How much paper supply is too much?

Letter # 48, 2nd July 2021

What if you had the power to make rules that companies wanting to list on the bourses must follow? How would you design those rules? If it were me, and since I am very pro retail shareholders, I would have something along these lines…

  1. If the company has never issued shares before, the IPO must be at face value.
  2. If the company did issue capital before, I (and I alone) will fix the premium that it would be allowed to charge based on MY assessment of: (a) trends of shares of similar companies already listed; (b) value of shares based on the company’s profit-making capacity; (c) future prospects; and (d) present and future dividend paying capacity.
  3. While at it, I might also prescribe a minimum investment in the offer by the promoter group. Well, throw in minimum investment by directors as well.

Did I hear you say, “have you lost it, already?” If so, let me convince you that’s not the case, and offer you a trip down memory lane.

The Controller of Capital Issues (or CCI) was set up in 1943 and established as a statute in 1947. CCI’s permission was mandatory for capital issuance of any sort (equity, preference, debentures). The whimsical rules I list above, were, in fact, the law of the land until SEBI was set up in 1992.  SEBI did away with arbitrary pricing methods and companies were allowed to raise money at will and at a price that companies thought was fair.

Relaxation in raising money in India was also accompanied by Indian government allowing companies to raise money abroad and Global Depository Receipts (GDR) became the preferred route. The Indian economy had just been liberalized and growth had started galloping to almost 7.4% by 1994. Other Asian economies were also starting to show some resilience (the Asian tigers) and the common perception was that the growth in India will outstrip that of its Asian peers.

Suddenly, every business needed vast amount of capital to prepare for the future. With ability to raise capital getting relaxed and foreign capital suddenly becoming available, raising money through the GDR route reached a level of frenzy, which later gave way to domestic IPO frenzy.

Domestic offerings (1): From 1989 through 1992, some 14 companies used to IPO every month. Between 1992 and 1996, that number increased to a whopping 84 companies per month. In the run up to the market peak in Feb 1995, 145 issues were opened for subscriptions in just the month of Jan 1995, followed by 78 subscriptions in Feb 1995.

Phew! Those were good times. Now, let’s jettison back to the current time, i.e., now. Remember our What IF series–one where we answer unusual and fun questions with lots of data. One such question that we received was, “look, India Inc. is raising so much money through IPOs, FPOs, OFSs, QIPs etc. What IF there was a way to correlate that behaviour with market cycles?”

Well, that’s an interesting and pertinent question, and it was fun trying to come up with a suitable  answer. Like our previous notes, we divided the past two decades in three cycles: start of the cycle (2009, 2016), middle of the cycle (2012, 2015 and 2019) and peak of the cycle (2008, 2010 and 2018). We then dug up data on all issuances and juxtaposed the total to overall market-cap of India Inc. (absolute numbers don’t mean much, given the inflation and rising market participation).

The exhibit above narrates a decent story. The start of the cycle is characterised by two things:
(1) the amount raised is between 10bps and 40bps of the total market-cap of all listed stocks; and
(2) the size of individual IPOs, is small. By the middle of the cycle, the range moves up marginally (20-50bps), but the size of issuances increases; larger companies are now tapping the market. Lastly, when the cycle has peaked in the past, cumulative issuances have ballooned (more than 1ppt), but more characteristically, it turns into the season of Mega IPOs.

Now, just because it has historically followed a pattern, we won’t go so far to suggest that it will recur. But come to think of it, markets do follow the laws of economics. Given the limited demand for financial assets at any given point, an incremental large supply of paper would act to shift the equilibrium of market pricing to a lower level in the coming period.

But, behavioural aspects are important too, and that is where the euphoria that engulfs certain IPOs is noteworthy. I remember the Reliance Power IPO (I used to work for one of the bankers to the issue at the time). India hadn’t gone completely digital back then and applications had to be submitted in person. On the last day of application, people queued up for 3 floors and beyond the gate of the building to submit forms. You had to be there to feel it; it was surreal!

Retail shareholders, as a cohort, have come a long way since then. Their sustained investments amidst Covid correction last year, despite FII selling, demonstrated that they have arrived. We are neither arguing that the current period’s 80bps of issuances (close to peak of the cycle) imply we are nearing a peak, nor that the lack of mega IPOs suggests that we might not be there yet.

What we do however point to is that our compilation of previous data points (inverted valuation pyramid structure, % of stocks hitting 52-week high etc.) is indicative of the rising complacency in the market. And, history has not been kind to people who have dramatically increased risk at a time when selling a stock almost always makes one look foolish the next day and buying the dip almost always makes one look smart.

(1) PRIME,Your Gateway to Indian Primary Capital Market (
The letter was originally published here: India Inc Is Raising A Lot Of Money; What Does History Suggest? (

Information in this letter is not intended to be, nor should it be construed as investment, tax or legal advice, or an offer to sell, or a solicitation of any offer to make investments with Buoyant Capital. Prospective investors should rely solely on Disclosure Document filed with SEBI. Any description involving investment examples, statistical analysis or investment strategies are provided for illustration purposes only – and will not apply in all situations and may be changed at the discretion of principal officer. Certain information has been provided and/or based on third-party sources and although believed to be reliable, has not been independently verified; the investment managers make no express warranty as to its completeness or accuracy, nor can it accept responsibility for errors appearing herein.

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