got blocked. This trend only

got aggravated with the regulation of the equitisation of over -subscribed issues. Thus, the

small investors were left with very low returns on their investments in the NIM.

50 As reported by Prime Database.

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Chapter VIII

The high response exhibited by issues that had a large share of term loans,

promoters' equities, or issues to existing shareholders, highlighted the role of insiders, and

also the quality of such firms. The growth of under -subscribed issues during the post -CCI

period, therefore, points to a large rise in the number of firms which are of lower quality,

which in tum suggests that the investments which were channelled to these firms were not

the best use of those funds.

The post-issue balance sheet analysis carried out on nine per cent of the total

sample to understand the effect of public issues on the performance of firms showed that

this equitisation process helped many firms that had a high tQtal debt -equity ratio during

1991 and 1993 to decrease their respective debt-equity ratios in the post-issue period.

Further, it was found that in the post-issue period, the average annual growth of fixed

investments was high in the case of these reputed manufacturing firms (in the small sample),

suggesting an expansion of their production bases during the 1990s. Since a majority of

firms had productive-need based objectives for their public issues, it could be said that the

capital raised was utilised for asset-building and capacity expansion. However, the fall in

post-issue profits recorded by these firms shows that this production expansion did not

translate into a rise in operating incomes for them. This was due to the recession in the

manufacturing sector in the mid-1990s. However, during this period, most of the firms

showed larger shares of non-operating income in. gross profit, suggesting the use of share

premium surplus for financing current assets.

The post-issue analysis of the effect of public issues on firms' performance also

showed that current liabilities recorded a high growth rate across all the manufacturing

industries (considered in the small sample). The growth rate of deferred liabilities was

higher and this indicates that the role played by the stock market in financing equity was

complemented by banks and financial institutions, as there was a growth in both loans and

other long-term debts. Thus, it was clear that these firms used the channel of deferred

liabilities to finance more investments, as most of the money raised from the market were

equities that are non-debt creating in nature. This further confirms that firms that were

better placed in terms of 'good will' used banks and financial institutions as a source of

financing, even in the equity boom period of the 1990s. Therefore, it appears that the

growth of the NIM did not restrict the business of the banks and financial institutions and

that the role played by the NIM was complementary to rather than competitive with that of

the banking sector.

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chapter viii demand and supply conditions in the new...

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