The broad undertone is supportive from a long-term perspective, though. Economic Survey 2022 noted that almost all indicators show that the economic impact of the "second wave" in Q1 of the calendar year (CY) 2022 was much smaller than that experienced during the full lockdown phase in the financial year (FY) 2021 even though the health impact was more severe.

The Indian economy is estimated to grow by 9.2% in real terms in FY2022 (as per the First Advance Estimates), after a contraction of 7.3% in 2020-21. Growth in FY2023 will be supported by widespread vaccine coverage, gains from supply-side reforms and easing of regulations, robust export growth, and availability of fiscal space to ramp up capital spending. The year ahead is also well poised for a pick-up in private sector investment with the financial system in a good position to provide support to the revival of the economy. Thus, India's GDP is projected to grow in real terms by 8.0-8.5% in FY2023.

How volatility will play out in the near term is the issue. Even though the certainty of a second wave was predicted during the start of CY 2021, and it eventually sprang in Q4 of FY2021, what remained constant was the euphoria in the market. On the back of it, the market saw numerous Initial Public Offerings (IPOs) coming from various emerging technology driven sectors. There were 65 IPOs in CY 2021, raising Rs 1.81 lakh crore besides the 60 small and medium enterprise IPOs.

The capital pumping in the economy by the government during the pandemic resulted in liquidity available to investors. The liquidity found its way into the stock markets, particularly towards IPOs in CY2021. Domestic institutional buyers also went shopping for new stocks that went public for the first time. So, fund raising was never a problem for the emerging businesses.

Listed Indian companies raised funds through QIPs. They raised about Rs 51,216 crore through QIPs in FY2020 despite uncertainty posed by the covid-19 outbreak and worries over corporate earnings due to the extended lockdowns and general sluggishness in private consumption.

During a QIP, a company raises capital by issuing equity shares, fully and partly convertible debentures, or any securities other than warrants that are convertible to equity shares to institutions. The Securities and Exchange Board of India (Sebi) introduced the QIP process in CY2006 to prevent listed companies in India from developing an excessive dependence on foreign capital. The complications associated with raising capital in the domestic markets had led many companies to look at tapping the overseas markets via Foreign Currency Convertible Bonds (FCCB) and Global Depository Receipts (GDR) to fulfil their needs. To keep a check on this process and to give a push to the domestic markets, QIPs were launched.

To be able to engage in a QIP, companies need to fulfill certain criteria such as being listed on an exchange that has trading terminals across the country and have the minimum public shareholding requirements specified in their listing agreement. As the money raised in QIP is used for longer term, it helps companies overcome difficult times. If the issue size is up to Rs 250 crore, there should be at least two institutional buyers. If the issue size is above Rs 250 crores, there should be at least 5 buyers. If the QIP issue is of more than Rs 250 crore, a single buyer cannot be allotted over 50% stake. Promoters of the company cannot participate in this type of issue. The company should issue a minimum of 10% of the total allotment to mutual funds.

If a company can comfortably raise money through QIPs in the share market even in such uncertain times, it reflects its sound financial health. It shows institutional investors' belief in the business model. Also, once a company successfully undertakes QIP, there is some increase in the company's share price. There is an overall positive sentiment on the shares.

In CY 2021, 35 companies have raised Rs 42,000 crore through QIP as against Rs 66,110 raised in CY2020. The availability of cheaper debt and expectations of a further rise in stock prices resulted in fewer QIPs last year. Equity comes with huge cost and promoters are expecting elevation in the overall valuations which is also why the firms could be delaying fund raising.

A recent regulatory development is likely to make the institutional investments a critical aspect for valuing businesses. Securities and Exchange Board of India (SEBI), which regulates India's securities market as well as mutual funds and alternative investment funds, has issued a stewardship code in December 2019, which imposes a number of obligations on mutual funds and alternative investment funds. The Stewardship Code comprises of a set of principles that seek to improve responsibility and accountability towards corporate governance. Since institutional investors invest in a large number of shares in the company and as seen in the previous section have powers to promote good governance, the stewardship policy ensures that these influencing powers have a codified source.

SEBI noted that the importance of institutional investors in capital markets across the world is increasing the world over; they are expected to shoulder greater responsibility towards their clients/ beneficiaries by enhancing monitoring and engagement with their investee companies. Such activities are commonly referred to as ‘Stewardship Responsibilities' of the institutional investors and are intended to protect their clients' wealth. Such increased engagement is also seen as an important step towards improved corporate governance in the investee companies and gives a greater fillip to the protection of the interest of investors in such companies. The Stewardship Code shall come into effect from the Financial Year beginning April 01, 2020.

As a part of the aforesaid comprehensive policy, institutional investors should have a policy on continuous monitoring of their investee companies in respect of all aspects they consider important which shall include performance of the companies, corporate governance, strategy, risks etc. To protect and enhance wealth of the clients/ beneficiaries and to improve governance of the investee companies, it is critical that the institutional investors take their own voting decisions in the investee company after in-depth analysis rather than blindly supporting the management decisions.

Out of total QIPs that took place in the year 2020 and 2021, there are 3 companies that have raised capital through QIPs in the both the years  viz. Canara Bank, Inox Leisure and Punjab National Bank (PNB). Canara Bank has raised Rs. 2500cr at issue price of Rs. 94 in December 2020 and again Rs. 2500 at Rs. 139 in August 2021. Inox Leisure raised Rs. 250cr in 2020 at Rs. 245 and Rs. 300cr in 2021 at Rs. 300. PNB went for QIP in 2020 raising Rs. 3788 crore at Rs. 34 and Rs. 32 in 2021 raising Rs. 1800cr.   There are 20 companies belonging to the Banking and Financial sector which indicates the sector's capital requirement as well as continued business operations despite the pandemic.

Comparing the TTM ended December 2021 with TTM ended December 2019 (ignoring the 2020 washout due to pandemic), Canara Bank has improved revenues by 37% and while PNB by 41%. As banks continued to operate and lending continued at lower rates, PNB and Canara Bank have maintained a positive OPM in TTM ended Dec'2021. On the other hand, Inox Leisure has seen a huge drop of 77% in revenues as most restrictions to multiplexes were lifted later in the third quarter of FY2022.

There are 15 companies that have reported a drop in the revenues in TTM ended Dec'2021 as compared to TTM ended Dec'2019. Of these, two businesses of Multiplex chains, Inox and PVR, have seen the highest drop of 77% and 72% respectively. Followed by this, businesses belonging to real estate sector, viz. Godrej Properties, Indiabulls Housing, Phoenix Mills have seen their revenues drop by 60.24%, 39.13% and 38.99% respectively in the same period. There are 39 companies which have improved their revenues in both TTM ended Dec'21 and Dec'20. Of these, 15 have also improved their OPM in the same TTM periods. More than 50% of the shortlisted companies have reported a drop in their operating profit margins in TTM Dec'21 compared to TTM Dec'19.

Outlook:

Companies going in for the additional financing support via raising funds offer an interesting set of businesses. These companies raised additional funds despite a very challenging operating environment and lack of clarity in the business outlook, especially in the period before the rollout of the covid-19 vaccines.

Institutional investors pumping in the funds via QIPs look for long-term structural plays offering good scope for capital appreciation and returns. With the increasing volatility in local stock markets in recent weeks, these companies need to be scrutinized by rational investors.