Shyam G. Menon
Latha Venkatraman

Mumbai, May 22

It is not a development that requires change to company strategy, but the volatility and decline in the Indian stock market could end up more than just a CFO's challenge. Of prime concern is the pattern of disconnect between official pronouncements and stock market reaction, illustrated vividly by Monday's swing in the BSE Sensex.

Providing for the market's known aversion to the Left parties, the real descent of May started last Monday when weak signals from global bourses, correcting metal prices and heavy selling by foreign funds knocked 462.91 points from the BSE Sensex. "I will put it as a correction provoked by reasons, which are quite understandable," the Finance Minister, Mr P. Chidambaram, had said the next day as the market steamed back to close 51.53 points higher despite an intra-day swing of 575.55 points.

On Wednesday, the Sensex gained 344.08 points but it lost that and more on Thursday when the index crashed 826 points, even as Mr Chidambaram clarified on the draft government circular blamed to have kick-started the day's incessant selling. Lack of margins and statements from the Left ensured another battering on Friday. Authorities continued their clarification on taxing issues through the weekend, but Monday sailed into a totally different reality - mid-session fall for the Sensex was over 1100 points.

What has upset some company officials is the limited effectiveness of a whole week of damage control and on certain days, the near contradiction between remedy and market reaction. More than the points vaporised in the index, it is this ballet of contradictions, which they fear, may have diluted the market's international standing not to speak of eroded investor confidence. "When people followed what the government told them to do, shifting from bank deposits to stock market and from direct investment to mutual funds, the authorities should have handled things more responsibly," a senior finance official at an automobile company, who did not wish to be named, said.

While `feel good' and presumed link between Sensex and vehicle sales cut ice no more, the absence of clarity on what drove the markets down and thereby difficulty in assessing when and how the situation improves, has given the recent declines a hue beyond lost numbers and mere constraint on financing. "I want to wait till May 24 when positions get squared off, before estimating the market's impact on consumer confidence," the official said. In all likelihood, impact if any, would be limited because there is sufficient de-link between such shocks and consumer sentiment.

The short-term casualty therefore, would be project funding.

Officials said that IPOs could have a tough time given the need for lower price levels. That needn't be too worrisome because it means pressure on only equity funding. The debt route continues viable given interest rates, which remain manageable despite fear of rising rates having been a cause for last week's market corrections. But overseas debt is often accessed through convertible instruments and the attraction in converting debt to equity lowers in tune with the lower share price in the local market. Convertible debt typically has lower rate than pure debt. "When the market is volatile, it is difficult to take a view and investors could force a reduction on spread should a company push for convertible debt at this juncture," one company director said.

As for pure debt, the argument is that while interest rates may be currently affordable, blockage in the equity route theoretically means that much more demand shifted to the debt avenue. Debt coming under pressure is the last thing many companies want for its impact goes beyond corporate funding and into retail financing. Cheaper funds have played no small role in the growth story of the last few years. "Such a scenario is far fetched because the blockage experienced is quite temporary. Rather than impacting interest rates, my worry would be whether sustained bearishness in the market may defer consumer spending due to weak overall sentiment," the director said.

"Companies do not adjust their strategies based on stock market movements. We should be more concerned about the other markets through which we reach out to consumers. Plus of course, commodity prices," the CFO of an FMCG company said.

(This article was published in the Business Line print edition dated May 23, 2006)
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