One by one, India Inc's fund-raising options are shutting down

A nightmare. Nothing else better describes how 2011 turned out for Indian companies that hoped to raise funds through the capital markets. Turbulent markets and a pessimistic outlook forced several companies to put their fund-raising plans on hold.

According to a report by SMC Global Securities, fund-raising activity through initial public offers (IPOs), follow-on public offers (FPOs), American/global depository receipts (ADRs/GDRs) and qualified institutional placements (QIPs) plummeted compared with 2010 figures.

Consider these facts:

• Money raised through IPOs declined by a staggering 81 percent from last year to aboutRs 14,000 crore

•Funds raised through QIPs slumped by a staggering 88 percent to Rs 3,451 crore this year. Only eight issues hit the markets compared with 53 last year. The value of the deals also sank: Canara Bank was the only entity to raise more than Rs 1,000 crore through this route.

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[caption id="attachment_163107" align="alignleft" width="380" caption="The situation for companies hoping to raise funds in the medium term (via debt or equity) just got worse."][/caption]

•No company raised funds through the ADR route - the second year in a row this has happened. Even funds raised through GDRs fell drastically - just $220 million by 12 companies - compared with $880 million raised by 33 companies last year. The largest issue was by Rasoya Proteins, which raised $32 million.

•Foreign currency convertible bonds also posted a 46 percent drop to $840 million from $1.55 billion last year. SMC Global Securities said volatility in equity markets lowered appetite for these instruments, viewed by investors as proxy equity instruments.

•The only silver lining was external commercial borrowings (ECBs), or overseas debt, which witnessed a sharp jump in the number of issues to 810 from 672 a year ago. Debt raised also increased to $30 billion from $22 billion over the same period.

Overall, two things are clear from the data.

One is that locally, companies struggled to raise funds via both the equity and debt routes. Clearly, volatile equity markets and high interest rates played spoilsport in the pursuit of capital. That will have implications for the expansion plans of companies across the board.

Two, the problem was exacerbated by the fact that overseas capital markets were also extremely turbulent. Raising equity funds overseas became a no-no, although the markets remained moderately conducive to debt raising.

The bad news is that even that window of opportunity might be closing. Domestic companies flocked to the ECB market because interest rates were 5-6 percentage points lower than on rupee-denominated loans.

Now, however, the more than 18 percent fall in the rupee has practically negated that benefit (a falling rupee raises borrowing costs in local currency). In addition, companies will have to create huge provisions for mark-to-market forex losses.

In other words, the situation for companies hoping to raise funds in the medium term (via debt or equity) just got worse.