Reviving the Indian primary market

Written by Prithvi Haldea | Updated: Jun 4 2014, 10:19am hrs
The election of a stable, development-focused government has raised hopes across all quarters including with the issuers as well as investors. Courtesy economic slowdown, coupled with paralysis of policy and implementation, the primary capital market has been comatose. The last fiscal witnessed just one main-board IPO, raising a modest R919 crore, the lowest ever. What has been very worrisome is that because of poor sentiments, public issues worth over R60,000 crore, which had obtained Sebi approval, did not dare enter the market.

With expectancy of economy regaining its rightful course, the secondary market has already shown buoyancy. Typically, if both sustain, the primary market will get the kick-start, and can rise to new highs. The new government must take the lead.

Disinvestment: The new NDA government should repeat the performance of the previous one in this regard. PSU issues can be the instrument for reviving the sentiments. Disinvestments had gone off-track in the recent years. To bring down the fiscal deficit, the objectives of disinvestmentsenlarging the capital market to bring in more household savings into equities, reducing volatility caused by low float, bringing about more transparency and better corporate governance in PSUs subsequent to listing and bringing in the much-needed money to the exchequerwere given the short shrift. Ingenious means were devised last year, including buybacks, special dividends, cross-holdings, sale to state undertakings et al. The only good news was a partial sale of the stake held by SUUTI in Axis Bank.

PSU IPOs, too, have been relegated completely to the backburner. The last such IPO was the

R125 crore one from NBCC, in March 2012. Since then, there have been many reports on the impending IPOs of Rashtriya Ispat Nigam and Hindustan Aeronautics Limited, among others, but little has actually materialised.

The new government should bring its stake down to 51% in all listed PSUs and PSBs, and in the interim, mandate all of them to comply with the Sebi guideline of minimum 25% public shareholding, as is the norm for the private sector. The government should also immediately sell off its stake in ITC, L&T and Axis Bank; there is simply no justification for this more than decade-old holding to continue, especially in a non-strategic cigarette company. Stake sale in Hindustan Zinc and Balco, which can collectively raise over R22,000 crore, should be prioritised. These measures shall bring the much-needed money for the exchequer. In fact, it should be mandated that the entire proceeds from disinvestments be exclusively used for building infrastructure.

For enlarging the capital market, divestment should be targeted mainly at small investors. A policy targeting just retail investors will have a major positive impact. It will provide both, depth and width, to the capital market. The household savings of millions of retail investors brought to the capital market shall help an equity cult to grow. It will also address the grave scarcity of good listed companies which causes excessive speculation and volatility. FIIs do not bring any strategic value to these undertakings as they are pure financial investors.

In the name of transparency, the intent to sell specific shares of listed companies is announced much in advance, leading to the market beating down the prices of such stocks. The government ends up losing money as it is forced to sell the shares at much lower prices. In the recent case of Power Grid, the loss to the government was R574 crore. In future, the name of the PSU and its offer price should be announced with only two days notice and its shares should be put in suspension mode till the sale.

For listed PSUs, only retail offerings should be made at a significant discount to the market price. For unlisted PSUs, 25% of the offer should be offered to institutional investors for price discovery and the remaining 75% to retail at high discount to the discovered price. Central PSU ETF, that was launched recently, may also be promoted.

Discounts would mean public wealth being shared with the public, and this shall also be politically expedient. It is intriguing why the last government was not keen on giving discounts to anonymous small investors but gave ONGC and Oil India a hefty 10% discount to buy 10% of its stake in Indian Oil. Significantly, such discounted offerings to retail would be criticism-free as allotments shall be made to anonymous, and not selected, investors.

There should be no concerns on the depth of the retail. Vested interests representing FIIs often create fear about the lack of depth of the domestic retail investors. This is a bogey. Just two examples would suffice: 46.23 lakh retail investors put in R39,919 crore in the IPO of Reliance Power and 15.61 lakh retail investors put in R10,232 crore in the IPO of Coal India. These were laymen investors, who put in applications of less than R1 lakh each sans the multiple applications, following regulations strictly.

Strategic sales: There should also be a plan for government to exit from loss-making PSUs as well as such businesses where the government need no longer be involved. A transparent method of open bidding should be followed. To protect the interests of the employees of such enterprises, the government should make it a pre-condition that no retrenchment shall take place for, say, 3 years. VRS may also be offered. In fact, some part of the proceeds from such sales could be earmarked for the employees future.

Better governance: On a long-term basis, to reduce political interference and to be able to plan and execute divestment effectively as also improve the governance structures of PSUs, all shareholdings of the government should be transferred to a professionally-managed holding company.

Tax scheme: The Rajiv Gandhi Equity Savings Scheme, despite being launched just two years ago, should be scrapped as it is poorly structured with a focus on trading; it is available only on listed stocks instead of on capital formation and is valid only for brand new investors, apart from being very complicated. A new scheme providing tax benefits on investments in IPOs, PSU divestment and mutual funds, should be launched. One such focused on young retail investors should also be considered.

The tax arbitrage on money market instruments should be done away with, so that the mutual funds concentrate only on small investors, their raison detre. Investors should also be allowed to get allotments in the physical mode. They would be saved from the hassles of opening demat accounts and paying custody charges. Only for selling, demat account should be mandated.

Foreign listings: The government now allows unlisted Indian companies to list abroad without first getting listed on a domestic exchange. Given the scarcity of good companies on our bourses, this export of our capital market would be detrimental and prevent domestic investors from participating. This decision should be put in abeyance.

Pension funds in equity: Worldwide, pension funds provide huge depth to capital markets. In India, EPFO has traditionally been anti-equity terming it very risky, without taking a long-term view. The EPFO should be asked to invest at least 5% of existing corpus and 15% of new accretions in equities.

Corporate bonds: For a variety of reasons, despite pronouncements, the bonds market has not matured in India. An empowered task force should be created to identify all handicaps and make suggestions to be implemented forthwith.

Single KYC: Multiple KYCs are not only cumbersome and costly, but also become an irritant. It is time that a single KYDC is introduced, valid for the entire financial sector.

Empowerment of bank branch: Since all banks are now computerised, it should be possible to mandate that all bank branches across the country handle transactions of all financial products. This would not only be of great comfort to the common man but would also save on costs and increase outreach.

Investor education: A very major reason for lack of growth of our capital market has been poor investor education. The need now is of a national financial literacy programme.

Sebi Act: The piece of legislation giving Sebi more teeth could not be passed in the Parliament and the government instead issued an Ordinance. To prevent public money being looted by ponzi schemes and to tackle insider trading and such ills, the Sebi Ordinance must be made an Act.

As far as the role of Sebi in the revival of the primary market is concerned, it should be recognised that the regulator can do little. That is more a function of the economy and the secondary market. What Sebi can do and has been continuously engaged in is improving disclosures and transparency as also processes. Sebi is already working on a plan to bring in compulsory electronic IPOs, which not only saves the cost of printing millions of physical application forms, but also saves processing time and costs. A move to make Application Supported by Blocked Account compulsory is also awaited. Some more rationale is being considered in terms of dilution for minimum public shareholding.

The author is chairman, PRIME Database