The primary market eclipse

By C. R. L. Narasimhan

The new issue market has been in the doldrums for so long that it may disappear for ever from ordinary investors' consciousness. That is a dangerous development obviously having plenty of negative implications for savings and capital formation and, of course, for the capital market itself.

The linkages between the primary (new issue) market and the secondary market are sometimes exaggerated but this time the problems of the secondary market are adding to the woes of the primary market.

The secondary market on which so much hopes have been pinned by the present Government has been a big let down. Instead of boosting sentiment as it was expected to in the wake of a widely applauded budget, the market crashed.

A scam was identified soon and evidently another set of ``scam prevention measures'' will have to be put in place. A Joint Parliamentary Committee is at it. The regulators are on their toes, announcing one liberalisation measure after another but so far to no avail.

A fortnight ago it was a relaxation in the investment limits for foreign institutional investors (FIIs).That was followed by an announcement from the Reserve Bank of India permitting bank finance to brokers for margin trading.

There is talk of hiking the creeping limits within which existing company promoters can shore up their stake. Individually, these measures may be good for the capital market in the long run but at this juncture they have not done anything to improve sentiment. The secondary market has been comprehensively overwhelmed first by the threat of war and thereafter by the actual war in Afghanisthan.

Looking at the near term horizon, there is little to cheer it up. Which means that the new issues market will not get even the faintest of encouragement from the secondary market.

Despondency is complete

How despondent is the primary market? Mr. Prithvi Haldea whose Prime Database has been tracking the primary market says that the current phase is the worst ever in its recent history. Consider the following: In the first six months of the current fiscal, only two initial public offerings (IPOs) were made to raise Rs.6 crores and even they were more for getting a stock exchange listing than for mobilising capital.

A comparison with the same period last year, which itself was considered sluggish, is revealing. At that time, there were 83 IPOs for Rs.1,807 crores. Thirtyfive companies that had secured Securities and Exchange Board of India approvals to launch their issues let them lapse rather than venture into an unpredictable territory.

According to Prime, there are now 43 companies holding SEBI approvals while another three have filed their applications with the SEBI. If all of them do not backoff, they should be raising an aggregate Rs.1,815 crores in the remaining months of the fiscal year. But the big question is whether they will venture.

Among the companies that are ready with the proposals but still undecided are: Punjab National Bank (Rs.320 crores), Mahindra British Telecom (Rs.100 crores), Future Software (Rs.200 crores) and Godrej Sara Lee (Rs.200 crores).

On the horizon,(though at the beginning stage only) are the mega issues of Tata Consultancy Services (about Rs.1,000 crores) and BhartiTeleventures (Rs. 950 crores).

Intermediaries worst hit

The present crisis in the primary market puts paid to hopes and aspirations of wide sections. The small investors are naturally disappointed. For many of them, the IPO market was the way to acquire valuable scrips. The public sector disinvestment programme had earlier depended on offloading shares through public issues. Now that the accent has shifted to strategic sale as a methodology, there is considerably less reliance on the new issues route.

The bigger damage is on capital formation .With few alternatives for equity financing through the IPO route, there is no doubt at all that industrial activity is also suffering. Capital market intermediaries - the brokers, underwriters, registrars, financial advertising agencies and share registrars - have all taken big hits.

Many of them have been driven to oblivion. There is no point even in wishing for the revival of the old style new issue market.

Is there a solution? Ironic though it is most of the well intentioned regulatory moves concerning the stock market have had the effect of marginalising the small investors.

Take for instance book-building. Under this method the bigger player gets to fix the price of a new issue. Its justification is better price discovery.

In practice this method, though theoretically available to any investor big or small, militates against the latter.

In a real sense technology absorption by the capital market has in the first instance side-stepped the smaller of the investors. Regulation of course is a key ingredient for protecting investors and in the current context of reviving their confidence. The SEBI which in its present phase emphasised investor education more than any other reform still has plenty more to do.

Investors' disenchantment is another key reason for the collapse of the primary market. There have been regulatory failures. Offenders, notably the promoters of the vanishing companies have not been brought to book and maybe will never be.

However, there is no case at all in not having stringent regulation and equally important implementing them.

There is muted expectation from the Investor Education and Protection Fund (IEPF) that was set up two years ago and only now getting operationalised. The corpus of the fund is made up of unclaimed dividends, interest, fixed deposits and debentures. One has to wait a while and see how the IEPF operates towards mitigating investor grievances.

In developed markets, class action legal suits to counter market misdemeanour are common. In India, the legal system as a redress mechanism is out of bounds for most investors.

Investor associations will have a greater role in the new order but to build up the new issue market to any decent level it is imperative to tackle investors' disillusionment on a priority basis.

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Section  : Business
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