Primary Equity Markets in India: Problems of Plenty

by Anshuman Jaswal, PhD, July 6, 2010
Industry Trends


The primary equity markets in India have recovered from the effects of the downturn and are expected to grow rapidly in the next two to three years. New equity raised is expected to double between 2009 and 2013 as a result of improving markets and recent regulatory developments.

In a new report, Primary Equity Markets in India: Problems of Plenty, Celent analyzes the possible impact of a recent regulatory change stipulating that every listed company should have at least 25% of its shares owned by the public. This could mean that between Rs 1,500 billion and Rs 2,500 billion of equity offerings could come into the market in the next two to three years--a game changing regulation, if implemented in its entirety.

The figure below shows the resource mobilization in the Indian capital markets through domestic equity and foreign capital in the form of foreign currency convertible bonds (FCCBs) and ADRs/GDRs. All three sources of capital improved performance in FY 2010 after the declines in FY 2009. The effect of the downturn was more pronounced in the case of the equity markets. Investment through FCCBs/ADRs/GDRs has recovered from its FY 2009 lows but has not returned to FY 2008 levels. The estimated volumes show a drastic rise in FY 2011 onwards because the recent government regulations making compulsory free float of 25% will result in a flurry of activity in the primary markets.

“The primary markets are still in recovery mode, and a glut of equity issues could have an adverse effect on them and the entire economy,” says Anshuman Jaswal, Senior Analyst with Celent's Indian Financial Services Group and author of the report. “The implementation of the decision to impose a minimum free float of 25% has to take into account the impact on the market.”

This report also discusses two other aspects of this issue. The first is that the rise in equity offerings would result in a rise in revenues for investment banks. Second, while it might be beneficial to have larger primary equity markets, there is a strong chance of some companies delisting to avoid having to comply with the regulation and also of there being a negative effect on the secondary equity markets.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

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Table of Contents

Executive Summary




Market Overview



Fund Mobilization



Distribution of Capital Mobilized



Investment Bank Rankings


Opportunity in the Primary Market



Change in Regulation



The Fees Conundrum



Investment Banks’ Revenues Expected to Rise


Potential Issues Related to the New Regulation



Overpricing of IPOs and Lower Demand



Impact on Secondary Market






Competition from Other Emerging Markets



Noncompliance by Some Entities



Impact on Price of Successive IPOs



Failure of Previous Regulation




Leveraging Celent’s Expertise



Support for Financial Institutions



Support for Vendors


Related Celent Research


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