Market wishes for 2014

The year 2013 may have seen the Sensex rise by nearly a tenth and scale life-time highs. Foreign institutional investors (FII) would likewise have poured in over $20 billion for purchasing Indian stocks this year, notwithstanding a brief period from June to August when they were net sellers. But beneath the surface of these broad numbers that give an illusion of a roaring bull-market lies a not-so-sanguine reality. While the Sensex and the Nifty may have both gone up, the indices reflecting the movement of mid- and small-cap stocks are set to close lower this year. Indeed, roughly 70 per cent of stocks traded in Indian exchanges will end up posting negative returns. Similarly, the FIIs’ continuing demonstration of faith in Indian equities has been in marked contrast to the virtual absence of retail participation. Net sales by retail investors have been 25 per cent more than last year. The Rs 8,000 crore outflows from equity and balanced funds during January-November show they aren’t keen to invest even indirectly.

But more than the secondary market, it is the lacklustre primary market — where actual fund-raising by companies happens — that is a true barometer of investor confidence today. 2013 saw just four primary offerings garnering slightly over Rs 6,700 crore; that included Rs 5,400 crore by the state-owned Power Grid Corporation and Rs 927 crore by the search engine provider Just Dial. Compare this with the 73 offers in 2010, a reflection of both investor appetite then for equities as well as India Inc’s own desire to raise money for executing projects on the ground.

The takeaway from all this for 2014 is that we need a more broad-based rally in the markets, the key to which lies in attracting retail investors back. That can happen only when stocks are reasonably priced through initial/follow-on public offers. This is where the Government must take the lead by proactively divesting its stakes in public sector undertakings at prices that will elicit wider retail participation — especially novice investors not scarred by the 2008 crash. The success of the recent Power Grid issue that received bids worth six times the offered shares is a case in point. A focused divestment programme, apart from yielding useful revenues to the exchequer, will also help ‘seed’ the primary market and stimulate private corporate offerings in due course. A revival in primary equity markets will also encourage corporates to undertake investments that have been shelved only due to high financing costs. The Government/SEBI needs to also keep the focus on curbing insider trading and price manipulation through circular trading, which have shaken the faith of retail investors in the past. The modified insider trading regulations are, no doubt, helpful. But the challenge for the regulator and the exchanges in 2014 is to ensure that these and other regulations do not remain merely in letter, but are enforced.

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