Only around 25% of the equity raised through initial public offerings (IPOs) is allocated for capital expenditure, while the majority of funds are utilized to repay debt, invest in subsidiaries, and reduce working capital borrowings, according to a research paper by Bank of Baroda (BoB) chief economist Madan Sabnavis.
According to the report, among the fresh equity raised, 26% was designated for capex, 29% for debt repayment, 9% for subsidiary investments, and 6.2% for working capital. The report indicated that the allocation for 24.5% of the funds was not specified. The 189 IPOs encompass companies that have accessed the equity market this fiscal year or have submitted draft red herring prospectuses.
A noteworthy point according Madan Sabnavis is that the ₹1.82 lakh crore intended to be raised by these companies, 66% was through a fresh issuance, while the remainder would go to existing shareholders via the offer for sale (OFS). This is important because when existing shareholders divest their stake, the proceeds go as profit to them and do not contribute to the company’s business objectives.
Thus, the main takeaway of the report is that the businesses are likely to receive approximately 65-67% of the total proceeds from an equity offering in the market. Additionally, around 26% or 16.5% of the total equity raised may be directed towards capex purposes, while a slightly larger portion could be allocated for debt repayment.
IPO market so far
Additionally, a study by Bank of Baroda indicates that the IPO market has recently experienced growth. According to Prime Database, during the first seven months of the fiscal year (FY25), 96 companies issued a total of ₹1.25 lakh crore through FPOs, IPOs, and OFS.
For context, IPOs reached ₹2.11 lakh crore in FY25, with 105 companies participating, marking a record high for issuances. Notably, the five-year period ending in FY25 saw a total issuance of ₹5.66 lakh crore from 413 companies. In comparison, the cumulative funds raised from FY05 to FY20 were slightly less at ₹5.64 lakh crore. Thus, there is clear evidence of a substantial surge in the IPO market recently.
This growth coincided with the positive sentiment observed in the secondary market where the Nifty 50 delivered a cumulative return of 123%. In comparison, the return over the previous decade starting from FY11 was only 62.6%.
Madan Sabnavis noted that it would be helpful to understand the motivations behind companies seeking to raise new capital in the market. This action is typically linked to new investment strategies and differs from the turnover in the secondary market, which primarily involves the exchange of money among various shareholders without any direct benefit to the companies.
“However, a robust secondary market can motivate companies to seek additional capital, which may be at high premiums, thereby enhancing both the company’s and the market’s value,” added Sabnavis.
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