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The new finance minister has to revisit the subject of IPO selling and PSU divestment to revive investor sentiment

By Mohan Sule

All the fat-cat US CEOs sacked for non-performance must be looking at the presidential election in India with shock and awe. Only if their boards were as compassionate as Congress party’s High Command to factor in the woes of the euro zone or the slow recovery of the domestic economy for their under-performance. Pranab Mukherjee’s promotion or golden handshake, depending on how his shift from the North Block is viewed, is as astounding as his appointment as finance minister. Even US Secretary of State Hillary Clinton had wondered then: To which industrial group is he beholdened? His legacy is a heated economy (inflation 8.1% per annum end of March 2012 as against 3.8% in 2009-10, the year he took charge), a cooling IIP (down to 2.83% from 5.29%), a weak rupee (losing around 20%), slowing growth (GDP expanded 6.5% last fiscal from 8.4%), and sparse presence of foreign portfolio investors (with FII net equity investment nearly halving). The President-in-waiting also undermined the autonomy of various regulators by setting up an umbrella body, chaired by him, apparently for better coordination but probably to keep a cap on activist bosses like C B Bhave, who doggedly followed the stock market trail even to big companies and tamed an unruly mutual fund industry. Under his watch, a high-ranking official of the Securities and Exchange Board of India had to seek the prime minister’s intervention against the finance ministry’s interference, unwittingly shining a light on the working of the capital market watchdog. The bottom line, however, is the finance minister can be as good or bad as the government he represents.

There is no better way for Manmohan Singh to ride into the sunset in 2014 by gifting Sonia Gandhi a healthy economy and, consequently, a majority of her own. The scope for rate cuts and fiscal stimulus is tied to inflation. Withdrawal of fuel subsidiary has to be calibrated so as not to ignite inflation. In the meanwhile, the new finance minister needs take up steps that could restore the faith of foreign investors in the immediate term. The logic that India should not be considered a tax haven is valid. The law to tax capital gain on foreign investors’ assets in India should have been implemented subsequent to the passage of the finance bill. Doing so would pave the way for Vodafone’s India unit to go ahead with its mega IPO, thereby reviving the primary market, which should be the utmost priority of the new dispensation. This can be done by two ways: providing tax-breaks in the secondary market and evolving new rules in the primary market that would be fair to both issuers and investors. The latest budget has scaled down the securities transaction tax by 20% for cash delivery. The STT should be scrapped for small transactions of, say, less than 500 shares per company. This will boost the popularity of the Rajiv Gandhi equity savings scheme, incentivising the small investors to enter the market directly instead of depending on fund managers. Similarly, short-term capital gain tax can be sliced from the present level for small-volume trades.

A debate is on whether a change in the way IPO shares are sold would insulate investors from drubbing. The provocation is the post-listing debacle of Facebook’s IPO, blamed on its lead underwriter Morgan Stanley revising upward the price on the eve of the offer to capitalize on the hype surrounding the social network. The issue is how to bring back retail investors, left out in the cold as book building centers around demand from big-ticket investors. The Dutch auction, where investors bid for shares at prices deemed appropriate by them, is no solution as it gives institutions an upper hand due to the large size of their orders. Discounts to ordinary investors on the price offered to wholesale investors have not proved to be effective as most issuers want to debut in a bull market to stock up their premium reserve. A radical method would be selling retail investors’ quota at a fixed price linked to the book value or networth. Funds should be required to place bids at this floor price. Perhaps the quickest way to revive the market would be to put PSUs on the block. Some15 state-owned enterprises have been identified for divestment this fiscal. The problem is that the basket is not of uniform quality. Some PSUs have other government entities as their major customers, while many are under pressure from market forces to shape up. An alternative would be to create special purpose vehicles to buy shares during divestment instead of seeking bailout by LIC. Listing of the SPVs, representing a mixed bag of underlying assets, would hedge investors from non-performance by a few with gains from those benefiting from the India growth story.

Mohan Sule