Dear Mr. Finance Minister...

Updated: Jan 28 2003, 05:30am hrs

The primary capital market has been comatose. Regrettably, it has been denied its due place, now for a long time, and our focus continues to be the secondary market. We seem to have forgotten that the main role of the capital market is to provide capital.

Why has the primary market been in slumber for so long For one, it is still suffering from the after-effect of thousands of vanishing companies in the first half of 90s. Inefficient IPO guidelines, volatile secondary market and continuing malpractices have only added to the woes. The equity investor seems to have gone into a shell. Fairly enough, he recognises and is prepared to struggle with the huge risks inherent in equity; what he now refuses to manage is the risk of fraud.

The year 2002 will rank the worst ever, with only 6 IPOs (out of which 4 were from banks), raising a meagre Rs 1981 crore. Slowdown of economy is only partly responsible for the state of the primary market. The reverse is truer...that it is the lack of capital formation that is causing the slowdown.

There is no dearth of companies wanting to raise capital. According to PRIME, 621 companies, many of which have been waiting for years, want to float IPOs, with a collective issue size of over Rs 30,000 crore. Moreover, there are hundreds of blue-chip companies that continue to remain unlisted and efforts to invite them to list will see positive results.

On the other hand, investors have hardly had any investment options and courtesy increased household savings, the liquidity is on the rise. Looking at the huge response to the IPOs of 2002 and the subsequent gains, the bottomline is... make a reasonable offer to investors and they will respond. It is not fair to characterise the private sector as greedy when it comes to deciding their issue prices. Charity does not come easily, and should not be expected either, from the private sector. Courtesy the market conditions, the P/Es being commanded by most sectors/companies are low, acting as dampers for potential private sector issuers.

The onus for kickstarting the primary market rests substantially on the government and the regulator. There is a need to rationalise several guidelines.

Alongside, there is a need to ensure that the secondary market remains scam-free, and if scams do happen, these are dealt with swiftly and offenders are punished adequately.

I have only two fiscal measures to suggest:

* While action against vanished companies is essential, it may not bring any financial relief to investors. Investors should be allowed to secure deduction of their capital losses in respect of shares of such companies, which are not traded at all. These shares do not find a buyer at any price and in the absence of a transfer or sale transaction, the investor is unable to include his capital losses in the income tax return.

* Tax on dividends in the hands of the receiver should be abolished.

The key, however, lies in non-fiscal measures, some of which are presented below: * Blue-chip PSUs should be divested through offering of over 90 per cent of the holding to retail investors at attractive prices and through the fixed price route. A start should be made with the forthcoming issues from Nalco, BPCL and Maruti.

* Over the past 5 years, a meagre 5 per cent of the total capital was offered to the small investors in public issues. Moreover, only 16 per cent of the total capital was offered through public issues, much lower than the desirable 25 per cent. For one, the "small investors" redefinition should cover applications below Rs 25,000. Second, the minimum public offer should be increased to 25 per cent. For large capital companies, this condition can be waived if the value of shares offered to the small investors is more than Rs 100 crore or if the number of shares offered at Rs. 10 face value is above 1 million. Moreover, in bookbuilding IPOs, the allocation for small investors should be increased from 25 to 45 per cent.

* For companies wishing to list at both the markets, the requirement should be that of a compulsory domestic listing, followed by an overseas listing.

* First, we allowed the export of the Indian capital market (through the GDR/ ADR) route. Now, we are allowing export of Indian capital (through direct as well as mutual fund investments into foreign capital markets). This, in my view, is a step that will adversely affect the growth of the Indian economy as well as of the Indian capital market. Investments in foreign capital markets should be permitted only after our own domestic market has achieved a sizeable depth and width.

* One of my major recommendations, as in the past, continues to be action against those of the 3,900 companies of the early 90s that vanished or committed other frauds. Because of a poor definition, only 229 such companies have been identified and even in terms of action, nothing significant has materialised. Severe punishment to offenders will give him the assurance of an effectively regulated market in future. Such punishment will also act as a deterrent to potential offenders.

* The proposed Central Listing Authority should be set up expeditiously in order to bring a uniform standard to the entire listing process. This authority should also be entrusted with the task of post-issue monitoring. It is also imperative to re-look at the entire structure of OTCEI in order to facilitate capital raising by SMEs who abound in India, and typically are capital-starved.
Yours Truly,

Prithvi Haldea

(Prithvi Haldea is the Managing Director of