Whenever reputed corporations require a sizeable amount of equity infusion to achieve a higher rate of growth, they turn mostly to –
- Financial institutions like investment banks including well-known entities like Goldman Sachs, Morgan Stanley and CitiGroup.
- Equity Capital Markets or ECMs which cover a far greater area than stock markets and are perhaps the most reliable platforms for IPOs.
An IPO or Initial Public Offer is a privately-owned company’s first sale of shares to the public at large, transforming it into a publicly-owned organisation and offering a launchpad of liquidity which may be used for debt repayments, Mergers & Acquisitions and removing working capital (WC) bottlenecks.
It is perhaps the single-most-important moment for any private company as its IPO performance can leave a deep impression on its future.
Equity Capital Markets Definition
In simple terms, an Equity Capital Market or ECM is where financial institutions meet prospective companies looking to raise funds. Since every company has different requirements, ECMs are divided into specialised niches. Stocks are also traded on ECMs.
A company’s representatives get an opportunity to meet their counterparts from various financial institutions and apprise them of their plans. The latter group will then provide a detailed proposal of how to move forward in a manner that is of mutual benefit to both parties.
ECMs are always larger than stock markets as they have multiple arms including bond markets, book-building & private placements. They play an important role in an economy as the health of a certain country’s equity capital market is a significant indicator of that country’s general economic status.
In times of uncertainty brought about by stock market crashes, bank failures, panic selling and 2020’s pandemic, ECMs tend to lose some of their sheens. Depending on the extent of the damage done, this market automatically corrects itself in a given time.
At times, however, market regulators like the SEC in America and the RBI and SEBI in India have to step in.
Within an ECM are two more entities – the primary and secondary markets. Both these sub-markets have their well-defined areas of operations, although these areas sometimes intermingle.
Here are brief overviews of these ECM constituents.
- Primary markets:
It comprises the following operations:
- Private placements: Unlike a generic IPO, private placements are sales of stocks and bonds to a group of pre-selected buyers. These sales are often finished by the time an IPO starts.
- IPO distribution: It is the most important constituent of the primary market. It controls every aspect of an IPO, and the success of a company’s initial share offerings depends substantially on how well an ECM functions.
The chart below highlights the top 5 IPOs worldwide in the last 15 years.
|Name of the Company||Listed Name||Funds Raised via IPO||Year|
|Alibaba Group Holding Limited||NYSE- BABA||$25 billion (Credit Suisse was its ECM)||2014|
|Visa Inc||NYSE-V||$18 billion||2008|
|AIA Group Limited||OTC-AAIGF||$20.5 billion||2010|
|General Motors||NYSE-GM||$20.1 billion||2010|
It must be noted that Visa had a record-breaking IPO in the years the sub-prime loan crisis was raging. It had a consortium of book-runners including JPMorgan, Goldman Sachs, Wachovia Securities, HSBC and several others.
- Warrants: Also known as ‘equity warrants’, anyone who possesses such an instrument can purchase shares of a pre-determined company at a lower-than-average price. Note that such warrants have limited validity.
- Book-building: They are groups of specialists who analyse every aspect of a company planning to go public before setting a base price for an IPO.
Institutions which deal directly with these primary markets and its constituents are parties interested in IPOs. They may include Venture Capitalists, Angel and Retail Investors, Broker-Dealers and Private Equity firms.
- Secondary markets:
This 2nd component of an equity capital market has no power or function that can help raise capital, very unlike the former type. Instead, it acts as an exchange where interested parties can buy and sell shares of organisations. It is what we know as a stock market; stock exchanges and a network of dealers who facilitate ‘Over-The-Counter’ sales are all part of this secondary market.
Equity Capital Markets in India
Although most of the world’s largest economies are suffering the withering effect of a raging pandemic and the onslaught of subsequent economic chaos, India’s economy has somehow managed to turn the tide around. Even in May or June 2020, stock markets were in the doldrums and trading sessions were halted several times to prevent further turmoil on the exchanges.
In October 2020, reports emerged that India’s ECM activity was at an all-time high. Till October, equity capital markets had raised sums of over $32.7 billion, beating a record set in 2017.
It was also an improvement of over 85% from statistics compiled in October 2019, a year ago.
Analysts attribute this momentum to two factors. One was the Government’s response- at both Central and State levels and the loosening of their purse strings. The other was more prosaic: companies are wary of investing too much in uncertain times. This is leading to a build-up of liquidity, which is reflected in their balance sheets.
It is expected that more major corporations will follow the footsteps of Reliance Industries and strengthen India’s equity capital market further. In June 2020, RIL priced its rights offerings at a record-smashing $7 billion. There are several private entities and some Government firms which have similar designs.
Ultimately, equity markets come under a broad umbrella of investment banking. Until global agencies including the World Bank, the IMF and the European Union, the International Bank for Reconstruction and Refinancing and even the International Development Association take adequate course-corrective measures, equity capital markets worldwide may suffer.
Already, there have been several top-level meetings between these agencies and Governments of several countries. Most experts agree that unless an effective vaccine stands out internationally, the global economy will remain in suspended animation.
With that, both EMCs and DMCs will also be afflicted.