INDIA NEEDS DEEPER, TRANSPARENT STOCK MARKETS TO ATTRACT CAPITAL

Operator-driven bourses won’t carry too far

Sharad Mistry

A little over two months ahead of Union Budget 2002-03, domestic bourses have once again turned vibrant. Players have been occasionally citing that institutional investors are now bullish on India. The fact, however, is that institutional investors, including foreign moneybags, know the reality better and, therefore, are choosing to stay away from investing as clouds of uncertainty gather over India’s economic horizon.

“We are really worried of the type of circular trading that is currently going on”, says a fund manager at a state-owned institution expected to invest a part of the money that it receives as fees from the services it offers. “Because of the ongoing problems facing the country and the global economy, neither domestic nor foreign institutional investors (FIIs) are currently active in the market where baseless optimism is luring investors. Entering the market at the current stage will prove to be riskier than one bargains for”, he adds.

It was none other than finance minister Yashwant Sinha who, on December 2, for the first time admitted at the India Economic Summit organised by the Confederation of Indian Industry in New Delhi that: “India is facing a serious financial crisis”.

Unmindful of this fact, or precisely because of the state of the economy, the powers-that-be have let operators and speculators on the bourses turn investment sentiments and make the climate attractive. Little wonder, then, that with blessings from the right quarters, operators have once again taken the reins in their hands even as the moneybags prefer to stay away. It is because of this that a section in the bourses has entered the vortex of circular trading and slipped into the hands of the speculator-operator duo. In addition, former bull operator, Ketan Parekh, marketmen say, is operative through his friends (a la former bull operator Harshad Mehta), as is reflected in the galloping prices of K-10 stocks. He is luring a cross-section of investors to the riskier, if not dangerous, game — that of translucent circular trading, say marketmen.

Is anyone worried? Hardly, for it is common knowledge among all concerned in the stock markets that, as in the past, the current boomlet (a small boom) on the bourses may have the blessings of both the finance ministry and the government, both of whom desperately need anything but clouds of depression affecting the planned divestment programme expected to raise over Rs 12,000 crore. Without a vibrant market, this will not be possible.

So what if the market is extremely volatile and there is no strong fundamental reason that warrants a ‘smart’ rally on the bourses? It’s high time investors returned to the stock markets with their savings kitty, they would say. The savings-to-GDP ratio is said to be over 23 per cent, among the highest in the world. After the stock price crash this year, investors have stayed away for far too long. And, in the absence of any other viable investment avenues, stock markets should be their best bet.

What is more, market circles are abuzz with rumours about KP having met members of the Joint Parliamentary Committee (JPC) probing the stock market price crash in March this year and even some top government officials regarding allowing him to operate in the stock market, if for nothing else then to allow him return to his dues of over Rs 300 crore to the Bank of India.

Whether or not KP has met JPC members or other officials, one thing is clear — if people like him are allowed to operate in the bourses at this stage, aggressive as they are with their money power, they may be able to push aside the gloomy clouds and create the necessary atmosphere, at least for the divestments that are lined up. But whether the same clouds will return with a vengeance remains to be seen.

Also, too much is at stake with the placid stock market and pessimism gripping investor psyche. For one, the fate of the high-profile initial public offerings (IPO), like that of Bharti TeleVentures, too, hinges on the strength of the capital market, perceived or otherwise. And, along with this, the fate of many other IPOs waiting for the much-awaited turn in investor sentiment.

On their part, Sebi chairman D R Mehta and his officers are finding themselves entangled in replying to questions raised by the JPC. The JPC has twice sought an extension since it was set up in April this year. Inevitably, Sebi has asked stock exchanges, the self-regulatory organisations (SROs), to be vigilant. Accordingly, the SROs have revised the special margins on some 60-odd volatile scrips.

Meanwhile, top market sources say that the operators’ game to create a positive atmosphere before the announcement of the Budget in February is an old game on Indian bourses. This time, too, it is game-time for a select band of players.

Speculators and operators take charge of the stock market at least five months ahead of the announcement of the next year’s Budget proposals on February 28. Amidst the allround hope of better days ahead, is the underlying hope that the foreign moneybags will continue to pump in more money next year as FII investment allocation is usually decided in January-February each year, after the Christmas holidays. Thus, in each of the past few years, expectations of higher inflow from FIIs to the Indian stock market has been one of the key factors to drive marketmen and investors.

However, for various reasons, the required financial mite of domestic institutional investors, like Unit Trust of India, LIC and others, to support such expectations, has depleted. Therefore the over-dependence on foreign funds, not just in the domestic stock market but also in the economy as a whole. In the absence of dependence on foreign funds, this operator-driven activity on bourses will not be much of a concern, as has been seen in the past.

But the need for change in such activity on the bourses is overdue. More so because, one, it does not help deepen the stock market and two, with recurrent bouts of baseless optimism and resultant pessimism the operator-driven circular trading will lead to evaporating investor money, which will land into the hands of a select band of operators who prefer to park such funds outside the country only to re-route it in times such as the present. As a result, serious investors, including institutional ones, will prefer to keep away.

Above all, circular trading may temporarily change the investment climate, but it will hardly generate any wealth or help route the money to the productive sectors. In contrast, developed stock markets, unlike their Indian counter-part, help direct funds to productive, promising sectors and generate wealth within the economy. In the process, they get mature and deep enough to withstand occasional shocks (like September 11). Therefore, there are no recurring bouts of upswing and downswing, as is common on Indian bourses.

This small, shallow, opaque state of affairs in the Indian bourses is a major stumbling block for overseas cash-flush investors, for example, venture capital investors. And this situation is not restricted to India, but the whole of Asia. The deeper the capital markets, the more foreign funds will be available. In turn, a part of this capital will be available not just to investors, but also to sectors that need it most.

Reflecting the concern of venture capital investment business, the US-based venture capital major, Warburg Pincus’ managing director W Bowman Cutter said: “Private equity business in Asia is an extremely risky and difficult proposition in Asia. This is especially because of the small and shallow equity market. If this deepens and matures the private equity capital market too can thrive and grow”.

Addressing participants at a two-day seminar in Mumbai on ‘Indian Private Equity — Investing in the New Environment”, Mr Cutter said: “Private equity table is not yet set in Asia, because of the Asian paradox — the region has high savings rate but still lacks investment capital. Private capital can play a marginal role in overall growth of the region, but they are not inevitable”.

According to Mr Cutter, Asia minus Japan would require annually around $500 billion for growth. It is not that these funds are not available, but the Asian paradox is a big concern. And one of the key ingredients for a vibrant and viable private equity game is missing — the key ingredient is deep and transparent capital market”.

No wonder, then, that the Indian capital market is just 2 per cent that of the US, and the Asian market is just 1 per cent of the US’? For overall economic growth, private capital is essential and, as Mr Cutter says, it can’t always be foreign capital.

Lastly, Mr Cutter had a veiled message for Indian policy-makers. “As everywhere, governments and policy makers don’t understand capital markets, and so also in Asia. For the region’s overall growth, Asian private equity market cannot be a simple appendage of USA.”

A difference, to begin with, can be made by making the capital markets, deep and transparent to attract capital — domestic and foreign, portfolio and venture — and channelise the same to promising sectors.