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By C. R. L. Narasimhan
Will the ongoing rally in the stock markets influence the primary market positively? As every investor knows, barring the recent Maruti IPO, the new issues market has not seen any worthwhile activity recently. By many yardsticks — (the number of new equity floatations, the vastly diminished roles of capital market intermediaries) the new issues market has gone into a slumber. Since it is the primary market (and not the secondary market) that plays a key role in capital formation, its moribund state has been a major cause for worry. Any recommendation or suggestion to revive it has been lapped up by policy makers, even if some of those are far fetched. It is also likely that deeper meanings are read into certain market developments. The expectation that a buoyant share market may just pull the primary market out of its rut has always been popular. Although belied on many occasions before, it is gaining popularity at a time the Sensex and other benchmark indices have been moving up in a more sustained fashion than at any time in the recent past. <167,4.3p,1>However, the link between the two sub-sectors of the capital market has never been as straightforward as it is generally presumed. The structural issues connected with the two have been different. The investor profiles of the two are also different. Capital market reform and regulation have impacted differently on the two. Some of the key factors propelling the ongoing surge in share prices such as FII inflows are not immediately relevant to any discussion on reviving the primary market. The latter has had certain unique problems that neither the policy nor the regulation has been able to redress. For instance, the havoc caused by "vanishing companies" has left a deep scar on the investors' psyche. Another problem has been the paucity of quality issuers. It is particularly striking at a time when the avenues open to the small investors have been shrinking dramatically because of certain policy decisions. In that context it is naive to think that the primary market can be "kick-started'' by any development, however significant it may be for some other part of the capital market. The belief that the Maruti IPO will be a harbinger of much better times for the new issues market may be totally misplaced. For now however it is part of orthodoxy: after all a first time public issue from an erstwhile public sector enterprise has ignited investor interest in ways that could not be comprehended before. On its part the Government has latched on to the unprecedented success of Maruti by announcing a few market friendly measures. Last week the Securities and Exchange Board of India notified certain new rules that raise the bar for new issuers. In a different genre but with greater relevance has been the decision to offload large chunks of equities held by the Government in the erstwhile PSEs, which were sold through the strategic sale route earlier. The Maruti issue proved many points: for instance, the success of a particular method of disinvesting Government's stake in public sector enterprises. The Government had already ceded control to Suzuki. The IPO route was adopted as the next step to offload Government equity. If that was a success in terms of price realisation (to the Central Exchequer) and widespread investor appeal, it was also due in no small part to the fact that the shares were being offered for the first time by a well run company, which continues to maintain market dominance in the face of growing competition. Also, Maruti's being an IPO; its shares were being made available in the stock markets for the first time. Institutional investors (led by the Unit Trust of India) who bid aggressively through the book-building route found value in the stock precisely because of that reason. All these have been positive factors specific to Maruti. There is nothing to suggest that a new trend has been set in which the Government and the investors will reap rewards in every other case. The Government's stake in companies such as Balco, CMC and VSNL remains sizable. Almost all these companies are already listed. The Government's holding in them is sizable and it follows that any offloading by the Government will — by adding to the supply — depresse their prices. If an institutional investor wants to buy these shares it can do so without having to wait for the Government to make an offer of sale on its shareholding. In short, the Maruti IPO and the proposed sale of Government stake in these companies are not comparable.
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