Private placements - their effect on the performance of firms in India

Abstract

The Private Placement market in India has witnessed a very rapid growth in the recent past with companies increasingly adopting the private route for funds mobilization. Several Indian companies have chosen to make private offerings to sophisticated and qualified institutional investors rather than issuing securities publicly. This is borne out by the fact that in the period of April- December 2006 alone about 414 companies raised Rs. 86,917 crores through private placements. The accelerated growth of private placements in spite of the presence of a well-developed public market warrants an investigation into the causes of the same and the effect it could have on the performance of companies concerned. While the regulations scenario in India might have a major role to play in this, there are several additional views on the subject. Some analysts and trade experts attribute this growth to the advantages that can be derived in terms of the savings in transaction costs because of the limited number of investors involved and the considerable amount of time saved vis-à-vis public offerings. They also argue that private placements can be effective in resolving several agency issues while spurring a firm to higher performance by increasing the efficiency in the operations and management system through direct and concentrated control. However, another school of thought argues that private placement investors’ interest in a firm is limited to the short haul with the sole aim of maximizing their returns for a limited period of time. This gives them an incentive to under-invest to the detriment of the long-term growth capacity and sustainability of firms. Private placements generally involve a few investors who, as opposed to the public investors, are more proactive, have higher control and might have a higher risk appetite. This could both act in favour of or against the interests of a firm. Since the consistent, improved performance of Indian companies is crucial to the sustenance of the growth in Indian economy, it is important to examine whether the choice of the financing decision of private vs. public offerings has an impact on the value of firms or on monitoring, bonding and residual costs. Further, the effect of private placements in performance improvement needs to be investigated. It is needed that empirical data from Indian companies is examined to study the magnitude and direction of this effect, if any. This project aims to look at a few of these issues in detail to arrive at a clearer understanding of the still young but fast evolving area of private placements in India.