It was not just that support from the DFIs was crucial to financing investment at the margin, but the nature of capital mobilised from the market also indicates a bias in favour of debt. As Chart 3 shows, in the past, as during 1992-93 to 1995-96, in years when significant sums of capital were mobilised, a substantially larger share came from the issue of equity rather than debentures. If active markets help firms to mobilise capital through equity issues, that would be the preferred option since risks are shared with the investor, whereas creditors have to be paid interest routinely and given precedence in case of liquidation. Interestingly, however, towards the end of the 1990s and early into the next decade, when the record with mobilisation of capital from the markets has been reasonably good, firms have had to rely on debentures rather than equity. Clearly, investor preference was for debentures rather than equity, indicating that the capital gains and returns expected from the latter were overshadowed by the security of the former.
Chart 3 >>

All this suggests that two features of the remarkable performance of the markets in 2003-04 in terms of delivering new capital against shares that were not previously being traded are of utmost significance. First, the important role of the FIIs in sustaining the boom in markets and in acquiring the shares of the six PSUs that ensured the record capital mobilisation figure. Second, the fact that there was one extremely attractive PSU, namely ONGC, whose share had been put on offer.

Even within days of the opening of the issue of shares of some of these PSUs, the interest of foreign institutional investors was obvious. For example, they accounted for 75 and 55 per cent respectively of the demand for IPCL and CMC shares by February 26, 2004. Therefore, the government's real concern was not with these companies, but with IBP. In the case of that company, the FIIs were not interested at all, accounting for just 2 per cent of total claims. Unfortunately, retail investors, who were important targets of the disinvestment exercise, were not the ones who helped shore up the issue finally, since they accounted for just 6 per cent of demand. The prime role was played by the financial institutions and mutual funds that had come forward to take up 44 and 36 per cent of the demand, at a time when the issue was still not oversubscribed. Given Disinvestment Minister Shourie's alarmist tantrums when the issue was not being responded to, it does appear that the government had "persuaded" the institutions to fill the gap.

Compare this with the performance of the ONGC issue. The sale of 10 per cent of ONGC shares, which was the largest-ever public issue in the country, was fully subscribed within 10 minutes of the opening of the offer. The immediate surge in demand on the first day of the issue came mainly from FIIs who accounted for bids amounting to over Rs 18,000 crore. Retail investors applied for just 13,520 shares, compared with 26.14 crore shares that the FIIs bid for. According to subscription details, FIIs accounted for over 87 per cent of the total bids made on the first day. Finally, the issue was oversubscribed six times. There was a further twist to the story. The media has it that Warren Buffet pumped in around $1 billion to acquire a large chunk of shares.

This kind of interest on the part of the FIIs and by investors like Buffet who virtually "lead the herd", suggests that the pricing of the shares was such that they were so lucrative that the offer could not be refused. Associated with the success of the issue may be, a substantial loss in terms of the value of the assets that the government has given up. There are bound to be questions regarding the price band in which the shares of the different PSUs were offered. It is widely known that given imperfections, prevailing market prices are no indicator of the true value of a financial asset. But even such comparisons are suggestive. There were very few ONGC shares floating in the market, but evidence from the other firms is telling. Thus, IPCL shares were being offered at a floor price of Rs. 170, which was well below the Rs. 195.70 at which the share was being quoted at the National Stock Exchange just before the offer opened. The corresponding figures were Rs. 475 and Rs. 541.50 for CMC and Rs. 620 and 717.75 for IBP.

The figures also make sense in the light of other evidence. One puzzling feature of the data on mobilisation of capital through the market is that during the period 1998-99 to 2001-02, the share of new (as opposed to existing) companies in total capital mobilised was extremely high (Chart 4). But, these were the years when additional mobilisation occurred largely through debentures. There seems to be a reversal in 2003-04, which is clearly a year when mobilisation through equity would overwhelmingly dominate. Interestingly, that also happens to be a year when the sale of equity by existing and highly profitable companies would account for an overwhelming share of the mobilisation. The message therefore appears clear. The experience of 2003-04 is not one that points to a transformation of India's stock markets into a cash cow for entrepreneurs with new investment ideas. It is proof that while the capital market remains one in which profit hunters trade risks in secondary markets, there would be periodic primary market booms whenever speculation spills over into a thirst for even new shares or when the government desperate to mobilise budgetary resources and/or shore up its "reformist" image puts on sale the best PSUs, at what are seen as bargain prices. The entrepreneur with an eye to the small investor's wallet has little cause to cheer.
Chart 4 >>