Retail investors will return to the market not because of any regulations but due to confidence in the economy
By Mohan Sule
Now that the secondary market has heated sufficiently, the focus has shifted to the primary market. Several government-owned and private units are preparing to enter the ring. Some PSUs would be offloading shares to reach 25% public holding, while many others to meet the ambitious Rs 50000-crore disinvestment target for the fiscal. Promoter-driven companies could be issuing equity to lighten debt, fund stalled expansion or build a chest for organic or inorganic growth. It is understandable that the private sector would wait for a frothy secondary market to get rich valuations. But for the government to strike when the mood is bullish suggests lack of confidence in the operational performance of the PSUs, many of whom are monopolies and should be able to draw investors’ attention without difficulty. The idea of enlarging the ownership to ordinary investors can be best achieved when the market is depressed and shares can be sold at attractive prices instead of offering a nominal discount to inflated P/E. Second, most issues would be of modest size. Subscription targets can be met with the participation of domestic and foreign institutional investors. Private sector companies have been placing shares with these investors even during the low phase. So do issuers need retail investors?
The marginalisation of retail investors, ironically, began as reforms gathered pace and gave rise to sunrise sectors such as tech, telecom, education, media and logistics. Many of the players in the old industries have become large caps due to the licence raj, which raised barriers for new entrants without the right connection. In contrast, the need for capital of the new sectors is modest compared with producers of, say, steel and capital goods. As such the emerging industries’ reliance on retail investors is far less than that of old economy companies. For instance, e-commerce businesses have no problem raising capital in the incubating stages. Yet many of these ventures are bigger by value than decades-old manufacturers as return from nascent industries has the capability to outstrip that from mature industries. During the dot-com bubble at the turn of this century, traditional earning matrix such as cash flows was junked in favour of esoteric parameters such as eyeballs. The valuations assigned made no sense to retail investors trying to comprehend their potential without any previous markers. The ensuring crash confirmed their fears. The changing investment landscape, however, has brought into focus the indispensability of retail investors. Venture capitalists and private equity managers pump in funds in the hope of exiting at bumper profit on listing. Angel investors reap the initial growth benefits. By the time they begin trading, these enterprises have achieved critical mass and future growth may not be at the same pace as in the past. Retail investors enter at a high point, with the promoters pricing shares exorbitantly based on past performance (minimum three years of profit to list). This is another reason for them to shy way from the primary market.
The role of Sebi, too, needs to be scrutinized. On the eve of the government preparing to flag off its big-ticket divestment program, the regulator goes through the now-familiar exercise of tightening investor protection rules and adding more features such as expanding the retail quota, introduction of marketing-making and safety net, stipulating discount to the offer price, and increasing the maximum investment limit. At the same time, it eases the cost and time required by issuers to raise money through the wholesale route. For instance, placements with qualified institutional investors do not have a lock-in as in preferential issues. If anything, book-building has created confusion rather than succeeding in coaxing retail investors. Most issues are bid at the higher range for fear of being left out, particularly from desirable offerings. Importantly, the price band is determined based on the response of institutional investors. Proportionate allotment has given rise to multiple applications from the same household, pushing aside the small investor. So there is a strange picture of wary retail investors caught between a confused regulator and expedient issuers. As the mood of the sulking market has undergone a change post May 2014, issuers are once again readying to target retail investors despite no fresh carrot dangled by the regulator to protect capital and enable them to earn higher return than fixed-income products. The lesson is that no amount of tweaking of rules will bring back retail investors as would the confidence that the economy is going to be in a better shape tomorrow than it is now.
