PE Exit Worth $2.5 Billion Caught in IPO Quarantine

The COVID-19 pandemic sweeping across the world has caught everyone unawares. No one among the policymakers, businesses and the larger public was prepared to deal with the highly infectious disease. Without any available treatment, governments reacted by shutting down large parts of the economy to stop the spread of the novel coronavirus that causes the disease.

The Indian government too declared a 21-day lockdown, exempting only essential products and services. The lockdown coupled with a steadily rising number of infections led to a stock market crash. One of the most crucial functions of the stock markets is to help companies raise funds. With the investor sentiment turning negative, the impact of coronavirus on the Indian IPO market has been severe.

The primary markets were already under pressure due to the slowdown in the broader economy. The COVID-19 pandemic amplified the crisis. Fundraising through IPOs had fallen by 60% in 2019 to Rs 12,362 crore. Companies had raised Rs 30,959 through 24 public issues in 2018. The stock market crash led to the postponement of several IPOs as companies became wary of listing in a turbulent market.

Markets in turmoil :

March can be termed as one of the worst months in the history of the Indian stock market. Both the benchmark indices, Nifty50 and Sensex fell over 23% each in the month. Investors lost a cumulative Rs 30 lakh crore in the crash triggered by an unprecedented exit of foreign institutional investors. Panic-stricken FIIs dumped Indian shares worth $7.54 billion in March, making it the worst sell-off in a month. The resulting negative sentiment led to a virtual stop in fundraising activities.

When the primary markets get negatively impacted there are several victims. An IPO generally has two components, fresh issue of shares and offer for sale. The money raised through the fresh issue of shares goes to the company and is typically utilised for expansion or payback of debt. In an offer for sale, existing shareholders reduce their stake and the money goes to them. Most IPOs in the recent past had both fresh issues of shares and offer for sale by existing shareholders.

The victims :

With the impact of coronavirus on Indian IPO, companies planning to raise funds for expansion are unable to access much-needed capital. Investors seeking to exit a company are trapped indefinitely. The government seeking to raise funds through stake sale of state-owned companies has to revise the budget to manage the shortfall. In a nutshell, there are three primary victims of the impact of coronavirus on Indian IPO market—companies, existing shareholders and the government.

Foreign entities are large investors in the Indian market. Either they invest in companies through the stock markets or buy a stake in private deals. A number of private equity firms are investors in Indian companies that were slated to go public. Many private equity firms had plans to make a partial exit but a stop in fundraising activities has resulted in deals worth $2.5 billion getting stuck. Some of the world’s largest investors such as Blackstone, True North, Everstone Capital, Warburg Pincus and CX Partners had plans to make partial or total exits. They are shareholders in companies like Burger King, Samhi Hotels, Barbeque Nation and CAMS. Many companies were forced to postpone their IPOs due to the prevailing uncertainty in the markets, even after getting approval from the Securities and Exchange Board of India.

The much-awaited IPO of the Life Insurance Corporation of India is likely to be another major casualty of the coronavirus-induced slowdown in the primary markets. The public issue of the largest insurer in India was considered to be a game-changer by market experts. The extreme volatility in the market is likely to force the government to delay the IPO, if not completely shelve it.

Conclusion :

According to estimates, public issues worth Rs 40,000 crore were expected to hit the market between March and December. But a majority of the issues have been deferred due to the impact of coronavirus on Indian IPOs. Some of the prominent companies said to have delayed their IPO plans are specialty chemicals maker Rossari Biotech Ltd and fast-food chain Burger King India Ltd. Fundraising activities have taken a hit, but the situation will improve sooner than later. When the effect of coronavirus on the IPO market in India subsides, private equity firms, the government and companies, everyone will gain.