Maturing of the investor base

The recent public offering of Tata Consultancy Services shares was a significant achievement in many ways. Having raised approximately a billion dollars, this was the largest pure equity fund raising by the private sector in India till date.

It was also one of the largest fund raisings in the technology sector globally in 2004. Also unlike many other high-profile issues in Asian technology stocks, like the Chinese semiconductor company SMIC or LG Philips of Korea (flat screen TFT-LCD manufacturer), the TCS issue has done very well post listing.

The deal was not downsized, and the issue price was neither reduced, nor did it look shaky at any time. It was also completed in a very difficult international capital market environment.

The listing has added more than Rs 45,000 crore (Rs 450 billion) of market capitalisation to the Indian bourses and further raised the visibility and profile of the Indian IT services sector among global investors.

While all of the above is very well known, what is not is that the transaction was path-breaking in many other ways.

First of all, this was to my mind the first issue in which the strong response of the Indian retail and high net-worth investor was the driving force behind the success and not foreign investors.

In most other large equity offerings, foreign investors have acted as the key anchor and Indian retail demand would tend to follow the level of foreign interest, come in only on the last day, and tend to be very fickle and short-term in nature.

The momentum behind any deal would always be judged by the quality and size of foreign interest, nobody usually even bothered with the domestic retail portion.

So much so that before any large issuance, all the investment bankers would poll the largest foreign institutional investors to make sure they were willing to support the proposed issuance, barring which they would not have the confidence to go ahead with a deal.

This type of behaviour was only natural, as in many prior large equity issues the Indian retail portion would go partly unsubscribed. Most retail investors were also notorious for flipping out of any stock immediately on listing.

In the case of TCS, exactly the opposite happened. The incredibly strong domestic response to the issue gave the FIIs confidence, and drove the momentum behind the offering.

From the first day itself, share application forms were in short supply and market watchers were talking of an opening day quote of Rs 1,000. Many FIIs who were sitting on the fence worried about the outlook for Nasdaq, and, having just been burned by the last two to three IPOs in Asia, were convinced to invest purely on the basis of the domestic euphoria behind the offering.

The deal would have had difficulty in my view if the domestic response not been so strong. The retail response highlights the trust reposed in and reputation of the Tata name, and the investment bankers and senior managers of the Tata group should feel proud.

This is a very important development to my mind and demonstrates the gradual maturing and deepening of the domestic investor base. In any capital market, it is very important that the domestic investor base be large, savvy, and strong enough to act as a counter weight to the influence of the global players.

It is heartening to see the beginnings of this in India. The Budget measures on capital gains taxation will only strengthen this move towards investor balance as it directs more domestic savings towards financial savings.

The above should also hopefully act as a wake-up call to the investment bankers, and cause them to pay more attention to domestic investors going forward.

The second interesting development was the broadening of the investor base even among foreign investors. This was the first issue of any size in India that was very successfully executed, despite not being very heavily subscribed to by the so-called old India hands.

One of the problems in India historically had been that the bulk of the foreign money in India had come from only 5–6 large institutions. The Capital group, Morgan Stanley, Jardine Fleming, Fidelity, Templeton, and two to three other institutions accounted for 60–70 per cent of the money invested in India as recently as two years ago. Market watchers would forever fret, what if one of these institutions wanted to sell? Who would buy? The markets would fall, etc.

Where will the next investment dollar for India come from as these institutions were already overweight in the country? Such was the dominance of these institutions that no investment banker could even contemplate doing a billion-dollar deal without their active participation.

Well, obviously times have changed, as I have it from very reliable sources that most of the above-mentioned big India investors did not participate in the TCS deal in any meaningful way. In fact, three of the top investors skipped it totally.

So who invested? It seems to have been a very wide swathe of hedge funds and global technology funds as well as many large traditional (long only) funds investing in India for the first time. This is again a very positive development; the broader the foreign investor base engaged with India, the better. It only adds to the depth of the capital markets and ensures easy exit and entry for all.

The fact that the TCS stock got listed at a healthy premium to issue price and has since then maintained its price seems to indicate that all these new investors have not invested just for a quick flip. At least, some have held on taking a longer-term view, and should continue to do so post the taxation changes of October 1.

Both the above developments -- the emergence of a strong domestic investor base able to determine the success or failure of an issue independent of the FIIs, and a broadening of the FII universe beyond 5-6 giants -- are signs of the increasing maturity and relevance of the Indian capital markets.

The more investors (who understand the quality of India's corporate sector, domestic or international) engage with India, the better.

This augurs very well for an Indian corporate sector poised to raise large sums of money from both domestic and international capital markets over the next two to three years.

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