Fund mobilisation by companies through equity and debt routes has dropped 20% in 2022 to nearly ₹11 lakh crore, as exuberance dwindled this year due to expensive credit avenues and volatile markets. The first half of 2023 could continue to remain challenging.
The year 2021 was extraordinary for fundraising from the equity and debt routes, while 2022 has seen a slowdown in capital raising owing to elevated volatility provoked by unprecedented inflation globally and the Russia-Ukraine war.
“The first half of 2023 could continue to be challenging, largely driven by global macro developments. If the slowdown/recession in the U.S. is mild, then we could see a rally in global markets in the second half of next year, which would aid investor sentiment and the Indian markets as well,” said Vishal Chandiramani, Managing Partner Products and COO, TrustPlutus Wealth (India) Private Limited.
“Even with a bounce back in markets, it will be more difficult to garner funds over the next few years as compared to earlier,” he noted.
In the year passing by, mobilisation from debt markets has inched up, while fresh capital mop-up through equity instruments has sharply fallen as volatile stock markets triggered by geopolitical tensions resulted in IPO fundraising halving in 2022.
Debt market mobilisation continued to contribute a lion’s share to the overall fundraising activity this year.
Out of the cumulative ₹11 lakh crore garnered till mid-December this year, funds totalling ₹6.92 lakh crore were mopped up from the debt market, ₹1.62 crore came from the equity market and ₹2.52 lakh crore via the overseas route, data compiled by analytics major Prime Database showed.
In 2021, firms had raised ₹13.6 lakh crore, including ₹6.8 lakh crore through debt and ₹2.85 lakh crore through equity, which constituted a record ₹1.2 lakh crore from initial public offerings (IPOs).
These figures suggest that the climate in 2021 was highly attractive for fundraising activities and the 2022 environment exhibited a stark difference. Mr. Chandiramani described 2022 as a challenging year for domestic and global markets as compared to 2021. Inflation has spiked globally which has led to Central banks raising interest rates multiple times during the year.
“This has increased the cost of borrowing and pushed up yields, resulting in one of the worst years for global bond markets in decades. In addition, equity markets globally have been volatile with most giving negative returns,” he added.
“Even in private markets, fundraising has slowed down drastically and the valuations are down 50-70% from a year ago,” said Kanika Agarrwal, co-founder, Upside AI.
“The year 2021 was a good one to refinance debt at lower costs, raise new capital through debt at highly optimised costs as well as avail happy valuations amid upbeat sentiments,” said Nirav Karkera, Head of Research at Fisdom.
“In 2022, the stimulus dried up, easy monetary policies started to reverse, runaway inflation became the global theme, the Russia-Ukraine war bruised global supply chains and along came a myriad set of challenges,” he added.
Fresh capital was raised by companies for debt payment, to fund capital expenditure for new projects, support inorganic growth such as acquisitions and also for marketing and R&D purposes.
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Of the total ₹6.92 lakh crore raised through debt in 2022, ₹6.84 lakh crore came from private placement and ₹7,921 crore via public issuance.
A paucity of liquidity and low base of the interest rate cycle initially made debt routes cheaper for companies raising funds, said Vinod Nair, Head of Research, Geojit Financial Services.
In the equity market, funds mostly came via preferential issue of equity shares, which is one of the fastest mechanisms for companies to rake in funds. However, fundraising through other equity avenues such as Qualified Institutional Placement (QIP), rights issue and IPO saw a drastic decline.
IPOs accounted for over ₹59,000 crore, QIP route added ₹11,743 crore, the Offer for Sale (OFS) segment contributed ₹8,342 crore and rights issue of shares to existing shareholders accounted for ₹3,817 crore. Also, real estate and infrastructure investment trusts (REITs and InvITs) together raked in ₹2,700 crore.
The fundraising through initial share sales halved from ₹1.2 lakh crore in 2021, which was the best IPO year in two decades.
Going into 2023, Nikhil Kamath, co-founder of Zerodha, said debt is looking extremely enticing and it will grow significantly — corporate and government debt will have higher coupons, giving higher yields.
“One can get an FD rate of as high as 7.5% and stock markets have traditionally returned around 8% a year (with risk). If risk-free investment — debt — can generate a yield close to that, the arbitrage between the two is getting smaller,” he added.
On the impact of the new COVID variant on fundraising, Mr. Agarrwal said, the markets now know how to react to variants. This looks like a “known” risk which is probably getting factored in.
However, the Chinese government has been very opaque in its policy response so the lack of transparency may add a layer of risk if it causes further supply chain disruptions, she added.
