In the markets, cronyism doesn’t work

The rhetoric about crony capitalism and how the Ambanis and Adanis call the shots in the corridors of power has dominated the airwaves in the recent leg of Lok Sabha polls. But irrespective of whether they are able to make the government of the day dance to their tunes, the Ambanis and Adanis haven’t been able to call the shots in the stock market, that ultimate arbiter of wealth.

Take Mukesh Ambani’s Reliance Industries (RIL), which is at the eye of the ‘crony capitalism’ controversy. A decade ago, it was impossible to imagine a bull market without the RIL stock leading the charge. But this bull market has been comfortably underway for the last year or so, without any support from RIL.

Frustrated investors in the company will tell you what a chronic underperformer the index heavyweight has been in recent times, for all the power (alleged to be) wielded by this business family.

Even as the company has quibbled, confronted and engaged in a war of words with the Centre on the pricing of the gas trickling out of KG-D6, the stock market has been thoroughly disinterested. Thus, while the Sensex zoomed 112 per cent over the last five years, the RIL stock is up a meagre 8 per cent.

In fact, so marked has been the stock’s sluggishness on the bourses that many fund managers have propped up their portfolio returns simply by under-owning the stock.

If Reliance Industries has been unable to impress stock market investors with its forays into new businesses, stocks from the ADAG group have been actively battered by the bears.

Even as the Sensex has doubled since April 2009, the Reliance Communications stock has plummeted by 42 per cent, Reliance Infrastructure is down by 22 per cent and Reliance Power has lost 44 per cent.

In fact, such has been the investors’ disenchantment with this group of stocks that the group’s finance arm — Reliance Capital, despite inking some really good deals with the Japanese Nippon group — now trades 25 per cent below its levels five years ago.

While prospects in infrastructure, power and telecom have taken a beating due to policy flip-flops and fuel hitches, the group’s aggressive debt-funded expansion has aggravated its problems. Institutional investors have whittled down their holdings in these stocks in the last five years, with an eye to avoiding leverage.

This is bound to have had a telling effect on the personal wealth of the promoter too. The Sensex has already surpassed its 2007 peaks, but the combined market cap of the ADAG stocks has shrunk by half between 2007 and now.

Shrinking market value has also weakened the Ambani groups’ stranglehold on the benchmark indices. In early 2009, the two Reliance factions together had six businesses represented in the Nifty — Reliance Industries, Reliance Infrastructure, Reliance Power, Reliance Petroleum, Reliance Capital and Reliance Communications. Together, they made up as much as a 20 per cent weight on the index. But today that count is down to one. Only Reliance Industries remains in the Nifty and commands a weight of under 7 per cent.

This loss of clout in the index is not due to any deliberate action by the exchanges. With both the Sensex and Nifty adopting free-float market capitalisation as the basis for selecting stocks, stocks that are chronic laggards automatically get weeded out and are replaced by ones that go with the momentum.

Therefore, for the Ambani stocks to regain their lost glory on the stock market, what is needed is stock price performance and the fundamentals to drive it.

No amount of subtle influence on policymaking can help their cause, if it doesn’t translate into profits on the ground.

Despite the Gujarat connection and the now-famous land deals, the Adani group too has been similarly unable to influence its stock price performance. Despite the recent surge in Adani group stocks, Adani Power trades 53 per cent below its market price five years ago. The flagship Adani Enterprises, despite its recent mad run, has been a market underperformer.

Adani Ports alone, with a 150 per cent gain over five years has trounced the market; it is not a coincidence that this is the most profitable firm in the group.

There are very logical explanations for why Indian stock markets can no longer be influenced by a coterie of influential businessmen, even if they wished to do it. For one, there’s the fact that it is foreign institutional investors and not retail investors, who today dominate stock trading.

In the 1990s, when FIIs had not yet made their Indian debut, retail investors made up the bulk of daily traders and the only institutional investors any market operators had to contend with were UTI and LIC. In that milieu, it was quite simple for market operators to collaborate with promoters to corner a stock, reel in retail investors and sustain sky-high valuations for a stock.

But such operator-driven collusion has become almost impossible (at least in the large and liquid names) with the gush of FII money into Indian stocks. With hedge funds, arbitrageurs, high frequency traders and a number of other savvy and tech-enabled punters constantly on the look-out for pricing anomalies, today it is difficult for an unrealistically priced stock to hold on for any length of time.

The last five years have seen FIIs tighten their stranglehold on the markets, thus edging out other operators. At last count they owned over 30 per cent of all outstanding shares in the Indian market, while retail investors owned less than a third of this.

Two, there has been a quantum improvement in the efficacy of surveillance mechanisms at the exchanges. Thanks to technology, the bourses can today track down unusual stock price action before, during and after an event, down to the last tick. Bidding up a stock on the basis of rumours for months at a time, is thus nearly impossible in today’s market.

Three, the gullible retail investor of the yore too has turned quite hard-headed, after the many primary and secondary market debacles of the last decade. Small investors engaged in day trading in the cash market, brokers tell us, are a dying breed, with the savvier punters shifting to derivatives and others dropping out altogether.

Overall, one can take comfort from the fact that, whether or not crony capitalism gains ground post-polls, stock market investors need not worry too much about it.

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