Good Morning India:Good Luck, Omar Abdullah

Media Pulse

Over the past few weeks, the public has been bombarded with reports in the media of a forthcoming massive boom in the primary capital market. To hear them tell it, no less than Rs. 30,000 crore of initial public offerings (IPOs) are on the anvil. The sectors which are reported to be involved are all heavyweights. Public sector undertakings, banks, multinational corporations, petroleum companies and large private sector companies are all lining up to make their offerings. The media has really gone to town on this good news. So much so that it is raising suspicions that there is an orchestrated effort to set up the market for a repeat of what happened in the late Eighties/early 1990s. Investor memory is short, else why would they forget so soon how they were scalded in the Harshad Mehta scam. Those were the times when five or more IPOs would be placed before the lusting public every day. All of them were subscribed many times over, all of them were listed at a huge premium to the offer price and everybody made tons of money, including the small investor. Taking advantage of the sentiment, hundreds of fake companies made offerings, pocketed the subscription and vanished.

Then the Harshad bubble broke and there was a mad scramble to cut losses and exit the market. Large corporates, financial institutions and banks (who made the most money) were able to cut the bulk of their losses and what they lost they could afford. The small investor, as usual, was the last in the line and, collectively, he took a loss estimated at Rs. 20,000 crore.

And what was the Security and Exchange Board of India, (SEBI) the monitoring agency of the capital market, doing all this time? Nothing! No action was taken by SEBI against the companies that swallowed the subscribers’ money and disappeared. It is only now, in June 2002, that the Department of Company Affairs has issued notices to hundreds of such fake companies. Only notices, mind, most of them sent to addresses which no longer exist. It strains credulity to believe that such belated action is going to be of any help to the thousands of investors who were rooked.

In terms of regulation of the market, the scene is almost the same as it was during the last boom. Brokers are still forming cartels and ramping prices, banks are still illegally financing them (forgotten Home Trade?) and SEBI is still toothless as the South Block mandarins are averse to delegating their powers. Today, SEBI has a new head but it is too much to expect that he can do much in the way of making the institution a feared watchdog on the lines of the Securities Exchange Commission of the U. S. A. And now a new primary market boom is being touted. Imagine, Rs. 30,000 crore projected against just Rs. 1082 crore in the whole of 2001-02!

The media reports have given the names of the companies and undertakings which are planning issues and they include the cream of India’s public and private sectors, along with the probable size of the issue. It cannot, therefore, be doubted that there are, indeed, plans for such a huge offering. But is it a certainty that the issues will actually be made? It must not be forgotten that a number of companies in past years put their plans to enter the market on hold given the near-recession conditions and the apathy of the market. Many who dared enter had their fingers burnt as the public refused to participate fully. Is there really a change in sentiment which could see all these pent up offers bursting on the market now?

According to reports, over 50 companies have IPO plans but, to date, only 12 have sought approval from SEBI. Obtaining SEBI approval is not an overnight process. It entails long delays and even after that it takes months before an offering can be made to the public. So why this sudden enthusiasm now—why this expectation that the market will absorb their IPOs fully over the forthcoming months?

The people who see the IPO bonanza coming base their claims on the fact that there is a recovery in the economy as tax collections have risen smartly, a good monsoon is expected, recessionary trends abroad are being reversed and the core sector industries have shown excellent progress. Does this make for a good IPO market? Well, yes and no.

In the first place, tax collections have risen, yes but in view of the advance tax phenomenon, only a Y-to-Y comparison can really identify an increase, if there is one. Paying large tax amounts in the first quarter does not necessarily imply that the trend will continue over the years. There are too many variables that have to be taken into account. As for monsoons, it will definitely lead to accretion of extra income and fuel demand, but this is an annual phenomenon and if, next year, the monsoon fails us, the fall in economic growth will be drastic. That the core sectors are doing well is probably the only real good news, but it is good news for the long term economic scenario of the country, not a signal for the creation of a hungry IPO market. And, most suspicious, why is the very unstable political situation being ignored? What happened in Gujarat, what is happening in Kashmir and what could happen on the border with Pakistan (despite the welcome drop in tension) at any time, are all aspects which canny corporates will definitely have factored into their plans.

Not that a buoyant primary market is not something to be desired. There is nothing better for the economy of a country than a healthy partnership between shareholders and companies. However, even assuming that all misgivings about the predicted boom in the primary market come to naught, we have still not prepared a receptive and safe environment for the boom. What usually happens when an IPO is made is that the public applies for shares in the hope that they will be listed at a premium, in which case they can sell their allotments and make a killing. The buyers are usually brokers who aggregate the shares and sell them to large companies or institutions at a handsome profit. This gives an opportunity for manipulating the listing to suit the big institutional investors who can then buy the shares at prices cheaper than their actual worth. Bharti Televentures IPO at Rs. 45 per share was oversubscribed 2.17 times. But a few days after listing the price dropped below the offer price. A number of retail investors (there were 25,000 applications) must surely have burnt their fingers.

All this can be avoided if the regulatory authorities keep a watchful eye on the market and nip potential scams in the bud. But this has not happened in the past and is not likely to happen now. SEBI and lending banks are supposed to directly and indirectly regulate the market. That SEBI has still not been able to trace the fake companies who raped the market eight years ago and that just recently banks fell over themselves to buy G-secs through Home Trade at better interest rates (and lost their money in the scam) proves that the primary market is still open to manipulation and scams. Before IPOs for such a huge amount as Rs. 30,000 crore enter the market, it is mandatory that all possible safeguards be set up.

Ultimately it is the small investor who pays the bill. The institutions have a sure means of obtaining advance information of impending scams in most cases as the corporates are their borrowers; the banks have been proved to have gone out of their way to fund brokers, which is illegal, and the management of the bourses consists mostly of brokers who are themselves involved in the manipulations. The small investor has no intrinsic knowledge or guidance about what’s going on. He pays.

Hence, all this talk of a primary market boom may or may not come true but if it does and the regulators do not do their job, it is surely going to lead to a lot of major and minor scams. Its not that India is the only country hit by such scandals. Bigger—and better scams have been perpetrated in other countries, even in the U. S. A. (Enron and Arthur Anderson are examples).