Post poll results, the domestic equity bourses have witnessed a dramatic shift in sentiment in the fund flow movements, a vital factor that drives the thriving of equity markets. Fund flows from overseas investors have picked up pace and domestic retail investors have returned to the trading ring after remaining lull for the most part of the last financial year.
With the signs of a bull market momentum returning to the secondary market of late, the key question is whether it would help in the revival of the primary market in India that got virtually dried up with investors? risk appetite shrinking sharply.
During fiscal 2008-09, the IPO business hit the nadir, with only 21 initial public offers (IPOs) hitting the market mobilising capital of Rs 2082.35 crore when compared to Rs 54,510.54 crore raised in 2007-08, almost a drop of over 96%, over the previous year. At the same time, the debt private placement grew.
The fund mobilised through the private placement of debt during 2008-09 stood at Rs 2.07 lakh crore with 1,061 issues as compared to 921 issues raising Rs 1.28 lakh crore during 2007-08.
Though investors would wait a little more to get clear signs of stability and sentiments to flock to the primary market issues, experts say that the need of the hour is to place simplified listing norms and create pools of fund raising avenues. So when the market really picks up, there will be a hassle free environment for the domestic companies to tap the capital market along with diversified investment opportunities for the investors.
Udaybhanu Thakur, associate V-P, SREI Capital Markets Ltd, said, “The immediate measures required is to expedite whatever procedures are required to raise funds by the domestic companies. I think the market regulator is taking pro-active steps in that direction that would bring down the time frame for any public issues”.
So some of the immediate measures the market is expecting from the market regulator Securities and Exchange Board of India (Sebi) in the primary market on the equity side is reducing the time frame for a public issue like IPOs, and rights issue from the current 21 days to 15 days. This would ensure that the issuer doesn’t have to face the risk associated with any sudden movement in the market prices. For raising funds through the QIP, Sebi had already relaxed the price fixing norms from the previous six months average price to two weeks average price.
“So far the regulator has done a reasonably good job in the primary market side by rationalizing the disclosure and listing agreements. But beyond these, this is the good time to create other pools of capital like Real Estate Investment Trust, Real Estate Mutual Funds (REMF) and further regulatory changes in pension schemes by increasing their scope of investment area to infrastructure and other stabilized asset classes”, said Jai Mavani, executive director, KPMG.
The basic argument behind these propositions is that the valuations of various asset classes are currently at the lower side and once the necessary regulations and approval are in place to launch these products, investors could benefit out of the potential upside in these assets in the next two to three years.
Already, there has been indications of disinvestment in the public sector undertaking (PSU) by the new government to meet the growing fiscal deficit. A senior investment banker who did not wanted to be named said, “A couple of good issues from the PSU at an attractive price would definitely bring back investors interest back in to the primary market”. However, on a more cautious note he added, “There is a disturbing trend among the institutional investors to book profit and exit a stock on its listing day. A certain regulatory mechanism has to be thought of where a certain percentage of their subscription or stake should not be allowed to off load on the day of listing to ensure price stability. And moreover, foreign pension funds should be allowed entry in the Indian market that is considered to be long term in nature”.
Along with it, the market experts are stressing the need for Sebi to take a very proactive step in reviving the primary and secondary market for corporate debt issues in India. Already, Sebi has notified the simplified listing agreement for debt securities where by an issuer whose equity is already listed in the stock exchanges is required to provide only incremental disclosures related to the debt security.
This is one of the key recommendations of the high level expert committee on corporate bonds and securitization headed by RH Patil.
However experts say that a lot more have to be done to develop a vibrant corporate bond market in India. The main hurdle in the development of corporate bond market is the lack of liquidity making it less attractive for investors. RH Patil in his report observes that Indian investors in general are new to the debt market although most of the retail investors do prefer fixed income assets like bank deposits, postal savings schemes among others. To entice these investors to the debt market, it would be necessary to assure them of reasonable level of liquidity in the secondary market for debt instruments. So conscious efforts therefore need to be made to create liquidity in the debt instruments by encouraging market makers who would give two way bid and offer quotes with reasonably narrow spreads.
“To bring sufficient volume and liquidity, all those private placements of debt that is being done outside the exchange currently should be brought under an exchange traded mechanism,” said, Prithvi Haldea, MD, Prime Database.
With the government giving greater thrust for investment in the physical infrastructures like roads, highways, shipping, power, ports among others to pump prime the Indian economy where a part of the capital has to come from the private infrastructure developers, there is a greater need to develop a vibrant debt market so that the financing need of the companies are adequately addressed. During the eleventh five year plan investment of $500 billion have been envisaged in India’s physical infrastructure out of which 30% is expected from the private sector.