Liquidity injection

The Rs 29000-crore infusion by Unilever could see capital going to assets in need of funding instead of gold and property

By Mohan Sule

Cash can be a blessing as well as a problem. For companies, reserves are primarily a buffer against downturn, when inventories rise, products are slow in moving, customers demand discounts and stretching of the payment cycle, and credit is required to service working capital. RIL used some of its reserves for additional depreciation charges arising from revaluation of its plants and machinery. The market loves companies financing their expansion through internal accruals. For investors, its presence on the balance sheet indicates a healthy operating margin. At the same time, the increasing size of cash pile adversely impacts the return on equity. Consequently, there is clamor from investors to use it to grow the business by undertaking expansion, which would be a cause for capital gain. There is also pressure to share some of it with the shareholders through dividends or as bonus shares. Of late, companies are offering to purchase shares to reduce capital, which boosts earning and invites better discounting. The tendency to dip into reserves is more noticeable during a bearish phase. Besides using this method to support the stock, lack of effective channels to expend is a vital factor in distributing cash. This is not so during a bull run. Besides, the attraction of dividend yield diminishes as stock prices surge. Buybacks and delisting become expensive.

The way a company prefers to consume its cash influences the market’s attitude towards the stock. Those offering dividend, tax-free in the hands of investors, are favored though they may belong to mature industries because of the predictability of their payout. On the other hand, fund-guzzlers are viewed with caution despite the opportunity to buy cheap and scope for appreciation as they mostly operate in the emerging sectors of the economy. For a time it did seem Indian investors were buying into this growth story from the huge response to the Rs 11600-crore Reliance Power IPO, the last of the big-ticket issue before the collapse of the primary market in 2008. Policy paralysis, regulatory overhang and shortage of raw materials have snuffed out the potential of the infrastructure sectors, including telecom, that had lured investors for a while. Buybacks are taken as a sign that growth has peaked and the company does not see many opportunities to expand market share. RIL had to resort to share mop-up to prop up the stock beaten down due to fall in natural gas production. Dell of the US is taking the company private as smartphones and tablets have disrupted the desktop and laptop market. Hindustan Unilever is an interesting case. Parent Unilever is increasing stake in the Indian company to the maximum permissible of 75% to stay listed but triggering speculation that the MNC might go private sometime in future as the margin and revenue come under pressure due to competition. The flawed reverse bookbuilding process mandated by Sebi will ensure investor interest in the stock in the hope of extracting a sumptuous exit price. The shares might even enjoy still steeper valuations, going against the conventional logic that stocks slip after buyback is completed.

What happens to the cash that is returned to investors through the various mechanisms? It will not be surprising if it is deployed in risk-averse fixed income instruments or locked up in gold or real estate. The Rs 29000 crore that Unilever is going to inject into the Indian stock market comes at a different time. There are reasons to believe that some of this largesse might finds its way back into the equity market, which is at a critical juncture. The US Federal Reserve has indicated it might gradually wind up its pump-priming program against the backdrop of return of risk-taking. The Indian market is benefiting from the spillover emerging from the surging Dow Jones Index Average and Nikkei indices. Indians are still buying gold in record numbers despite its declining value. The current account deficit expanded in April 2013 mainly due to higher gold imports. Yet, the difference over the four-and-a-half years since the global market meltdown is that purchases seem to be for consumption rather than for investment. Decent return from real estate looks slim at the current level. On the other hand, cheap sunrise sectors that need capital rather than FMCG counters with stretched valuations could lure investors. Pressure from foreign investors could even prod companies in the infrastructure space to improve their corporate governance and the government to initiate reforms that would allow players easy entry and exit and flexibility in sourcing supplies and pricing. In that sense the cash infusion by Unilever and other MNCs that might be tempted to follow the FMCG giant would be a welcome liquidity injection in the Indian equity market.

Paying the bill

It is the tax payers, including the small investors whose savings have been wiped out, who end up bailing out failed institutions

By Mohan Sule

From a humble beginning as money collectors, the Sahara and the Saradha groups have transformed into conglomerates dabbling into media and property development among other diverse activities. Their large-scale across-the-board flouting of the basic stipulation of getting details of the depositors and promising returns above industry standards lead to two conclusions. One, for deposit-taking outfits or chit funds, maintaining digital records is a liability for it leads to paper trail of the subscribers to whom they have to deliver the promised returns. The second is by following the commission- or the target-based business model, the promoters cleverly spread the responsibility of survival of the organisation on agents, whose campaign focuses on quantity rather than the quality of deposits and results in misselling of products. Most have long maturity and are embedded with high marketing expenses. Suck out the incentive, and the industry faces seizure as was evident when Sebi banned mutual fund entry load,which was parceled out to distributors. The other side of the sordid drama is the hunger of both urban and rural investors for instruments that secure the principal as well as guarantee high returns. The fuss about proof of presence puts migrants at a disadvantage and so also the minimum balance requirement of banks for those working in the unorganised sector. It is this space that unregulated chit funds and deposit-taking firms occupy.

During the evolutionary phase of mutual funds in India, small investors had to be wooed with promise of fixed returns till some public sector bank-floated mutual funds sunk into red. The bankruptcy of UTI predating that of Lehman Brothers and following that of hedge fund Long Term Capital Management in the US stemmed from this very problem, with its flagship scheme, US-64, coming to symbolise government-backed cash-flow spigot. Another conclusion is that small investors are an important component of the financial system. The Sahara and the Saradha groups’ scale of expansion and diversification on the foundation of small savings should clear any doubt on this score. These firms saw the opportunity and deployed an army of collectors, something the organised financial services sector neglected. Insisting on adherence to KYC norms and auditing of records, to start with, and asking the deposit takers to explain how they plan to invest their corpus to keep their guaranteed-return promise are obvious steps to rein in the unruly sector. However, these measures could prove counterproductive unless public sector banks are ready to fill the gap that may be created by the crackdown. One of the justifications bandied for the emergence of shady money-collection schemes is the clogging of the capital pipeline to those who may be short of collateral but long on ambitions. Running chit funds is never their ultimate objective. Rather it is the means to an end — to build an industrial empire spanning airlines, hotels, townships, TV channels. These capital-guzzling ventures need a steady source of funds.

From another angle, keeping out elements with plenty of daring but shortage of ethics could be viewed as the soundness of the banking story in post nationalization India. Yet the mounting bad loans of public sector banks is a reminder of the bane of crony capitalism that keeps away those whose only asset is their dreams. Lack of access to liquidity prompts many of them to seek avenues that are lightly regulated to raise resources. No wonder the first thing that these promoters do on achieving critical mass is to venture into media to buy respectability and influence policy makers so as to ease the path to future projects. The other crucial issue that has to be confronted even as regulators grapple with the disciplinary aspects to prevent such occurrences in future is what to do with the thousands of depositors who have lost their savings. West Bengal chief minister Mamta Banerjee has been criticized for levying a tax on cigarettes to compensate the victims of Saradha. This is surprising considering tax payers aided in the rescue of UTI. Eventually, though, the surge in equity markets helped the mutual fund to repay the government just as large investment banks in the US returned the capital infused by the government during the 2008 credit crisis. Closer in time, large depositors in Cyprus will find their corpus reduced as the government dips into their holdings to finance the bailouts of large banks. So whenever an important link in the value chain of the financial ecosystem collapses, it is the universe of taxpayers, including the small depositors whose savings have been wiped out due to the collapse of the institution, who pays the penalty. This is an important lesson that should not be forgotten.

Turning point

If rising prices of onions can effect a change in government, so may fall in value of gold

By Mohan Sule
For every country, company and investor there comes an inflection point that presses for a change in course. For the global economy, growth triumphed over fiscal discipline after the September 2008 credit crunch. No country wanted to experience the Great Depression in the US of the 1930s that resulted from spending cuts to balance the budget or Japan’s lost two decades due to the timidity of the government in stimulating the economy after the property bust of the early 1990s. Despite allowing prominent companies such as Enron, WorldCom and Long Term Capital Management to go bankrupt, a fiscally conservative government in the US enforced mergers and bailed out large banks by using tax money so as not to clog money supply. A socialist government in India realised the importance of private sector investment after it had to ship 67 tonnes of gold to banks in Europe in exchange for US$600 million as reserves had dwindled to finance only three weeks of imports. Prospect of downgrade of credit rating to junk prompted the UPA II government, which had turned the country into a welfare state, to turn attention to controlling fiscal deficit by paring subsidies on fuel and take up pending reforms. The role of auditors, independent directors and pledged shares came into focus in the Indian market after the accounting scandal at Satyam Computer Services. The 2-G spectrum scam showed that a closed and highly regulated industry was not essential to spawn crony capitalism and corruption. IT companies are realising that quality of earning is more important than market share.

It took a while for infrastructure investors to confront the reality that opening up only part of the value chain is meaningless unless supply of raw materials and last-mile connectivity too is freed from pricing controls. After the crash in real estate prices at the beginning of this century and in stocks in the third quarter of the last decade, the lesson for retail investors is there is no escaping from the cycles of boom and burst. The latest correction in commodities supports the belief that there is no permanency in any investment theme. If equities can nosedive or surge, reacting to external or internal factors, so can the value of debt instruments in relation to interest rates, which are not static. Higher is the coupon, more are the chance of default of principal. Till the recent sharp fall in prices, gold had achieved a special all-weather status. A bull run or a bearish phase did not dim its luster: However, the change in its characteristic to an investment option from a hedge against inflation, particularly in the last four years of economic uncertainty, has contributed to gold’s volatility. The launch of dedicated mutual funds and exchange-traded funds has proved to be a double-edged sword. If more inflows have translated into higher returns, they have also exposed the commodity to abrupt outflows.

World over investors take exposure to stocks and bonds to build a safety nest or to make money from trading. In contrast, Indians primarily buy gold for use or as liquidity of last resort. This is because of the agrarian tilt of the economy and inadequate penetration of financial products. Restricted inflows till 1992 and stunted economic growth due to absence of reforms resulted in weak linkages between local and international prices. Even if prices did not spurt sharply, the demand-supply imbalance insulated buyers from steep dips, burnishing the metal’s property as a safe haven. Easy imports have resulted in better availability, meeting one of the criteria for the change in policy, but have not diminished the attraction, the other important objective. Instead domestic prices have aligned to the futures markets in Chicago, with the influence of dollar movements on prices increasing. The turn of events is best illustrated by the fact that a weak rupee now gets a lift from fall in gold prices as the current account deficit narrows. During his term as finance minister, Manmohan Singh had famously declared that he does not lose sleep over stock market fluctuations. Wiser  about the importance of a healthy capital market to boost economic growth during his tenure as prime minister, he is not likely to repeat the mistake. Our policymakers’ agitation over inflation can be traced back to the time Indira Gandhi ousted the ruling Janata Party government in 1980 by harping on the spiraling prices of onions. Now, it will be interesting to see how the erosion in gold holdings of millions of Indians affects the national mood. The war with China in 1962 and the mortgage of the country’s precious asset in 1991 have been two low points for every Indian. Though end March 2013 forex reserves could meet about seven months of imports, we still have to attain closure for the defeat in Aksai Chin. The fall in value of gold might be good for the economy but will it be for those for whom it was the last investment standing?

Crime and punishment

Why is the market rewarding loose monetary policies of Japan but is unimpressed with India’s promise of fiscal discipline?

By Mohan Sule
A stock’s price is supposed to fully value its historical earning at any given point of time. Risk-averse pickers wait for correction to possess a long-desired scrip. The reversal in price could be due to company-specific hiccups. The counter could also slide on profit booking after a sharp run-up, deterioration in the health of the industry due to factors beyond the company’s control, or because of the broad market slide on muddied outlook for the economy. The small gains that the cautious investor makes through this incremental approach are blunted by limited opportunities. The other class of risk takers prefers to look ahead to load the portfolio. The appeal of a stock is based on growth potential, estimated through order backlog or completion of ongoing projects. Last year, Maruti Suzuki was beaten on worker unrest at its Manesar, Haryana, unit as the valuation assigned due to its bulging order book looked expensive in view of the imminent delays in delivery and cash flow. IT stocks swing to economic data from the US and the rupee movement, which dictate the flow, pricing and realisation of contracts. The market crashed even as the UPA I government was being formed in May 2004 as a partner indicated burial of the PSU divestment program, so vital for narrowing the fiscal deficit and easing pressure on interest rates. Most firms tend to be conservative in their guidance. However, many are unnecessarily optimistic. The reason could be to convince the market to assign premium pricing to aid in fund-raising.

The exuberance is more pronounced in a bull market. In a downtrend, the concern is the worst is still to come despite valuations that have already factored in the sluggish growth and liabilities on the balance sheet. Of late, the market seems to be going against logic. Take two recent instances. Equity investors hardly flinched when rating agencies downgraded the UK and Japan due to their unhealthy balance sheets: Britain’s debt-to-GDP ratio is nearly 90% and Japan’s fiscal deficit is expected to balloon to more than 10% of GDP in the current year. As against a conventional response, the Nikkei index surged to a new high. In contrast, the Indian stock market seemed unimpressed with the finance minister’s confidence of lowering fiscal deficit to 4.8% from 5.2% last fiscal and boosting growth to an impressive 6.5% from an anemic 5% estimated for the March 2013 year end. It remained flat in the month since the budget. If equities are supposed to be forward looking, Japan should have shed value and India experienced a renewed surge. There could be two explanations for this behavior. One, the market had already absorbed the two contrasting scenarios: growth pangs for Japan and a turnaround for India. Two, it was excited at the Bank of Japan’s aim to inject liquidity till inflation rose to 2%. On the other hand, the Indian finance minister had failed to spell out the roadmap to achieve his projections. PSU divestment had fallen short of the Rs 30000-crore target. There was expectation of renewed policy paralysis due to the election season.

Yet stocks had responded heartily to the increase in FDI cap to 51% in the retail sector and to 49% in aviation in spite of the formidable obstacles at the ground level and to the partial rollback of fuel subsidies despite the walkout of a key ally from the coalition government. On the surface, it would appear that the market is discriminating by ignoring Britain’s debt pileup and the danger to Japan’s health due to easy money policy. India’s promise of prudent fiscal policies, in contrast, is not getting a warm reception. The inescapable conclusion is that foreign investors are assigning higher discounting to growth and differentiating between good inflation (US and Japan) induced to expand the economy and bad inflation (India) due to supply bottlenecks that is stalling output. The message is that India has to undertake deep reforms. The glimmer of structural shakeup late 2012 did more to propel the market than balancesheet jugglery to bridge revenue shortfall. Selling shares of PSUs to a state-owned insurer can at best be described as cash transfer. Instead of drastically slashing market borrowings for welfare spending and subsidies that keep interest rates high, the budget has passed the buck to the conservative investors, who will face lower payout from debt mutual funds that had become attractive due to higher return because of the hike in dividend distribution tax (DDT) and from efficient companies making more than Rs 10-crore profit due to the increase in surcharge on DDT.

Changing equation

The seizure of the US mortgage-security market and India’s FCCB defaults show that debt is becoming as risky as equity

By Mohan Sule

The decision of the US government to sue Standard & Poor’s for assigning investment-grade rating to mortgage-backed securities has once again brought into focus the difficulties in making investing secure. As against the inbuilt uncertainty associated with exposure to equity including volatility in earning, debt is considered dependable for the stability in cash flow and protection of principal. Chances of projections about future earning going wrong are high for stocks but so is the potential for return. A credit rating for a fixed-income product, in contrast, is supposed to accurately predict the likeliness of default by the borrower. The advantage is neutralized by barely-above inflation return and higher tax compared with equity. This traditional equation of risk being directly proportionate to reward that divided investors into the adventurous and the conservative now looks close to collapse. This is because of the strengthening of the link between capital and leverage. Servicing of loan is dependent on the timely execution of projects, which, in turn, hinges on the financial performance of the borrower. Rating of debt, on the other hand, is influenced by the track record and the current health of the issuer unlike buy or sell calls on stocks, which pivot on the outlook for the company and industry. In fact, neither discounts sudden changes in the macro environment. This is because interest in issuance of paper increases during a bull period. This means the issuer has two choices: dilute equity by offering shares at premium or increase leverage through attractive coupon rates. Both are fraught with downsides.

With the world becoming flat, the power of the commodity cycles to pull up or push down markets is weakening. Rather fiscal policies such as taxes and spending cuts to balance the budget and monetary policies such as easing liquidity or increasing the cost of money sway the markets more dramatically. An unexpected decline in demand for products and services affects return ratios as well as the ability to service debt. Complicating matters is the popularity of derivatives. Cloudier the future, more is the hunger for these exotic instruments to hedge against future reversals. Mortgage-backed debt paper comprised securities of different profiles. Rating agencies erred in not alerting subscribers to the inherent volatility due to the composition. Instead, they clubbed it in the highest-safety category. The reasoning probably was that the mix of the dodgy with the credit-worthy would eventually spread out the risk. Instead, these papers turned out to be combustible. The fact is rating agencies that keep a hawk’s eye on countries’ fiscal health turned sloppy when it came to monitoring their clients. The legal battle will offer a glimpse of the method behind the madness. Protracted court proceedings, however, could also chip away confidence in these firms, supposed to be investors’ gatekeepers, and in the financial markets. If this happens it would lead to another seizure of the credit market in the absence of benchmarks at a delicate stage, with the US economy showing signs of recovery and the euro zone expected to bottom out. Instead, the opportunity should be used to clean up the system.

In view of the vital role they play, how can rating agencies avoid the conflict of interest of rating their clients? Are country downgrades quicker and harsher than those for companies? Is it because institutional investors pay for the intelligence, while ordinary investors do not? If market regulators are prickly about investment banks maintaining a Chinese wall between their underwriting and brokerage functions, rating agencies, too, should have two teams, one for client servicing and the other for third-party investors. Perhaps this is an appropriate time to examine if there is need to fall back on the volatility indicator used to determine the movement of stocks during different phases of the market for debt offerings, too. If a counter with higher beta can outperform during an upturn, its ability to service loans is also bright. Most times, rating alerts come after the equity market has passed its judgment. For investors the lesson is that fixed-income products could turn out to be as unpredictable as stocks. The increasing incidence of defaults by companies in redeeming foreign currency convertible bonds should be a clinching evidence of the tenacious relation between shares and debentures. Issued during a period when interest rates were soft and the markets surging, these instruments allowed companies the safety of conversion in case of stress in repayment. The calculation went horribly wrong as the subsequent bearish undertone hammered stock prices and also squeezed cash flows. Many issuers have had to bloat their balance sheets further to meet current obligations. If equity investing is like braving a hurricane, debt can be an iceberg, which hides more than it reveals.

Small strokes

The small investor, the small homebuyer, the small saver, and the small enterprise 
are the focus of the budget for 2013-14

By Mohan Sule

There were three challenges facing the finance minister as he rose to present the budget for 2013-14. The first was to revive growth. The second was to stick to the fiscal deficit target. The third was to keep inflation low. Confronting even one of them head-on would have resulted in the resolution of the other two. Balancing demand and supply could have dampened prices without sacrificing growth. Ironically, the roots of these problems could be traced back to the heydays of 8% plus expansion of the economy, which increased the level of income of a large number of people, requiring the import of more energy and thereby fuelling prices. The textbook solution would be to tighten money supply so as to slow down demand and cool inflation. The global credit crunch, however, ensured that traditional solutions that had stood the test of time were no longer relevant. Funds in search of better yields flowed into India despite the fragile health of the economy as the central bank had to keep interest rates high to due to increase in consumption. As a result, the stock market’s surge was not accompanied by the strength of the underlying economy. Complicating the efforts to bring back growth on track was the policy paralysis stemming from a series of scandals. Prickly coalition partners that opposed the rollback of subsidies to blunt the falling revenue and policies that relied on government handouts to erase poverty rather than creating more jobs were the other obstacles.

The year also flags off the election season. Not the best of time even for the most fiscally conservative finance minister. In such a situation, the temptation is to nurture the traditional constituency. Hence, 30% increase in Plan allocation besides 22% more for agriculture, Rs 10000 crore for food security, and Rs 6000 crore for rural housing. Yet there is no major ramp-up in direct or indirect taxes to balance the spending spree. There could be four reasons. First, as the Economic Survey 2012-13 points out, the worst for the domestic and global economy could be over and any tinkering could have delayed, instead of aiding, the recovery. Second, revision in taxes could have been short-lived as the rates would have to undergo another makeover if the Direct Taxes Code bill is passed in the current session of parliament and consensus emerges among states on the Goods and Services Tax rates. Third, of course, is the prospect that such a move would contribute to inflation, which is at a delicate stage as the economy absorbs the partial rollback of fuel subsidies. Fourth, the increasingly vocal urban middle class could be the reason for the feeble attempt to increase the income or service tax rates and base such as levying a token surcharge of 10% on those whose taxable income is more than Rs 1 crore per annum, 6% more excise duty on mobile phones above Rs 2000, 1% TDS on transfer of property above Rs 50 lakh, 100% customs duty on luxury cars, 30% excise duty on SUVs, and service tax on AC restaurants.

Despite the ballooning expenditure without matching revenue-raising steps, the finance minister is confident of bringing down fiscal deficit to 4.8% in the coming year and maintaining it at 5.2% this year. Besides austerity measures and decline in the fuel subsidy burden that allowed him to keep expenditure at 96% of this year’s budget estimate, the bet seems to be on the record 250 million tonnes of food grain production in 2012-13 to bring down food inflation, the main component of concern in the headline inflation. This could pave the way for softer interest rates and allow industry to borrow cheaply. Going by the budget’s efforts to attract them including cutting STT on sale of equity futures, foreign portfolio investors have been recognized as the growth drivers and so also debt as a better option to meet resources: There will be 10% surcharge on distribution tax on dividends, one of the  attractions of equity investing. Road infrastructure is to get a regulator, tax-free infrastructure bonds will make a comeback, and stock exchanges will have a debt segment, satisfying foreign investors and the small saver. Pension funds can now participate in debt and exchange traded funds. Another crucial source of revenue for the infrastructure sector is insurers. Public sector banks will see Rs 14000-crore capital infusion and along with those in the private sector can act as insurance brokers. LIC will have a presence in towns below population of 10,000 in a belated move to reclaim the space occupied by shady chit funds. By introducting tax sops for home loans up to Rs 25 lakh, reducing STT on redemption of mutual funds and ETFs, and imposing surcharge on DDT for debt funds to blunt their advantage over fixed deposits, the overarching theme of the status quo budget is the small saver and the small enterprise: there will be 10% surcharge on corporate tax for those with profit of more than Rs 10 crore. And if India manages by default to become the second fastest economy in the world after China next year not due to any bold efforts but because of the global sluggishness, it will indeed be a small consolation.

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.