Grocery supplier Zomato’s spectacular public listing is likely to pave the way for other major internet companies to raise capital from the public. This marks the beginning of a new chapter in the Indian primary market, which has had a checkered history since a new law forced multinational corporations to offer shares to the public and Reliance Industries breathed life into it for the first time in the late 1970s. Since then, there have been four major events that have changed primary capital markets. Each has expanded the pool of companies, expanded the investor community, or served as a reference point for rule changes.
In 1977 Reliance Industries Limited (RIL) first issued shares to the public. The output size was ₹2.82 crore and was priced at face value. It sparked events that would result in RIL playing a pivotal role in attracting individual investors to stock investments. Founder Dhirubhai Ambani actively used public capital to grow his business. RIL’s annual general meetings became big business, with a flurry of retail investors. Dhirubhai began to gain cult status.
Building on this popularity, Dhirubhai launched four major public themes over a period of five years on both sides of India’s 1991 liberalization spurt. Each time it was for a project that was created from scratch. Everyone received an overwhelming response but did not deliver exceptional returns. Each of these companies soon merged into RIL, often on favorable terms for the promoters. However, the appeal of RIL to retail investors continues.
The wild 90s
Together with RIL, liberalization also expanded the primary market. In April 1992 the capital market regulator Sebi (Securities and Exchange Board of India) was established. Four months later, the Capital Controller of Issues (CCI) was abolished. The IHK was a government agency that decided, among other things, on the price of an issue. Companies could now set their emissions and raise capital, and all they needed was Sebi’s approval.
The beginning of a free pricing regime saw many excesses. Companies flooded the primary market to raise capital. In 1991-92, the IHK’s final year, there were 195 public issues. The annual average over the next five years was 942 emissions.
The organizers used the capital raised for enrichment. Many of these companies no longer exist. These excesses would pave the way for rule changes aimed at protecting investors from fraudulent companies and practices.
In that flood of new issues in 1993, one belonged to Infosys. This sale of shares was barely subscribed. But the opening up of the Indian economy created new business opportunities. One of them was India as an offshoring base. Indian software services and business processing companies have convinced customers in the United States to do the same work from India at a lower cost. Infosys and Wipro were the driving forces.
More IT companies have been founded, grown in size and more publicly traded. But no one has fired the imagination of investors like Infosys and Wipro and later TCS. Of the 30 stocks that make up BSE Sensex today, 13 have been listed for over 25 years. Infosys leads this group in shareholder returns, delivering a 35% cumulative annual return. ₹100 invested in Infosys in July 1996 are now worth it ₹1.67 lakh.
Every story like Infosys, every market boom expanded the investor pool. As the market evolved, so did the rules, often in response to fraudulent practices. For example, in 2005 there was the IPO Demat scam in which thousands of fake custody accounts were opened by certain companies to increase allocations in public issues. Checks and balances were reviewed after the excesses of the 1990s, but it was a gradual process.
The rule change encompassed almost all dimensions of an IPO. These included the company’s financial track record, disclosures required by promoters, minimum public shareholding to ensure a good number of shares were in circulation, reservations for institutional investors to participate, and the code of conduct on advertising. The number of issues has decreased since the flood in the early 1990s, but the quality is better. One measure of this is the gradual increase in the average amount raised.
2021: digital boom
The listing of Zomato opens the doors for internet companies that are barely present on the stock exchange. Typically, these companies tend to be capital hungry and loss making. This permanent capital requirement has so far been covered by venture capital funds. In May, Sebi increased the incentive for them to be listed on the growth platform for innovators. The most important change was the shortening of the period in which 25% of the pre-issue capital of such a company had to be held by large investors from two years to one year. Zomato was the first from the blocks. The response to the issue suggests that investors believe the growth prospects of internet companies outweigh their current loss status, a belief that will be tested in the marketplace. Next up are Paytm and Mobikwik.
A variety of other relevant internet companies are waiting for you. According to a March 2021 report by Credit Suisse, there were 336 publicly traded companies in India with a market capitalization of over $ 1 billion ₹7,500 crore), another 100 were not listed. The Internet underpins a large part of their business models – including e-commerce, fintech, edtech, food delivery, software-as-a-service and gaming. In addition, two thirds were founded in the last 20 years. You could well be writing the next chapter in the history of the Indian primary market.
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