Cosmetic facelift

Instead of safety nets to lull investors into complacency, focus should be on the ease and the cost of entry and exit
By Mohan Sule

The market surge of 2012-13 is rekindling memories of the boom in 2007-09. Just like in the past, the recent buoyancy is due to foreign portfolio inflows. Low interest rates in the US are once again contributing to the liquidity. The similarities seem to end here. The expensive stock valuations when markets were hitting new highs in a matter of days four years ago seemed justified due to the robust health of the global economy, particularly emerging nations. China was notching up around 10% growth rate and India about 8% per annum in the second half of the last decade. The clawing back of the market to reclaim past glory is evoking concern instead of exuberance as most of the developed countries are in recession and some like the US are showing weak signs of recovery. China is tenaciously fighting to get back to the past years of high growth rate, while India is scrambling to put its balance sheet in shape just to avoid credit downgrades rather than to grow in double digits. Foreign investors have been assured of a benevolent tax regime till FY 2015. PSUs are being dusted off the shelf by the government to capitalize on the market momentum. The Reserve Bank of India has shifted its focus from fighting the still-high headline inflation to boosting growth. If retail diesel prices are being raised in slow steps, the cap on subsidized LPG cylinders has been enhanced to nine in a step backward. The scurrying about seems to be to reach the short-term goal of getting past 2014 intact. In short, a coat of paint is being given to make the house appear presentable to foreign visitors rather than carrying out structural repairs to make it livable for its inhabitants.

The weak economy, which is expected to grow just 5% in the current financial year, in a way has proved to be a blessing, shaking off the government’s policy paralysis and forcing it to act. This is in contrast to what happened for most of 2003-10. Instead of divesting PSUs to take advantage of the market boom and initiating second-generation reforms, the UPA II government launched treasury-draining welfare schemes like guaranteed rural employment. Not only did the giveaway contributed to fuelling food inflation, it boosted manufacturing prices too as the private sector had to raise wages to compete for workforce, The worry now is that in spite of the government’s belated realisation that there is no substitute for reforms, the inflows could reverse as quickly as they rushed in if the domestic economy does not respond to these stimuli. Recovery in the US, the euro zone and Japan too could help the turn the tide. Another reason is that equities in India are now fully valued based on their historical earning unlike at the start of the fiscal. Any further upturn will be justified by the economy surpassing the central bank’s estimate of 6.5% expansion next fiscal. This can come about only if the government quickly puts in place a transparent land acquisition and environmental clearance mechanism. The euro zone could be the next hotspot for inflows. Already yields on corporate bonds are rising in the region.

The high fiscal and current account deficits are slowing the central bank from aggressively cutting interest rates. Also, the government’s neglect of retail investors and tilt towards big-bracket overseas investors are not helping matters. Apart from the solace that long-term capital gain tax is unlikely to be raised from nil currently, the transaction costs including demat and brokerage charges and the securities transaction tax remain high for small investors. Book building has further marginalized the retail segment. Yet the recent attention on listing gains raises the possibility that the equity market is being given a cosmetic facelift to resemble a risk-free investment option. Toying with concepts like issue grading, market making, buybacks by promoters on dip in stock price over a fixed timeframe, however, are dangerous as they will lull stock pickers into false complacency just as US buyers, backed by cheap mortgage rates, came to believe that prices of property always go up. Instead of solely focusing on supply-side issues, the need is to encourage demand. Shrinking the period for listing and minimum 25% public float will ease entry and exit. Sebi has tried to create a level-playing field in the primary market by insisting on upfront margin and no-cancellation policy for big ticket investors and introducing ASBA facility that allows debit of subscription amount only on allotment. Another measure to reduce cost could be releasing of investors’ funds as per the progress of capital expenditure rather than on distribution of shares. This would enable retail players to earn interest on their unutilized portion and tamp down expectation of super listing gains, thereby de-risking companies from having to explain the fall in share prices due to delays in project execution.