On the surface, it
could not have been a better financial year for India's stock markets.
Providing one of the principal signals for what the government sees as a
widespread "feel good" factor, the market has performed extremely well,
touching new highs and not nose diving as a result of an inevitable
correction. Sustained foreign institutional investor (FII) interest is an
obvious explanation. FIIs have reportedly invested an unprecedented $10
billion in the markets this year, with more than a fifth of that amount
coming in over the last three months. Clearly, India is the flavour of the
season for the international investor. This has contributed in no small
measure to the new faith in the markets that is reflected in the media and
elsewhere.
However, it needs to be
noted that India is still a marginal market globally speaking and even the
growing presence of the FIIs has not radically transformed India's
relative position among emerging markets in Asia and elsewhere in the
world. According to one estimate, the ratio of capitalization in India's
markets relative to global market capitalization is estimated to have
risen only marginally from 0.6 to 0.8 per cent, when that of emerging Asia
has a whole rose from 4.3 to 5.1 per cent. But, given the past and recent
history of markets in India, the focus of analysts has been on the more or
less sustained nature of buoyancy rather than the cause for it or its
significance globally.
The
optimism generated by this buoyancy received a boost
when the government successfully completed, with large
doses of oversubscription, the disinvestment of large
chunks of shares in six
companies - IBP, CMC, IPCL, Dredging Corporation of
India, GAIL and ONGC. This amounted to sale of shares
worth in excess of Rs. 14,000 crore, with Rs. 10,500
crore being raised from the sale of ONGC shares alone.
Since these shares were not being traded earlier in
the market, the disinvestment amounts to mobilisation
of new capital through the market, even if not for
greenfield investments.
As a
result, India's languishing "primary market" appears to have received a
huge boost. According to figures released by Prime Database (Business Line
March 17, 2004), as compared with a little over Rs.1,000 crore each
mobilised from primary share markets in 2001-02 and 2002-03 and a peak of
Rs.13,300 crore mobilised in 1994-95, the amount mobilised this financial
year (2003-04) amounts to Rs. 17,665 crore (Chart 1). In fact, even if we
take the total additional capital in the form of equity and debt (shares
and debentures) raised from the markets during the 1990s there were only
three years between 1992-93 and 1994-95, when this year's primary equity
market yield was exceeded.
Chart 1 >>
Given
this dramatic performance in a single year, the temptation to declare that
India's stock markets have reached maturity and finally emerged a major
source of capital for investment is indeed great. Even if it was the set
of six public issues that helped deliver this result, the argument is
likely to persist because specific events are often crucial in changing
the tide in markets. For example, a virtually dead stock market till the
late 1970s gradually saw an increase in activity largely because of the
decision of multinational firms – especially multinational drug companies
– to dilute their share in the equity of companies they held. Pressured by
the Foreign Exchange Regulation Act, which required dilution of the
foreign share in equity to the 40 per cent level, multinational firms put
on sale large chunks of equity that were sold to buyers in small lots of
shares, so as to retain control. This did encourage some retail interest
in stock markets, resulting in a reduction in the overwhelming role of the
financial institutions and large corporates in the market. The question
then is whether the choice of market-mediated disinvestment of large
chunks of equity in successful, high-profit, public sector units would
change India's stock market scenario. In particular, would this transform
India's markets in a manner that would make it easier to mobilise capital
for investment directly from saving households in the years to come?
There are
a number of reasons to believe that the answer to that question must be
negative. To start with, nowhere in the world is the stock market a source
of capital for new investment, not even in the US which is home to some of
the best organised and vibrant markets. It is known that in that country,
during the period when financial liberalisation transformed the financial
structure of the country, retained profits of firms were the principal
source of capital for investment. Further, debt in the form of bank
finance and bonds continued to play a more important role than equity.
Thus, between 1970 and 1989, the ratio of profit retention, bank finance
and bonds to the net sources of finance of non-financial corporations in
the US amounted to 91.3, 16.6 and 17.1 per cent respectively. The
contribution of equity was a negative 8.8 per cent. The first two of these
sources played an overwhelming role during this period in the U.K. and
Germany as well, with even bond markets playing a limited role and equity
markets virtually no role at all in financing corporate investment. More
recent evidence suggests that this scenario persists. The message from
those markets is clear: the stock market is primarily a site to exchange
risks rather than raise capital for investment.
Chart 2 >>
In India,
the experience with equity and debt mobilised from markets as sources of
finance during the 1990s is indeed telling. To start with, as Chart 5
shows, the ratio of capital mobilised through equity and debentures to
financial assistance disbursed by the financial institutions has fallen
steeply during the latter half of the 1990s. That is the role of finance
from the development financial institutions, which in volume terms rose
from Rs.12,810 crore in 1990-91 to a peak of Rs. 75,364 crore in 2001-02
(before falling to Rs. 58,735 crore in 2002-03), was not just significant
but overwhelming in the latter half of the decade. This was also the
period when a combination of failure (as in the case of UTI) and policy
was preparing the ground for an end to the era of development finance in
India (Refer Macroscan, Business Line, February 17, 2004).
Chart 5 >>
