Unnecessary distractions

The market watchdog should focus on insider trading, front running and disclosures rather than worrying over listing gains

By Mohan Sule

Companies coming out with share offerings have to follow a quiet period after filing their draft red herring prospectuses till the shares are listed. The idea is to provide investors a cooling period to dispassionately analyze the offering and to avoid influencing of the debut price by promoter hype. The government seems to be an exception from this enforcement. The cabinet can announce reforms whose impact may take a while to be felt at the ground level or whose divisive characteristics reduce the scope of getting approval of parliament, even as it unveils the PSU lineup for dilution. The finance minister can talk up the market in the run-up by asserting that meeting the fiscal deficit target is within reach. Injecting optimism, particularly during a depressing phase, is what rulers are supposed to do. Yet there is annoyance when it is discovered that the smooth-talking salesman sold at discount goods whose prices were inflated before the generous giveaways. Similarly, the recent sale of government stakes has been greeted with skepticism in the absence of inadequate price discovery of these illiquid stocks. Investors could also be excused for feeling restless as the sudden gush of issues at the first indication of market upswing could cap the market rally. The irritation is not only with the government’s opportunism in rushing through with its divestment candidates to take advantage of the up-tick before the close of the fiscal but also with the market regulator for insisting on sticking to its deadline of mid 2013 for minimum public float. This is another instance of good intentions gone awry.

Take, for instance, the fiasco of reverse book building, which seems to be on the cusp of demise. The idea was to protect the minority shareholders by giving them a decisive voice in the exit price. The results have been disappointing. Investors enter stocks in anticipation of de-listing, distorting the already skewed prices of the promoter-driven companies. Initially, many MNCs caved in but not any longer, with the shareholders left holding expensive stocks. Of late, these companies are opting to stay listed, by offering shares at depressed prices, hurting those already invested. Perhaps, the Securities and Exchange Board of India should re-examine the issue of minimum float including the deadline. It could revisit the success of de-materialization, which was introduced in a phased manner, and follow a top-down approach by setting an earlier deadline for PSUs, followed by large caps. This could avoid bunching of issues and provide relief to investors. The experiment of protecting mutual fund investors from carrying the cost of entry load in their investment is another reminder of the pitfalls of sudden cleanup measures. As inflow into mutual funds dried up, Sebi had to reintroduce distribution fees. The complex formula worked out to lighten the burden on small investors and at the same time attract them to the market has endeared it to no one. Another tinkering from this year completes the circle: no entry load on those taking exposure through asset management companies. Indeed leaving it to the industry to evolve their own fee structure would have been a competitive solution that would have seen commission fall in the fashion of brokerage charges hitting rock bottom.

The goal post of Sebi seems to be shifting from high pricing of issues and poor listing returns to, now, sabotaging of offerings by rivals. In fact, the market regulator should welcome complaints, however frivolous, as a window to know if the issuer has left out any vital facts from the DRHP. The abruptness with which issuers are coming out with their offerings, leaving very little time to examine the quality as against the days of the Controller of Capital Issues, when there was plenty of lead period to sell the fixed-price issues, is disorienting. Companies, however, have no restriction on the size and pricing of equity. Also, full disclosures enable different segments of investors with varying risk appetite to decide on exposure. For instance, junk bonds, too, have niche buyers. Many richly valued issues from the private sector have been under-subscribed or had to be withdrawn and those from the government had to be bailed out by financial institutions. Market forces, thus, have played out their role and Sebi should stop fretting over listing gains, lending weight to the increasing feeling that most subscribers merely want to flip the issue and that grading of equity issuances has been a spectacular failure. Instead, the capital market watchdog should be expending more time on insider trading, front running, and inadequate and discriminatory dissemination of sensitive information.

The year of the awakening

The apparent contradiction of keeping poor on welfare and at the same time boosting growth became stark

By Mohan Sule

The juiciest metaphor to illustrate the fall of the mighty in 2012 was the demotion of the mango from its exalted position of king of fruits. Yet the common man’s plate of woes did not get lighter. Instead his ordinary dessert of banana achieved the status of a national emblem. Even before cash transfers gained currency to buy oil refiners breathing space and to expose the poor to technology interfaces such as mobile banking, bypassing dated practices including minimum balance, they had already become fashionable in corporate corridors as book entries disguised as interest-free advances to win over influential friends. Not surprising really when it took an acidic report in a beltway newspaper in the US to shake off the policy paralysis rather than the beseeching by the who’s who of India’s power elite, downward revision of growth forecasts by multilateral institutions, and hints of downgrades by rating agencies. It was a year in which corruption charges, crony capitalism and coalition dharma took the country to the edge of the credibility cliff. Coal and gold, both were lusted, the difference being getting a block to mine was an acknowledgement of moving in the right circles while hankering to own a hedge against inflation was frowned upon as damaging to the country’s fiscal health. CAG was not the result of a precocious child’s stubborn refusal to get the alphabets right but symbolized nitpicking over decimals to put a figure on the magnitude of the loss to the treasury due to giveaways of scarce resources. As the hatchet job to transform a hero into zero got underway, a grounded king of good times spiritedly defended his kingdom, losing a crown jewel in the process.

Another abdication to grab attention was at Bombay House, as an era came to an end. From an India-centric conglomerate, one of the oldest groups in the country has taken a seat among global corporations, delighting some shareholders and testing the patience of others. Just like our western neighbor distinguishes between good jihadis (who want to dismember India) and bad jihadis (who are inward looking), our political class too differentiated between good FDI (in aviation) and bad FDI (in retail). Perhaps they were taking a cue from the US for whom China is a good Communist though its governing members are appointed in secrecy, keeps its currency low and lends some of the resultant surplus to buyers of its exports, but not our homegrown variety elected to rule West Bengal for years. US’s top diplomat rewarded the vanquisher with a visit soon after, though the mercurial politician is driving out rather than attracting investment. Now it is clear that the platter of cookies that might have been offered to the visitor could not have come from any MNC supermarket chain. What is not known is the brand of tea the chief minister served along with them. In retrospect, a few months too late for the touchdown, even this brew would have been a luxury, with the pullback of subsidies on fuels. While the demand-side pricing was being corrected, there was no clarity on supply-side policy. Should natural gas prices be hiked or not? The question remains unanswered despite a new minister for oil and gas.

Face-offs were not restricted between the government and the private sector. The psychological warfare between the finance minister and the central bank over interest rates did not deter foreign investors as the ruling party backed rural prosperity over keeping inflation low and favored loss in revenue due to tax avoidance rather than loss of face because of poor investment sentiment. The flood of inflows provided tailwinds for PSU divestment but complicated monetary loosening. Another spat that turned into much ado about nothing as the year drew to a close was the carpet-bombing of Corporate India by anti-corruption activists. Shell companies, Swiss accounts and string pulling to tailor policies were some of the sins of omission and commission of the rich and powerful. As eight states plunged into darkness following the tripping of the northern grid, the solution offered to tide over shortages by the frenzied people’s movement was to freeze payment of bills instead of letting power discoms charge market rates for uninterrupted supply. Perhaps this is the manifestation of applying varying sets of rules to different consumers. The typical example of the year is PSU banks, buffeted between government nudge to lend to favored sectors and the bank regulator’s mandate to increase provisioning for restructuring these assets. Similarly, investors were sandwiched between the CCI’s crackdown on the cement cartel for holding prices high and the PMO’s directive to supply coal at low prices. No wonder, GDP growth has become the casualty of politics of convenience. Truly, 2012 is the year marked by collusion of the corrupt and collision of contradictions.