India's capital market grows
up By Arun Bhattacharjee
NEW
DELHI - Just when the government was feeling confident
that India's capital market had stabilized after reform,
the Bombay Stock Exchange saw a drop of 258 points on
Monday that wiped US$3.71 billion from the market. Stock
market analysts in Delhi, however, described this as
normal, as they feel it was in response to uncertainties
in other global markets, forcing foreign institutional
investors to sell and go for the Initial Public
Offerings (IPOs) of India's blue-chip companies instead.
Industry leaders and fund managers, including
Uday Kotak of Mahindra Capital, are not unduly worried,
as they feel India has finally been able to revive the
confidence of retail investors in its capital market,
after a decade of trial and error, through necessary
reforms and by providing it with increased depth and
scope. But though major corporate investors fared well
in the pitching market, which has recorded sharp ups and
downs, instability scared new and small investors,
essential for the further broadening of the base of
India's capital market.
In spite of falling
interest rates and rising inflation, Indian households
are scared to invest in the capital market due to its
volatility - although returns from their savings are
plummeting fast. Only 2 percent of India's household
savings are invested in the capital market, while in
developed economies market investment is around 20
percent, and in the US it is around 51 percent.
While they continue to encourage both small and
retail investors, market regulators and operators are
happy that foreign investment in India's capital market
in the last two months has surpassed $1.8 billion, and
is expected to overshoot by 40 percent the $7.6 billion
of foreign investment in calendar year 2003.
The
foreign investment boost came from five major IPOs, led
by government-owned Oil and Natural Gas Company (ONGC),
for a market capitalization worth $3.56 billion, as well
as efforts by Berkshire Hathaway's chief executive
officer Warren Buffett to purchase $1 billion ONGC
shares through depositary notes by special permission
from the Securities and Exchange Board of India (SEBI).
These developments, coupled with the improved profile of
the Indian capital market in the Morgan Stanley Capital
Index (MSCI), helped to encourage the flow of foreign
funds into the market.
Meanwhile, India's
Ministry of Disinvestment was restrained by an order
from the country's Supreme Court from offloading
government shares to private-corporate and overseas
institutional investors on the grounds of constitutional
impropriety. With the court satisfied, the government
wanted to increase its liquidity for infrastructure
investment - worth $10 billion - promised by Prime
Minister Atal Bihari Vajpayee and to reduce its fiscal
deficit by collecting $3.2 billion from the market, an
amount constituting 0.5 percent of the country's gross
domestic product. India's current deficit is 5.4 percent
of GDP.
Although IPOs by the five companies
pushed the capital market index up by 55 points,
economists feel that this is a short-term measure for
sustaining the economy, as this eventually will dry up
capital for investment by the private-corporate sector.
But the government's economic advisers argue that in the
last year many Asian and Southeast Asian countries
partially privatized government holdings in industry in
order to raise funds. Leading the pack is China, which
is offering $3 billion worth of shares from China Life,
over-subscribed by 170 times; Japan is next, offering
$2.36 billion of shares from Shinsei Bank; followed by
Taiwan, $1.37 billion of Chunghwa Telecom; and
Indonesia, where the government recently divested 35
percent of its largest bank, while Pakistan is raising
$2.7 billion by selling shares of the government owned
Oil and Gas Development company.
India's two
associations in the industry and corporate sector feel
that the capital market has more or less stabilized due
mainly to the efforts of the SEBI, which is working on
additional safeguards such as grading the IPOs in four
categories for the benefit of investors: requiring them
to include in their offer forms their management
practices, performance, profit and loss accounts and the
profit statement from the year preceding the purchase of
the IPO. SEBI is also encouraging independent rating
agencies to value IPO share pricing as this is beyond
its control.
While most agree that stabilization
of the capital market is essential for an economy the
size of India's, an economist from the Confederation of
Indian Industry explains that some of the companies
being disinvested were paying more than 300 percent
dividends to the government. Raising funds from the
capital market releases the government of responsibility
for paying interest on public borrowings. Selling the
stocks, however, will deprive the government of the huge
dividends it was receiving from these blue-chip
companies whose performance was beyond reproach.
Amit Mitra, Secretary General of the Federation
of Indian Chambers of Commerce and Industry (FICCI)
feels that India's capital market has matured and
seasonal ups and downs will continue as the shares of
overseas institutional investors increase over the
years. And Uday Kotak says the Indian capital market has
graduated to a stabilized market without much government
intervention.
In spite of these assurances,
small investors have yet to gain confidence as India's
capital market has witnessed enough rigging, cornering
of shares and manipulation with support from
nationalized banks in the past.
Tapas Mazumder,
a noted economist, United Nations Educational,
Scientific and Cultural Organization consultant and a
professor at Delhi University, says manipulation of the
capital market can never be totally controlled unless
the size of the market grows, and with so much liquidity
with the banks at present, which is forcing them to perk
their funds with the Reserve Bank of India, manipulation
of the country's central bank is possible, but unlikely.
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