What’s the buzz?

Food security, electioneering, bad loans, interest rate cuts, and M&As are the talking points for 2012

By Mohan Sule

Some countries and companies attract the buzz. Some do not even on trying. For instance, money managers are eyeing Africa as the next big story even as China and India desperately try to remain relevant. Russia is increasingly talked about for its lawlessness in spite of riding an economic boom fuelled by oil prices. Every move of Steve Jobs was monitored with excitement, but does anyone care  who is the boss of Samsung, the largest consumer durables company in the world? Many were prepared to write off Apple after the demise of its flamboyant founder late last year. Defying pessimism, the iconic company is attracting buzz in the blogosphere in anticipation of the third version of its tablet that is likely to be unveiled this month. Will it have the voice recognition software that made its latest smartphone a killer device? There is unanimity among analysts that China is poised to become the largest economy in a decade. At the same time, it is attracting attention for its ‘khoka’ companies and growth driven by investment and exports rather than consumption and its capacity to face an Arab Spring type of revolution. The India buzz centres around policy paralysis as amplified by lack of decision on infrastructure projects and the suspension of foreign direct investment in multiple-brand retail and the anti-corruption movement. With budget day a couple of months away, the expanding fiscal deficit is providing fodder to the chattering class, which is also betting on the central bank embarking on interest rate cuts but is divided on what this will mean for the equity markets in the absence of foreign fund inflows.

Right-wing economists, bankers, corporate honchos and investors may protest, but the Food Security Bill is creating a buzz around the world just as the unique identity project and the cheapest tablet, Aakash. Not only poor nations but even the rich world are watching in awe how India is going to extend the right of cheap food to millions of its hungry citizens. If its execution is as successful as that of the national rural employment gurarantee scheme providing 100 days of wages to the rural poor, Sonia Gandhi is sure to find a place among the pantheon of India’s deities. The buzz is that 2012 marks the beginning of the election cycle for India. Whether the campaigning will go on till May 2014, when the term of the present parliament expires, or ends early hinges on how the Uttar Pradesh results turn out. The low base effect will magnify every additional seat won by the Congress and will be taken as a stamp of approval for the Junior Gandhi-led campaigning. A snap poll could be in the pipeline as the UPA coalition, emboldened by the good showing, might want to break the parliament gridlock created by allies as well as the opposition. The March 2012 budget can provide answers. Introduction of stalled reforms will imply the government’s confidence of lasting the full term. A manifesto couched in a fresh salvo of subsidy programs, however, will signal imminent general election.

The buzz about divestment of PSUs has flared up after Sebi recently tweaked rules to allow companies to offer shares directly on the stock exchanges. The market is talking about the beneficiaries of rural power. Good monsoon, cooling of food inflation and employment programs are being credited for the surge in FMCG stocks. In contrast, the buzz about the IT sector is mixed: the blessing of rupee depreciation is blunted by the uncertainty in spending in the US and euro-zone. The slowdown is likely to see heightened M&A activity. Will troubled portal Yahoo! and Blackberry maker RIM change hands? In India, acquisitions would not be restricted to the telecom sector, which is disappointed by the department of telecommunications opposing the rules proposed by the telecom regulator to facilitate consolidation. Many companies from other sectors that had recklessly taken debt in their quest for expansion and diversification, too, could be on the block and so also some of the casualties of the steep depreciation of the rupee. Exotic derivatives that were supposed to provide a buffer instead have become a burden. The first deal of the year involving a complex web to rescue the drowning TV18 promoters has baffled the market about the real ownership of the media group. The bottom line is the company has replaced one set of lenders with another: RIL. As the buzz about real estate companies’ crash-landing due to pricey properties and huge debt is gaining momentum so is the talk about banks’ soft-landing despite inadequate capital and ballooning bad loans to state-controlled sectors as the government prepares to infuse cash. 2012, thus, will be the year when contradictions play out without anyone blinking.

Mohan Sule

Clash of idea

The India story is grappling with opposing ideologies of welfare schemes v reforms, entitlement v meritocracy, inflation v growth 

By Mohan Sule

The tearing down of the Berlin Wall in November1989 signalled the end of textbook Communism as spelt out by Karl Marx and Frederick Engel and also the Cold War that was triggered after World War II in March 1945. The ideological clash hinged on the best way to prosperity. The developed world credited freedom of choice for its success. In contrast, Communists believed the state had to take care of its citizens by ensuring equitable distribution of wealth. With the disintegration of the Soviet Union, the debate appeared to have been finally sealed in favour of the ways of the west. As it increasingly looked that the world was once again going back to being a peaceful place, bothered about bread-and-butter issues, political scientist Samuel P. Huntington in 1992 disturbed the complacency by warning that another clash was imminent. He explained in detail his thesis in a 1996 book, The Clash of Civilizations and the Remaking of World Order.  Post 9/11, Huntington’s exposition gained gravity.  He predicted India would swing between opposing cultural and religious identities. Looking at the current situation, it looks like India instead is wrestling with an identity crisis of being a superpower in the making to being a perpetually developing economy.

What are the crises that India is grappling with? The notion that elections can be won on welfare schemes guaranteeing employment and food security rather than boosting investment is being severely tested. To run a benevolent state, the treasury has to be in surplus. This is possible only in a booming economy, when tax revenues are buoyant. As it is, the subsidy on petroleum products has been causing a severe strain on finances as crude oil prices are never static and, in fact, tend to rise when demand surges, throwing into disarray all calculations made in the budget document. Another source of revenue is from sale of assets. A good price can be fetched only when the stock market is in a cheerful mood. The bottom line is that even to dole out handouts, the investment climate has to be conducive. In fact, a measure of a country’s outlook is to examine how the assets of the state are used, resources allocated and prices of services and products determined. As is seen from the examples of PSU aviation, banking and oil marketing companies, interference in the demand-supply equation can be at the cost of the health of the supplier. Another controversial idea that has caught the fancy of some people with influence on policy making is to make the private sector pay the bill for social services. Mining companies have to share royalty and profit with those displaced, and the price tag for land acquisition to build factories comes embedded with a premium. The new Companies Act awaiting parliament’s approval mandates a share of profit on social programmes. The best way to make companies conscious of their environment is by recognising that all the stakeholders — clients, suppliers, employees and shareholders — are important. The IT sector offers competitive rates, is run by professional managers, and has turned employees millionaires through stock options. In the bargain it has provided handsome returns to the shareholders. Many IT bosses are active in charity work.

It is also common for policymakers to allow concerns of containing inflation to subvert policies to promote growth. However, this way of thinking met with a neat burial post Lehman Brothers’ collapse in September 2008, when governments announced fiscal stimuli packages and central banks injected liquidity to enable investors to take on risk, which is essential to promote growth. It is now conceded that some amount of inflation is good as it signifies positively on the investment climate, indicating scope for further expansion to match the growing demand. Yet, our Reserve Bank of India has been proclaiming that it is willing to cap growth to bring down inflation. Pricey onions have known to cost an election but not unemployment. So seems to be the muddled reasoning just as promoters grooming their children to occupy the corner cabin feel nothing wrong in keeping a company run on public money family-controlled. Even first-generation entrepreneurs who have made it big are laying the groundwork for the second tier to take over. This practice is equally rampant in politics, mostly in Congress (the next generation of Deoras, Dixits, Scinidas, Pilots, and Gandhis are waiting in the wings), reinforcing the view that in India bloodline counts though royalty has been abolished (by the same party). In contrast, many MNCs, PSUs and even private sector firms are being managed successfully by professional CEOs. Whether India’s growth engine can run without any bumps will hinge on how this clash of ideas is resolved.

Mohan Sule

Crisis and celebration

Why India’s rupee dive and succession at the Tata group should be viewed as opportunities to strengthen their balance sheets 

By Mohan Sule

It takes a crisis to jolt the government into action. In May 1991, with foreign exchange reserves barely enough to meet three weeks of imports, India had to mortgage 47 tonnes of gold with the Bank Of England and 20 tonnes with Union Bank of Switzerland to raise US$ 600 million. The national outrage that followed led to the collapse of the government led by socialist Chandrashekar, resulting in the selection of P V Narasimha Rao as prime minister, who appointed former Reserve Bank of India governor Manmohan Singh as the finance minister. The ‘reformer’ liberalised the economy at the behest of the IMF and not due to his own initiative. This time, the decision, now put on hold, to open multi-brand retailing to 51% foreign direct investment was spurred by the rupee hitting a lifetime low of 52.7 a US dollar on 22 November 2011. Other sectors waiting on the sidelines include insurance, aviation and banking. Global retailers have mastered the art of transporting products from their sources to the consumers at minimum cost. As automation, refrigeration and good roadways are essential ingredients, many supporting industries will benefit. Leveraged organised retailers will get an exit route. It could also boost real estate developers sitting on a pile of inventories. The pop-and-mom shops, whose survival is at the centre of the current storm, should be offered financial assistance to upgrade and not used as votebank. Many of them sit on prime real estate with proximity to consumers that large retailers can never enjoy. The aviation sector is a good example of how a promising industry is in the danger of getting grounded because of the inhibition in inviting foreign investment. The reluctance of the Tatas to start an airline without a foreign collaborator (Singapore Airlines) should have offered hints to the government as well as the Indian promoters  of the difficulty in going it alone.

Like the retail sector, FDI in aviation will help in sprucing up the logistics of running an airline but will not guarantee profit. Otherwise, there would not have been so many bankruptcies in the business, the latest being that of the parent of American Airlines, the last of the legacy US airlines to have survived without undergoing restructuring. Yet there is no luxury of choice. The diminishing attraction of India to foreign investors and the resultant increase in inflation, embedded in the import bill, should speed up the unlocking of the residues of a bygone era. The fear of foreign ownership compromising India’s security had been raised while allowing foreign equity in the telecom sector. This apprehension seems to have ebbed now. Vodafone’s Indian operation is majority owned by the British company after buying out the Ruias of Essar. Uninor, a joint venture with Unitech of India, has nearly 67% stake by Telenor of Norway. In fact, fending the united opposition to FDI in retail and other sectors could be a test case for prime minister-in-waiting Rahul Gandhi, who so far has displayed poor judgment  (the anti-investor land acquisition bill has his stamp) and tends to keep aloof from national crises (Lokpal, terrorism, inflation, economic slowdown).

Rajiv Gandhi realised the importance of computers, despite resistance from trade unions, for India’s growth. A window has opened for his son to rebrand his left-of-center image by convincing the skeptics that reforms rather than a food security law or rural employment schemes are the best option for inclusive growth. On his success in this battle will hinge his smooth succession. The painless passing of the baton from the CEO to his successor is always a cause for celebration. The mood, however, was subdued at the recent Bombay House transition. For one, the successor to Ratan Tata is untested apart from helping manage his father’s construction business. Doubts persist about his ability to steer a conglomerate, which has acquired the complexion of an MNC. Tata, too, had no experience when he took over in 1981. That was a different era, when Indian industry was untested by foreign competition. To his credit, he consolidated the group’s global credentials through acquisition of well-known brands. Cyrus Mistry does not have to face the kind of dissidence Tata had to encounter from powerful chieftains, resulting in the unceremonious exit of Tata Steel boss Russi Mody. Nonetheless, there is disappointment at the missed opportunity of paving the way for a professional CEO instead of appointing the son of the largest individual shareholder. Perhaps that was the reason the market has decided to wait and watch rather than react hastily either way. What will be seen is if Mistry follows the footsteps of his predecessor, who divested loss-making businesses like textiles and computer hardware, by shedding some expensive properties.

Mohan Sule

Chalk and cheese

The troubled aviation sector can learn survival skills from the embattled telecom sector

Mohan Sule

After telecom and mining, another showcase of the reforms era is in the news for the wrong reasons. Unlike the telecom and mining sectors, the aviation sector has hit an air pocket not because of any scandal but due to operational deficiencies. Yet, just like the telecom and mining sectors, the problems of the sector can be traced to policymaking and the players’ ambition to gain market share. The open-sky policy introduced in the early 90s allows anyone with a borrowed aircraft or two to start an aviation company and fly on any domestic route with a serviceable airstrip by paying the fees for landing rights. It was the promoters’ headache to work out the math of balancing the cost of aviation turbine fuel, servicing the lease, maintaining the fleet and staff wages with passenger fares. In contrast to telecom and mining, which are considered basic businesses with little value addition to differentiate one player from another, the aviation industry has been associated with glamour and adventure right from the times of the eccentric aviator Howard Hughes. Even our own JRD Tata achieved a larger-than-life image not merely by making steel and producing commercial vehicles but after his triumphant return from a solo flight from Karachi to Mumbai via Ahmedabad  in a Puss Moth aircraft in 1932 before launching Tata Aviation, which later became Air India International. Not surprisingly, airlines till the end of the last century spent huge amount of money to build brands and loyalty.

The first batch of private sector aviation players was a motley crowd of poultry farmers, unknown entities alleged to be fronts for underworld elements, wheelers and dealers sensing another opportunity to earn returns, and industrialists keen to diversify. In the process, they failed to interpret the market signs correctly. The market was no doubt expanding. The emerging middle class wanted an option to the rickety services offered by Indian Railways. A diet of subsidized fares had hampered the domestic state carrier’s capacity to expand. There was, however, a limit to the premium first-time fliers were willing to pay for better services. Competition on the trunk routes resulted in fare war as in the telecom sector. There was incipient demand for feeder routes. To break even, it was essential that the aircraft had a minimum number of passengers per flight. To ensure this, there was no alternative for the new entrants but to woo the budget-conscious travellers. Among the casualties of this realisation was Damania Airlines, whose promoters were not adequately capitalized to sustain a fancy airline. Sahara Airlines decided to sell to Jet Airways, and Air Deccan to Kingfisher. Low-cost carriers SpiceJet and IndiGo gained popularity. Despite the consolidation and increase in passengers, airlines have not been able to stem the flow of red ink due to the surging prices of ATF, with crude oil crossing the US$100 a barrel in 2008. The brew turned potent on volatility of the dollar following the sovereign debt crisis in Europe and the hardening of domestic interest rates.

A striking feature of the current turbulence in the aviation sector is its similarity with the problems of the telecom sector. One is the wafer thin revenue per user. In spite of being among the fastest growing and the largest in the world, both the industries are not making profit even as they are gaining more users. This means there is demand for the service provided but the economics of providing the service is not viable. Telecom companies have halted the race to offer airtime at throwaway prices. Instead they are concentrating on the creamy layer to ensure decent usage. Airlines either have to follow the no-frills model or use the heavy rush on the metro routes to subside flights to tier I and II cities. Another option is pooling ground services or to carve up the feeder routes among themselves. Telecom services providers are sharing tower resources and till recently were inking 3G roaming pacts with those in other circles to provide users a seamless experience. At the same time, there are two glaring irritants that are unique to the aviation players. One is the subsidy provided by the Central government to Air India to keep its fares low. This provides a benchmark for passengers to compare private airlines. The second, and crucial, cause of grief is ATF. One way to tide over the problem would be to have a variable component in the air fare, linked to the fluctuation in the previous day’s crude price. After 9/11, may top-of-the-line airlines including Swiss Air and US carriers Delta and United Airlines went bankrupt, sending out a clear message that the era of discount flying is here. This means airlines like telecom services have become commodities rather than brands.

Mohan Sule

Short circuit

Rajat Gupta’s shortsightedness and the UPA government’s short-term policies are remarkable for their destructive power

Mohan Sule

The fall of Rajat Gupta in the insider trading scandal in the US can be viewed as a proxy for the India Growth Story: euphoria followed by disappointment. Gupta was the first-generation immigrant who vaulted to the top of Corporate America on merit. This was what the new Shinning India was all about: education and hard work were the capital to invest in the opportunities thrown open as licence raj was dismantled. Instead, the reforms consolidated the position of the entrenched conglomerates as sectors monopolized by the public sector were transferred to the private sector oligarchs with ties to the ruling party or to those entrepreneurs willing to pay a premium. Telecom, aviation and mining, the three showcases of reforms, abound with tales of rules bent to create a distorted playing field. The problem stems from Indian policymakers’ reluctance to let go the barter system and cling to the constituency of a welfare state, sitting at odds with the idea of individual initiative to become wealthy where the field is leveled for all. Despite intellect, and not legacy, being solely responsible for his success, Gupta could not differentiate between gossip and leaking sensitive information to a hedge fund manager. It would be easy to attribute the downward revision in India’s growth to about 7% from 9% for the current fiscal to the euro-zone debt crisis and the slow recovery of the US and Gupta’s woes to a cultural clash in ethics and values. In the end it all boils down to wrong calls of judgment.

Wrong calls on restricting bidders to circles and categorizing them on technology  sowed the seeds to the scandal that saw the corruption of the second round of sale of second-generation telecom spectrum. The underselling exposed the worst-kept secret of policy making in India: the minister-bureaucrat-corporate sector nexus. As a result, first-generation entrepreneurs have to adopt unconventional means to gate-crash into the exclusive group. Top this with inordinate delays in clearing projects such as Vedanata’s acquistion of  UK-based Cairn’s stake in its Indian joint venture to explore oil and gas or South Korean Posco’s desire to mine bauxite in Orissa. Even when bills are introduced to bring clarity to issues such as acquiring land for infrastructure projects or awarding mining rights, the laws are biased against the investors. With elections happening in some corner or the other round the year, most legislations are written either with timidity or brazenly to woo a chunk of the voters. The out-of-control rise in prices is another spoiler. Initially, liquidity caused by foreign portfolio investment was held responsible. There was even talk of imposing capital controls or levying a withholding tax as done by some other emerging economies in South-East Asia and Latin America. Later, the flow of foreign investment into the stock markets slowed down due to the sovereign debt crisis in Europe but headline inflation showed no signs of receding. It was then realized that surging food prices was the primary contributor. An expanding middle class and those lifted above poverty by the rural employment schemes were fuelling consumption of food items and boosting their prices.

A good southwest monsoon was expected to cool down foodgrains on higher output. Instead of a resolution, the problem has got compounded. The minimum support prices were increased recently to insulate farmers from the anticipated downturn in prices. In the meanwhile, the Reserve Bank of India has ramped up interest rates 13 times in 19 months, further hurting manufacturers already battling costly raw materials. The bottom line is prices remain untamed in spite of higher interest rates and slowdown in foreign capital inflow. The spurt in the wholesale price index caused by protein-rich diet and that by dollars chasing assets have to be viewed as separate events requiring different treatment. Yet the central bank has adopted a one-size-fits-all strategy. Making the RBI’s job more difficult is the government’s borrowings to fund social welfare programs on the eve of a clutch of crucial elections. Thus, instead of becoming the center of gravity by leading the recovery of global economy with structural reforms to make investment in infrastructure projects attractive, undertaking prudent fiscal measures to keep inflation under check, and speeding up PSU divestment, policies tailored for a limited purpose — establishing footprints in the Uttar Pradesh election to pave the way for the fourth generation of the Gandhi family to rule India — have short-circuited India’s Growth Story just as Gupta’s alleged desire to gain a quick entry into the millionaires’ club destroyed his reputation built over years of hard work and brilliance.

Mohan Sule

Where does the buck stop?

 

Ask what you can do for Air India and SBI, the government seems to be telling taxpayers

By Mohan Sule 

 

The protesters occupying the streets housing financial institutions and stock exchanges in the US and Europe are united in their disgust at corporate greed but not on how to wean away companies from their gluttony. Their anger seems to be directed at the bailout of too-big-too-fail corporations with taxpayers’ money. Arguments that doing nothing would have had a contagion effect, sweeping away other stakeholders including minority shareholders, clients, suppliers and employees with exposure to the failed institutions, do not appear to have made much of an impression. Many of these once-tottering empires have started making profit and returned government funds but their turnaround has had no impact on job creation. Instead of bringing growth back on track, the chain of events has resulted in economic slowdown. No wonder the rich countries of the euro zone are reluctant to foot the bill of the spendthrift members who have taken on too much debt to make their present comfortable at the expense of their future. The events of the past three years, therefore, have put a question mark over government intervention. A company gets another chance only if the opportunity is used to clean up the balance sheet. This means its shape and size are altered as divisions are hived off and employee strength trimmed. Allowing companies to collapse, viewing their extinction as a natural process of evolution, is a gamble. The hands-off approach to Lehman Brothers resulted in a credit crunch and meltdown of equities around the world.

The bailout of state-owned UTI in 2001 has been a turning point in the Indian government’s approach to sick companies. The quick intervention by pumping liquidity through government bonds prevented the domino effect from spreading to the stock markets. The bull-run that followed helped the mutual fund to repay the government. Since then, the landscape has changed drastically. The government has become proactive. Mergers and acquisitions have been reckoned as an important solution to the problem and not obstructed as happened in 1983, when NRI Swraj Paul tried to take over Escorts, whose assets were not producing the desired returns to the shareholders. A government-appointed committee shepherded Satyam Computer Services, felled by an accounting fraud by the promoters, through the auctioning process. Financial institutions encourage corporate restructuring instead of turning their back on the borrowers. This is in contrast to the pre-reforms era. It was common to stretch the death pangs of sick units by referring them to the Board for Industrial and Financial Reconstruction. Mumbai’s textile mills were allowed to wilt under a prolonged labor agitation. At the other extreme, government took over companies considered vital for the economy or simply because they were found to be profiting from the demand-supply mismatch. Overnight in 1969, 14 privately owned banks were forcibly converted into public sector. Air India, the international airline started by JRD Tata in 1948, was nationalised in 1953.

Now, these two showcases of socialism are in a state of disrepair. Air India is on the verge of bankruptcy. Lack of powers to take market-oriented decisions, dip in passengers following 9/11 in 2001 and meltdown of financial markets in 2008-2009, and rising fuel prices have resulted in losses. The merger with Indian Airlines in March 2007 to create a single entity for operational efficiency has not met with success. It is facing debt of Rs 67000 crore and seeking equity capital of nearly Rs 49000 crore as against Rs 2000 crore pumped in so far. Dithering over an IPO, first planned in 2005, to bring in additional capital has proved costly. A complete sell-off or partial divestment to Indian or foreign investors could give it a chance to recuperate. This looks unlikely considering the paralysis in decision making at the Centre. The condition of SBI is not as serious but the situation is more complex as it is listed. Being majority owned by the government, the bank’s priority is fulfilling social obligations. No wonder, it has to increase its provisioning for bad loans, as per the recent Reserve Bank of India directive. In view of the stock’s plunge to 52-week low, the Rs 23000-crore rights issue to meet its tier I requirement looks remote in the short term. Instead, the government would be infusing around Rs 10000 crore. Unless it pads up its capital, around 7.5% of the assets now, the proxy for the Indian economy won’t be able to grow its loan portfolio. Indeed, a sad commentary on India’s ambition to expand 9% per annum over the next decade. It would be instructive to know what the Wall Street Occupiers would have to say of the government using taxpayers’ money to bail out taxpayer-owned companies mismanaged by it.

Mohan Sule

Primary issue

Institutional and private equity investors should be made to act as filters before IPOs are offloaded to retail investors

By Mohan Sule

Though the market has recovered after dipping below 16,000, the need to revive investors’ confidence in equities has never been more urgent than now. After Lehman Brothers was allowed to collapse, there was unanimity among central banks and governments around the world about the dangers of letting the markets drift to the bottom and then wait till they bounce back on their own. There was no appetite for a repeat of the decade-long Great Depression of the 1930s, or Japan’s lost decade of the 1990s. The composition of the current crisis differs from that in 2008, when a credit-crunch threatened to stall the economy. Central banks had to pump in cash to keep the wheels of industry moving. Second, inflation was low, which allowed leeway for printing more money. This time, emerging economies are concerned about too much of liquidity stoking inflation and are prepared to sacrifice growth to tame price indices. In the US, the Federal Reserve is swapping short-term government bonds with longer dated ones to replace short-term pessimism with optimism about future. The increase in bad assets of banks in China and India, as the downgrading of SBI implies, also discounts loose-money policy. The bottom line is risk aversion rather than access to loans is the issue now.  Fiscal stimulus, initiated soon after the global meltdown three years ago, may compound inflation. Governments, therefore, are looking at other means. For instance, the Indian government has indicated reduction in stock-market transaction levies. The market has welcomed the move.

The finance ministry needs to go one step further and bring down the short-term capital gain (STCG) tax to 10% in the limited window of opportunity available in the run-up to the Direct Taxes Code, with peak STCG tax at 30%, to be implemented from the next fiscal. Besides short-term measures, it should also overhaul the capital-raising framework. Sebi initiated many reforms during the dull phase a decade ago, while preparing the market for better days that followed from 2003. In 1999-2000, procedures for the participation of foreign institutional investors (FIIs) in the primary and secondary markets were eased. By 2003, the number of FIIs exceeded 500, with over 1,500 sub-accounts. Due to FII interest, the Rs 100-billion ONGC IPO in March 2004 was oversubscribed in 10 minutes. T+5 rolling settlement was introduced in 2000 for dematerialised scrips and was expanded to cover more stocks with the facility of automated lending and borrowing mechanism or modified carry-forward system in any stock exchange. Trading in futures contracts based on the BSE’s Sensex and S&PCNX’s Nifty index began in June 2000. Norms for private placement were tightened in 2003 to provide for more disclosures. At the same time, there were missteps. At the height of the dot-com boom in 1999-2000, Sebi allowed tech companies  to offload only 10% post-IPO share capital instead of 25% mandatory for issuers in other sectors in an attempt to revive the primary market. This blatant pandering to the fancy for tech stocks eventually boomeranged with investors getting stuck in illiquid counters as software companies are not capital guzzlers.

Similarly, the response to offer individual investors, who have 5o% quota, shares at a price determined through book building has ranged from lukewarm to overwhelming. The procedure allows issuers and FIIs to create appetite for high-priced offerings. The spinoff is post-listing stampede for exit. At the same time, there is no interest in issues without substantial institutional participation. With the deepening of the investor pool, issuers prefer private placement with institutional investors rather than go through book building to mop up the mandatory retail subscription. The result is the entry of small-sized issues shunned by big investors. The present volatile times, therefore, are appropriate to review the primary market. The initial focus of reforms should be on small and mid caps, which have the maximum scope for appreciation and mischief. These issuers should be made to place their IPO/FPO with domestic and foreign funds, who should offload the capital to retail investors after three years. Only venture capitalists should be allowed to offer for sale shares of startups. By inserting the filter of institutional investors, Sebi would ensure that only equity checked for quality would be available in the market. After obtaining a stock at reasonable pricing, institutional investors would be compelled to monitor the company to create long-term value instead of thinking of making short-term gains. Issuers would be spared of catering to retail investors out of compulsion rather than choice. Thus, issuers as well as institutional and retail investors stand to benefit.

Mohan Sule