‘Loss-making companies tapping IPO is not a desirable trend’

Former RBI governor C Rangarajan on Friday said loss-making companies or entities without sound fundamentals tapping the IPO route to take advantage of the current market frenzy and liquidity is not a desirable trend.

“I mean it’s a wrong thing for a company or entity, which is basically not sound, to give a look of being sound. It is not the correct way in which we should move,” Rangarajan said at a virtual session ‘Impact of Covid-19 on Economy’ organised by FICCI.

He was responding to an audience question about a growing number of loss-making start-ups filing for IPOs in recent times.

Clear distinction

However, Rangarajan added that not all IPOs should be put in the particular basket and that there must be a clear distinction between companies that really want to take advantage of the current market situation and move forward and those that want to take advantage of the current availability (of liquidity).

“Because, if the economy is to pick up and go forward, investment will have to happen and that investment has to come from IPOs. Therefore, we should not be scared of that (IPOs) but should really move in the direction of channeling the additional funds that are available to entities that are sound,” Rangarajan said.

On the disconnect between stock markets and the economy, Rangarajan said that the behaviour of the stock market is a matter of concern, and it should not become a bubble that is waiting to burst.

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“The behaviour of the stock market is a reflection of not only the current but also the future level of economic activities because people bet on what’s going to happen,” Rangarajan said, adding, “Therefore, if the behaviour of the market is the reflection of people’s confidence in the economy in the years to come then it’s alright but it should not be a case of irrational exuberance.”

During the session, Rangarajan said that the government’s large borrowing plan and the RBI’s liquidity support will stroke inflation but the policy makers must accept higher inflation in order to stimulate growth.

“This is the dilemma. Many say that the only way out of the current problem is for the government to increase its expenditure, Rangarajan said, adding, “But, if the government does that, it can result in higher borrowing and that higher borrowing needs the support of the RBI, which can only lead to inflation.”

“The RBI has projected inflation of 5.1 per cent for this fiscal but my own feeling is that it will be well above 6 per cent during the year and the policy makers must be willing to say that in the current situation, the inflation rate will go higher if the government expenditure also increases,” he added.

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