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  • Ajay Garg

    Founder & MD, Equirus Capital
    Ajay Garg has over 23 years of experience as an investment banker and a solid track record in spotting investment trends. Garg founded Equirus in 2007 as a boutique advisory firm involved in mid-market investment banking with dedicated teams for advisory, ECM, institutional equities, PMS and wealth practices.

What explains the depression in IPO mart when market is at record high?

FY20 is headed likely to end as the weakest year in primary market activity since FY15.

Updated: Nov 28, 2019, 12.12 PM IST
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PMS as an asset class has witnessed good growth and reached three times the AUM of smallcap mutual fund schemes.
Last week in one of the public interactions, the Sebi Chairman asked a very pertinent question: while we have so many IPOs approved, why aren’t they hitting the market. The question assumes greater significance in the light of the fact that FY20 is headed likely to end as the weakest year in primary market activity since FY15, especially in terms of the number of transactions.

table 1

This is despite the buoyancy seen in the secondary market with average P/E for Sensex being at one of the highest levels we have witnessed in last five years.
table 2

So, what has plagued the primary market?

Besides the overall economy and capex slowdown, which has impacted companies across the spectrum, we believe the Sebi move to reclassify mutual fund schemes into largecap, midcap and smallcap categories has had an inadvertent fallout for midcap and smallcap stocks. The large cap universe, comprising the top 100 stocks, is cut off at a market capitalisation of Rs 30,000 crore while the midcap universe, which constitutes 101-250 stocks, had the market capitalisation cut-off at approximately Rs 9,000 crore. Out of the Rs 9 lakh crore equity mutual fund assets, approximately 92 per cent is in largecap and midcap funds, and they continue to grow stronger, while smallcap schemes constituting about 6 per cent, or Rs 50,000 crore, have witnessed limited growth.

The churn of portfolios to comply with the revised regulations impacted the performance of midcap and smallcap indices, which together with the smaller asset class and limited number of smallcap schemes to choose from has led to strong distributor preference for largecap and midcap schemes.

This is reflected in the relatively muted AUM growth in smallcap schemes.

While there has been some growth in multicap schemes, the same has not been enough to support primary market activity in midcaps and smallcaps.

3 table

This, when coupled with the fact that most companies that have approached the capital markets regulator would have been classified as smallcaps at the time of the IPO significantly limits the availability of institutional capital for participation in most transactions.

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So what can be done?
We believe Sebi needs to balance the need to protect interests of retail investors and ensure availability of equity capital to midcap/ smallcap and microcap firms and one of the steps in that direction can be through allowing PMS schemes to be qualified as ‘qualified institutional buyers’ to be able to participate in the QIB portion, including the anchor book.

PMS as an asset class has witnessed good growth and reached three times the AUM of smallcap mutual fund schemes.

table 5

Also, the relatively longer investment horizon and higher risk appetite of underlying investors make them well suited to help create the right momentum in these transactions.

This will open an additional pool of capital, especially for midcap/ smallcap companies and create potential for reviving the primary market and once again make mainboard listings a suitable capital raising avenue for smaller companies.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of

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