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Its the timing of the governments decision,to make it mandatory for all listed companies to have a minimum float of...

Written by Shobhana Subramanian

June 8, 2010 10:02 PM IST

4 min read

Its the timing of the governments decision,to make it mandatory for all listed companies to have a minimum float of 25,thats surprising. Its hard to understand why the government wants to flood the market with paper right now8212;13 billion has to be raised in the next twelve months since companies have to increase their float by 5 every year while the total value of paper to be offloaded is about 32 billion. Its as though there arent enough companies waiting to mop up money to fund their capacity expansion plans.

India needs about 50-60 billion of capital annually to fund its growth but instead of making sure that money is picked up by those who need it,the governments forcing companies who may not want cash to raise it immediately. Talk of a misallocation of resources! To begin with,the government itself wants to pick up Rs 40,000 crore through divestments this year which isnt a small number even if its not intimidating. If this target is to be achieced,it needs to keep the markets in good humour because a positive trend in the secondary market is necessary if investors are to be tempted to pick up equity in the primary market. FIIs invested about 17 billion in 2009 and the market was expecting a repeat performance this year,given that Indias fundamentals are strong. This was to have been supported by about 15 billion from domestic institutions mainly life insurers.

So far this year,FIIs have bought about 4.74 billion and while theres nothing to suggest that the buying wont be back-loaded as it was last year,with the financial turmoil in the Eurozone only increasing,its not hard to see money moving out. Even if too much doesnt flow out,inflows may be subdued. FIIs remain the biggest investors in the Indian market today and if theyre taking money off the table theyve pulled out just under 2 billion in May which is the highest single monthly outflow since September 2008the government needs to read into it. Its true that India is an attractive investment destination,but once fund managers turn risk averse they wont think twice about pulling out,kno matter how good the opportunity. Also,5 of a companys equity is not small and if a company has to do it for two or three years consecutively the overhang on the stocks could hurt because investors would know that theres more to come.

The current market price of NMDC,at Rs 262.80,is still below its issue price of Rs 300 and on Monday the stock lost 4. Even if the institutions,who understand the markets,grab the opportunity and pick up large chunks,at attractive prices,the retail investor will stay away. Indeed,the small investor has been away from the markets since the meltdown in 2008. The upmove,which gained momentum when the UPA government was elected to power in May 2009,was so sharp that almost everyone missed it. The retail investor certainly did. And by the time the Sensex had rallied back to 18,000 levels,he was too scared. The volatility of the past couple of months has made investors more skittish than ever and its unbelievable that the government has chosen to amend the listing rules right now.

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FIIs flood