QIP run halts; GMR cancels $500m issue

QIP run halts; GMR cancels $500m issue
The Financial Express, July 1, 2009, Page 1

Akash Joshi, Mumbai

GMR Infrastructure has become the first Indian company to withdraw its plans to raise finance through the qualified institutional placements (QIP)—the most popular route through which companies are raising finances this year. The withdrawal has raised concerns about the possible oversupply of papers and pricing issues in the market. In the week before the Budget, around Rs 13,000 crore of such fund raising plans are in the queue, according to data with capital market firm KRIS.

Bangalore-based construction firm GMR Infra on Tuesday informed the Bombay Stock Exchange that it is withdrawing its proposed $500-million (about Rs 2,500 crore) QIP, blaming unfavourable market conditions. “The management committee of the board of directors of the company has decided to withdraw the QIP in light of existing market conditions.” The board had earlier decided to allot shares on June 29 to qualified institutional buyers pursuant to the shareholders’ nod earlier this month for raising up to Rs 5,000 crore.

An investment bank source familiar with the development confirmed that over-pricing of the placement and a flurry of issuances had caused the management to rethink. QIP is a method that allows a domestic listed company to raise capital from stock markets without needing to submit any pre-issue filings with market regulator, Sebi. The rules were put in place by Sebi in May, 2006. H owever, the rules were modified in August 208 to make the offer price more realistic, by changing the pricing period from six-month average price to two weeks’. A two week price average is considered to be more close to current market conditions and, therefore, more realistic.

However the success of DLF’s Rs 3,860-crore QIP issue and increased investor interest in the space caused a flurry of announcements. India Inc intends to raise around Rs 32,500 crore this year through QIPs.

Some key QIP issues to be opened this week are from real estate companies like Purvankara, Shobha Developers, HDIL, HCC and Dewan Housing and domestic FMCG company Emami. Last week, Unitech closed a QIP issue for Rs 2,800 crore.

An investment banker with a leading foreign bank said, “There are more then $1.5 billion that have been raised from the market over the past month. With already so much of money being raised, there is a question mark on the fate of another $2.7 billion planned to be raised next week.” To put that number in perspective, Indian companies had raised Rs 54,000 crore through public issues in 2007-08 and around Rs 25,000 crore through the QIP route the same year when the going was good. But in the following financial year, they raised only around Rs 189 crore (till January 2009) even after the rules were changed.

Companies are redoing their math as the Budget draws near. Since the new norms say the QIP price will be calculated at a two-week average price against the earlier six-month average, they would prefer to ride out the Budget and its impact on the stock markets before moving in. But investors have different perspective. “Now, in case investors expect the market to fall after the Budget, they’d rather wait,” says Udayabhanu Thakur, associate VP, investment banking, SREI Capital Market.

An analysis of pre- and post-Budget market movement suggests that over the past 18 years, the market has corrected 14 times post-Budget. Excluding the outlier of 1992, the average fall is 4.3%.”This time as well given the higher expectations and strong rally subsequent to the election results, a post-Budget correction appears likely,” say analysts at Religare Hichens Harrison.

In the case of GMR Infrastructure, its share price has nearly doubled over the past six months. An investment banking source said that would indicate a price near the Rs 160-mark but the two-week average as on Monday when the issue opened was around Rs 143.43, almost 10% less.

The BSE Realty index fell by 7.4% on Tuesday, while the Sensex by 1.9%. Overall, the realty & construction sector was seen making a comeback as the QIP route has seen companies like Unitech and DLF raise more than billion dollars and take care of their debt and other financing obligations.