With the equity market scenario being much better than how it started out in the current year, investment banking activity has picked up. However, it seems to lack the zest it had two years ago. S Ramesh, COO, Kotak Investment Banking, spoke with Akash Joshi and Udita Lal of The Financial Express on how the investment banking scenario was unfolding and what could be the shape of things to come. Excerpts

The investment banking business is catching up again. However, there is not much action in M&A segment. What do you think is the reason and when do you see it reviving?

The investment banking business has picked up significantly as compared to the last calendar year. Most of this activity is focused on capital markets. Since May 2009, we have witnessed a record number of QIP issuances from Indian companies. The IPO market also opened up after a hiatus of a year. In comparison, M&A activity is relatively subdued. Companies are at the moment shy of taking new bets. The India growth story continues to be strong and we expect inbound M&A to be the key driver for M&A in the future. In the early part of the next calendar year, we expect heightened IPO activity and disinvestments, provided the market environment holds up.

There is this huge rush of supply of papers. You have the QIP and the IPOs coming in and could it impact the secondary market?

Calendar year 2009 has seen a record $12 billion of QIP and IPO issuances and another $3 billion from overseas issuances like GDR/Convertibles of Indian companies. We saw some correlation between the secondary markets and primary markets – the secondary markets went up by 46% in the first half of CY09 when there were almost no primary issuances. In the second half of CY09 till date, markets went up only nearly 12% after primary issuances picked up since May 2009. Interestingly, majority of the QIPs have returned money to investors. IPO investors have not been as fortunate as their QIP counterparts in this regard.

What about the coming months? How do you see the action panning out?

Real estate and infrastructure (mainly power-related) are the two dominant sectors where we expect listings to take place. Companies in these sectors are looking to raise capital for their projects. Disinvestments are likely to happen in high-quality companies through follow-on public offerings. All in all, we expect a busy schedule subject to secondary markets holding up.

A lot of allegations have been in the air that pricing of the IPOs has been extremely aggressive and therefore you see very little listing returns taking place. The allegation is also that investment bankers are aggressively pricing issues. What is your take on this issue?

We are witnessing volatile markets and this could spoil the party for listing gains. Listing day returns are unlikely to happen for all companies. To some extent, the state of the secondary markets also influences listing pricing. We have seen good and consistent listing gains in bullish markets but that is not the case if markets are bearish or choppy. Additionally, in IPOs from sectors such as infrastructure, these companies are strong fundamentally but the value in these companies comes over time. In such issuances, investors (especially retail) should not come with a mindset of immediate gains since this may be difficult to realise. I would suggest that every retail investor should distinguish between investing in an IPO and investing in a company. Investing in an IPO is with a perspective of immediate gains while investing in a company may or may not give one immediate returns but investors have confidence that it is a fundamentally well-managed strong company in a growing sector and will deliver returns over time.

There is a move by Sebi to reduce the number of days from the date on which the issue opens. How would this help?

Our feeling is that application supported by blocked amount (ASBA) over time will really help crunch issue timelines. This will enable faster leveraging of the IPO infrastructure, help capture more contemporary markets and help more companies tap the markets in a year. Investors do not need to wait three weeks till listing which therefore reduces investment risk. ASBA is a great initiative and is a bold and innovative measure to reduce the reams of activity, duplication of work between various intermediaries and the paper work that gets generated in an IPO with retail investors, the banking system and other related intermediaries.

There have been talks that a portion the QIBs subscribed to while participating in an IPO would be increased to more than the current 10% level. How would that impact the issuance market?

Yes, there has been a talk that QIBs would need to pay full margin on par with retail investors. When this happens, it is likely to impact the subscription levels in the QIP portion.

From a fund raising perspective, what are the challenges that corporate have seen in raising fund right now?

Volatility is one factor that companies face as contemporary risk. What could be reasonable pricing today may not be after a few trading sessions. I also think investors are becoming discerning and selective about their investment themes. There is also the challenge of continued performance from companies. Investors have a lot of choices today and companies need to bear this in mind. Investors are focused on track record, actual performance and strong growth prospects. Also, an excess of paper from the same sector could lead to investor fatigue and previous experiences may impact their investment decisions.

In between, we saw a lot of companies are talking about the bond issues. Do you see this trend happening further down like NCD bonds?

Firms, which may have a recurring need to tap the bond markets, would use the retail issuance path to create track record and infrastructure for further issuances. Otherwise debt from overseas and locally is available now for the right credit quality companies. So motivation for doing bond issuances may not be high now. Also, we need to keep in mind the cost of issuance and servicing.

So largely going ahead, what is the key investment banking theme you see?

On the back of a strong India growth story, I continue to see robust capital markets activities. A vibrant secondary market consistent with strong FII and domestic equity flows is an important prerequisite for this. Disinvestment in government companies which is being contemplated is likely to keep markets busy. Companies would also carry out restructuring of balance sheets and businesses. The offshoot of this would be the resultant M&A activity in the form of demergers/consolidations and possible buyouts/exits of minority shareholders. Also, the vintage PE investee companies would likely raise capital through the public market route to enable part exits.

If there would be a wish list for you saying that these are the regulatory changes you would want, what would they be?

As our capital markets mature, there could be liberalisation in the issue process for FPOs. As companies need to get to the mandatory shareholding threshold of 25% over the years, there is a need to have innovative ways/products to achieve this with least impact on the capital markets. QIPs are becoming popular amongst companies and investors; we could relook at the pricing norms for these issuances. New products like convertibles, Reits and exchangeables that could be listed and traded in Indian markets would be received by several Indian conglomerates.