Good issues survive

Indian primary capital market appears to have slipped into a mood of deep despondency. Somehow market has not been in a position to bring t...

Indian primary capital market appears to have slipped into a mood of deep despondency. Somehow market has not been in a position to bring together the savers and users of capital on a regular basis.

Thus, the market which had witnessed massive monthly mobilisations as high as Rs 5000 crore from scores of issues in 1994, managed to mobilise a measley Rs 1 crore from one issue in September 1997. This was followed by ICICI Bank and Corporation Bank issues getting oversubscribed by over 5 times. There appears to be some method in this madness. All the successful issues were carrying higher proportion for small investors. As a conscious policy a relatively smaller portion was reserved for large investors like mutual funds, financial institutions, FIIs etc. A lot of publicity was given to this aspect through corporate briefings, press reports and executive interviews.

Similarly all the successful issues were correctly priced. The offer price did leave something on the table for the investor. Most of the issues were quoted at the PE multiple substantially bellow segment and market PE multiple.It is thus evident that revival of primary market depends to a great extent on the availability of large number of reasonably priced issues from strong promoters and availability of an appropriate exit route. The revival can be really hastened, if the regulatory authority provides perceived protection to the investors against frauds by hauling up and meting out exemplary punishment to a few erring issues and their intermediaries. This will go a long way in convincing the investors that their future investments will be exposed only to fair market risks and not to frauds.In order to achieve a faster revival, however, a trigger has to be deployed. A strong incentive has to be provided to induce the investors back to the capital market. A quick look at the MNC equity dilution in the past can provide us some ideas as to the kickstart mechanism that can be used for reviving the market. MNC dilution was gobbled up by eager investors mainly because of the attractive valuations, bright prospects and strong managements. For the one off type of kickstart exercise, MNCs can be replaced by Indian Navratnas and/or a few of the Indian blue chip companies.

About 2 to 5 per cent of equity of these companies may be offered exclusively to the public at 20 to 30 per cent discount to their current market prices.The allotment of shares may be made in the demat form. For this purpose a few of the branches of banks in 10 important cities may be required to provide the facility for opening benificiary accounts of the investors willing to subscribe to the proposed issues. This will help quick revival of the primary market and give shot in the arm to the dematerialisation process. In order to achieve the best results the proposed equity dilution/issue programme has to be properly spaced over a period of revival.A suitable compensation package in the form of say, excise duty/sales tax holidays can be contemplated which may be considered as the states contribution to the market revival programme. Once a breakthrough is achieved, the regulator will have to closely monitor the market operations to detect irregularities, if any, in time and deal with them firmly to retain the investor confidence in the system.The author is the managing director of Anagram Wellington Asset Management Company.