Companies owe their investors $800 Million

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Mumbai: Companies owe their investors like private equity funds, hedge funds and other investment vehicles at least Rs 4,000 crore ($800 Million) for their inability to come out with initial public offerings (IPOs) within a specified time frame, a precondition for the investment they received from these funds, indicates an analysis by Mint daily of data provided by Nexgen Capitals, the investment banking arm of Delhi-based stock broker SMC Global Securities.

This condition is built into share subscription agreements between promoters and shareholders, typically via put options, which give investors the right, but not the obligation, to sell back their shares in the company to its promoter if it fails to issue IPO by a specified date.

"A number of pre-IPO rounds where an IPO was a clearly articulated expectation within a short period of time, are under pressure," said Harsha Raghavan, Managing Director of Candover Advisors India, the Indian arm of European private equity group Candover.

Jagannadham Thunuguntla, Head, Equity, Nexgen Capitals, said that Rs 4,000 crore is a conservative estimate. "There are many companies which received pre-IPO funding, but have not yet filed their draft prospectuses with the Securities and Exchange Board of India (Sebi)," he said. Details of pre-IPO placements in such companies are not publicly available.

In a few cases, the deadline for an IPO has not yet passed, but not too many firms are planning IPOs in the near future because of the downturn in the stock market.

Many pre-IPO deals were entered into in late 2007, when the Sensex, Bombay Stock Exchange's bellwether equity index, was still on its five-year winning streak and IPOs were attracting investors. In 2007, 105 companies raised a record Rs 39,387 crore through public offers. That year, the Sensex gave an annual return of 47.15 percent.

But since January 2008, equity markets have slumped and the Sensex, after hitting its lifetime high that month, lost 52 percent in the year. This has dampened investor appetite for IPOs. There were only 28 IPOs last calendar year, raising Rs830 crore.

The first three months of 2009 have not brought much cheer either, with the Sensex remaining relatively flat - it is up 4.2 percent from the beginning of the year - and just one IPO that raised Rs23.84 crore.

Nexgen scanned 53 prospectuses of companies that have filed their draft IPO documents with the capital markets regulator.

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