The Hindu Business Line : Primary capital: Mega issues, macro concerns

THE capital market surpassed all the past peaks in resource mobilisation in 2004-05 with an achievement of Rs 28,000 crore, a growth of 21.4 per cent over 2003-04.

This performance was accompanied by the excellent record of private companies raising Rs 17,200 crore against Rs 11,100crore by the government sector companies.

In 2003-04, private sector companies mobilised only 15.5 per cent of the total capital raised from the market. After 1995-96, 2004-05 is the only year when corporates mobilised significant amounts; a decade back, they had raised Rs 16,600 crore.

Many factors may have contributed to this trend, but the important ones include low interest rates on savings instruments, recovery in investor confidence, robust growth of GDP at 7 per cent, copious FII flows due to India's strong external position and robust capital gains in the capital market, efficient exchange rate management, and good liquidity in the economy.

The other striking change in the capital market is the arrival of of mega issues and exit of small companies, as reflected in the increase in the average size of issues, which worked out to Rs 470 crore per issue in 2004-05 compared to Rs 11.7 crore in 1995-96.

This is also supported by the large number of issues (1,725) in 1995-96 for only Rs 28,800 crore compared to only 60 issues for Rs 20,800 crore in 2004-05.

Twenty-six mega issues were made for Rs 27,000 crore and each of these on an average amounted to Rs 1,081 crore. It is apparent from the data that small companies raised relatively small amounts from the market probably due to high transaction cost, high listing fees and stringent disclosure norms set by the Securities and Exchange Board of India to protect investors.

So SEBI must continue with its good work to ensure there is no loss of investment, but robust capital formation, leading to higher production, economic growth and creation of employment.

Over the previous five-year period (2000-01 to 2004-05), IPOs have begun playing a major role in resource mobilisation, especially with the entry of government companies with mega offers. While listed public companies raised 40 per cent of the total capital mopped up, government companies took away 60 per cent.

The irony is that much of the funds/capital raised by the government companies may not result in capital formation. Banks and financial institutions also accounted for large fund raising, but this also may not promote capital formation directly.

Banks raise large funds through equity shares to augment their capital to meet capital adequacy requirements. Equity shares, which showed a declining preference among investors during 1997/98-2002/03 due to poor quality of issues, rapid decline in valuation of companies, lower wealth creation for investors and erosion in confidence, particularly in 1994-95 and 1995-96, bounced back in 2002-03; they accounted for 81 per cent of the capital raised in 2003-04, and bonds about 19 per cent. In 2004-05, the share of equity capital further surged to 86 per cent against about 14 per cent mobilised by bond issues.

An analysis of the break-up of equity between equity at par and that at premium, shows that the latter's proportion has been rising. The share of equity raised at premium went up from 76.6 per cent in 2000-01 to 99.8 per cent in 2004-05.

This shows remarkable comeback of equity capital and preference of investors for risk-taking, an evidence of the high expectation among investors for safe, fair and honest capital market. Academicians, however, have a diametrically opposite view.

Equity issues, they say, are overpriced by "qualified institutional buyers", foreign institutional investors and high net worth investors in collusion with the issuers. It may not be entirely true but over-pricing of equity needs to be looked into by the Government and the regulator. The process of price discovery should be examined so that small investors can be protected. There is no information on the reasons and factors that are considered before deciding to charge the premium on equity.

However, it must be remembered that equity price and the premium are not fixed based on long-term and real market factors; that is why the price of equity shares declines after listing.

This demoralises the investors, aggravated by a selling spree by the retail investors. Such events happen primarily due to the asymmetry of information in the market.

Thus, the information efficiency of the capital market needs quick improvement.

SEBI will have to evolve a corporate governance culture which should be implemented not only in listed companies but also by other capital market intermediaries and players too.

Effective implementation of corporate governance practices in the latter has been a long-standing concern of regulators all over the world. In India too, despite sincere and serious efforts by the authorities, weak implementation of corporate governance is quite apparent.

The responsibility lies with every agent in the capital market and not just the regulator. The corporate governance implementation at all levels should reflect the national and moral character of India Inc.

(The author is former Economic Advisor to SEBI.)

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