Stock Investors in India Bypass IPOs

Updated May 28, 2013, 11:58 a.m. ET

Stock Investors in India Bypass IPOs

By ASHUTOSH JOSHI and SHEFALI ANAND

India is on pace for its worst year for initial public offerings since the global financial crisis, largely because two key groups of investors—foreign institutions and the Indian public—are staying away.

“I doubt if we will see a rush of IPOs for the rest of the year, given the poor retail participation in markets,” said Avinash Gupta, vice president of research at Globe Capital Market Ltd. in New Delhi.

It has certainly been a slow year thus far. Including search engine Just Dial Ltd., which raised $166 million last week in the country’s biggest IPO of the year, three companies have raised a total of $234 million—the lowest since 2009, according to data provider Dealogic. By comparison, there were 26 IPOs through May 28, 2010, that raised $2 billion.Foreign investors have, in fact, poured money into Indian stocks this year, but they have been more selective about IPOs. Market experts say these investors are still potential buyers of new offerings, but only by profitable companies with strong cash flow and proper corporate governance.

“The markets are more looking at quality,” said Rahul Chawla, head of the equity and debt capital markets team at Credit Suisse CSGN.VX +2.21% in India.

Retail Indian investors, big buyers of IPOs until a few years ago, have become even more cautious after being burned by some new offerings.

Mahendra Chavan, who lives in the western city of Pune, said he lost money on IPOs and now is focused on blue chips such as Hindustan Unilever Ltd. 500696.BY -0.04%and cigarette-major ITC Ltd. 500875.BY +1.83%

“I won’t put money in an IPO unless I am convinced that the company has a really strong and sustainable business model,” said Mr. Chavan, 67 years old, who runs an office-equipment shop.

Just Dial’s offering was taken mostly by institutional investors and its shares will begin trading in June. The other two listings have delivered mixed performances.

Repco Home Finance Ltd., 535322.BY +2.91% a mortgage company that raised $50 million, has gained nearly 27% since their April 1 debut, but supermarket chain V-Mart Retail Ltd., 534976.BY -1.48% which listed in February after raising around $18 million, is trading 31% below its offer price.

Shares of telecom-tower company Bharti Infratel Ltd. 534816.BY -0.41% are also underwater, down 21% from the offer price after the company raised $764 million in December in India’s largest IPO in two years.

Still, foreign money has flooded into Indian stocks, particularly since early April, when oil and gold prices began to fall—seen as good for India’s financial health—and the Bank of Japan announced its drastic monetary-stimulus program. Since then, the 30-share Sensex has gained nearly 10% from its 2013 closing low, to end Tuesday at 20160.82, just 4% short of its all-time high.

In all, foreign institutional investors have poured $14.7 billion into Indian stocks this year, compared with $8.5 billion a year earlier, data from the Securities and Exchange Board of India show.

The bulk of that money has gone to listed companies, partly because dozens of them are lining up to sell shares to meet a new regulatory requirement that 25% of companies’ shares must be in public hands by June 3. At least 75 companies will have to sell stock worth $1.9 billion to meet this rule, Mumbai brokerage Kotak Securities Ltd. estimated in a recent report.

Looking ahead, many investors expect India’s central bank to further cut interest rates to promote growth, a move seen as bullish for stocks—at least those already listed. Analysts say it will take more than rate cuts to revive the IPO market.

“Big IPOs will come only when companies are confident of retail participation,” said Mr. Gupta of Globe Capital Market.