Policy confusion over market must go

By Nantoo Banerjee

The government and the Securities and Exchange Board of India (SEBI) appear to be totally confused over choosing right policies to grow the stock market and encourage an equity culture among Indian investors who traditionally prefer gold, real estates, government papers, PSU banks, state financial institutions and postal deposits to company stocks to channelise their precious savings. The policy initiatives undertaken by the union finance ministry and the SEBI to grow the stock market, private equity fund, mutual funds and bond market, however, seem to be often in conflict with each other.

On the one hand, both the SEBI and the union finance ministry want more good companies—public or private sector – enter the equity market with initial or repeat public offerings. They want liquid stocks of a company in the market should represent at least 25 per cent of its total number of subscribed equity shares as against present five to 10 per cent. Larger availability of liquid stocks will make the market less volatile. The movement of key stock indices will show a more scientific or realistic trend. Market manipulation through block sale and purchase of lots by promoters will not be easy. The price-to-earnings ratio of a scrip is expected to be more reasonable. Such an environment will attract both old and new investors to the stock market.

On the other, the unrestricted share buyback facility is providing opportunity to joint stock companies to not only manipulate the volume of their tradable stocks in the market, but also lift their entire floating stocks, if they want, to finally delist with the stock exchange. Unlike in China where most large foreign companies are required to operate as joint stock companies with local participation, few good well profit making overseas firms in India, including those operating in soft technology areas and competing with local outfits, are under any regulatory obligation to become listed public companies. As a result, there is little change in the composition of Sensex, the 30-share sensitive index of the Bombay stock exchange, or of Nifty, the 50-share national stock exchange index, over the years. The number of generally sought-after scrips has remained in the range 250-300 out of the total daily quoted stocks of less than 4,000 over the last 10 years. Where are the new good post-reform public companies and their stocks in the market? The economic reform and the incorporation of large number of foreign companies in India hardly influenced the demography of stock exchange listings.

In some sectors, which restrict entry-level foreign equity control between 51 and 74 per cent, foreign investors are asked to set up joint venture projects with local private partners in preference to Indian public. This has bred corruption as witnessed in the telecom sector and prevented foreign insurance companies from becoming public firms and being more transparent in their business deals, including investment portfolios. Much of the 2G spectrum allocation scandal is on account of the Indian licenseholders, who within no time of securing the allocation on the first-come-first-served basis partly resold their operating license to foreign partners at several times higher value than what they paid to the government for the air-waves. In the process, existing Indian licenseholders made a killing while the government lost a huge revenue earning potential.

The government is now thinking of auctioning the next round of spectrum directly to foreign companies who may later bring in local partners to comply with the overseas entry restrictions in the telecom sector. The question is: why a local partner, why not the local public? Instead of having a local partner, foreign investors should be asked to sell the required stake to the public through IPO within a stipulated period. This will help grow the market and make operations of these newly listed companies more transparent as they will be required to comply with the disclosure norms in their balance sheets. The massive political donations in India by Vedanta Resources, a London stock exchange (LSE) listed company having operations principally in India, last year, became public knowledge only through its balance sheet disclosure to comply with the strict LSE disclosure norms. A private limited company is under no such obligation to disclose its financial deals in public.

While a fresh PSU disinvestment will no doubt grow the market, apart from helping the government raise the targeted Rs. 30,000 crore from its stake sale during the current financial year, the provision of unrestricted buy-back of shares by promoters and existing delisting facility carry a potential threat to shrink or manipulate the market by companies ahead of PSU stock sale. Lately, share buybacks by companies have picked up pace with as many as 17 listed firms, led by Reliance Industries (RIL), made public their buyback intentions for a collective amount of nearly Rs. 12,000 crore. It would be interesting to watch what these companies do in the latter part of the year when the government enters the market to sell bagfuls of PSU shares.

Under the companies act, private companies beyond a certain annual turnover are branded deemed public companies.(IPA Service)

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