India's equity markets continue to scale new peaks, writes Sandeep Bamzai
In equity, there has been only one negative month this year and that was January which saw an outflow of a negligible amount of `141 crore only. Otherwise, it has been that kind of a year with money simply pouring in month after month.
Flush with bulge bracket dollars, India's equity markets continue to scale new peaks. As much as `198,136 crore or $33 billion of gushing liquidity has come into our capital markets in calendar year 2014 till date. A lot more has come into debt (`112,573 crore) than in equity (`85,563 crore).
In equity, there has been only one negative month this year and that was January which saw an outflow of a negligible amount of `141 crore only. Otherwise, it has been that kind of a year with money simply pouring in month after month. Similarly, there has been only one month of outflows on the debt side as well - April - which saw a capital flight of `11,155 crore. Shoring up finances remains at the very kernel of government strategy as it battles a permanent deficit of capital. Disinvestment unfortunately is also used as a bridge to India's fiscal deficit woes. A buoyant capital market always makes that prospect look simple and easy. Far from it as governments have found to their dismay in the past, disinvestment is always an onerous task.
Primarily because FII money routed to the secondary market as is the case currently finds its way to the primary market instead. This re-routing normally plays havoc with liquidity. And liquidity remains the single biggest driver of capital markets. In any case quality paper doesn't necessarily find appetite. Initial Public Offers have been few and far between this year and the government in its desperation reckons that the high tide will lift all boats on the shore. Its disinvestment plan is truly ambitious, follow on offers worth `43,800 crore should be absorbed by foreign, domestic institutions, mutual funds and the public. This is going against the grain as we saw last year and even earlier - domestic financial institutions and insurance companies have to be pressed into service to bail out imperiled government floated public issues. Leading to all round embarrassment.
Here is the line up this time - Coal India float alone is `23,000, ONGC `18,000 crore while NHPC is `2,800 crore. Scary if you ask me. For I am reminded of the NMDC issue in March 2010. India's number one institutional investor - LIC - was pressed into service, asked to rescue the follow-on public offer (FPO) of NMDC Ltd. Foreign institutional investors (FIIs), mutual funds, banks and retail investors mostly stayed away from the government's largest divestment issue of 2010. As much as two-thirds of the issue was subscribed by LIC, which is in a forced habit of bailing out the government's divestments. Overall, the issue was 1.25 times subscribed. Disinvestment secretary of the time Sumit Bose was quoted as saying, "We have not seen as many FIIs in NMDC as in the REC (Rural Electrification Corp. Ltd) issue." While at least 50 institutional investors participated in the issue, LIC alone placed bids for shares worth `8,000 crore. This resulted in red faces, after all the government succeeded in moving money from the right pocket to the left. A government divestment which sees another government entity become a shareholder, defies all logic and gravity. The idea is twofold - a wider dispersal of equity shares and a completely new set of shareholders. The government has over time failed to do this. In fact, the path to disinvestment by dumping minority shareholding of PSUs through follow on offers, offer for sale or the book building route using the French auction method are all fraught with danger.
In 2004, when jurist and petitioner Fali Nariman tripped Arun Shourie's dream of selling more and more PSUs using the strategic sale model in the Bharat Petroleum and Hindustan Petroleum cases, the minister was forced to opt for the stock market route. In a severe blow to the NDA government's decision to privatise profit-making public sector oil companies HPCL and BPCL, created by an Act of Parliament, the Supreme Court stayed the disinvestment process, holding that it could not be done without Parliamentary approval. "We restrain the Central Government from proceeding with disinvestment, resulting in HPCL and BPCL ceasing to be government companies without appropriately amending the statutes concerned suitably," the Bench said. Changing tack Shourie approached the stock market - but concerned over the lukewarm response to a catalogue of government IPOs, the minister attacked a cartel which deliberately pulled down the market and said that global advisers would have the direct responsibility to hard sell the public issues. With SEBI chairman and IB chief in tow, Shourie was quoted as saying, "Sebi has also informed us about pulling down of prices by certain players." In order to raise `15,000 crore through the sale of IPOs, the government was selling its residual stake in CMC, IBP and IPCL followed by IPOs of Dredging Corporation of India, GAIL and ONGC. Shourie believed that a cartel of rogue operators hammered down the market based on the assessment of the last trading prices of the PSU shares. The floor price of the IPOs on offer had been determined in a professional way by merchant bankers taking into account various parameters. Equally he expressed disappointment with merchant bankers over their inability to hard sell the government IPOs. Shourie being Shourie, he managed to get all the players on board with a mix of persuasion, cajoling, dictation and threats.
MANIPULATORS
But there was blood on the streets and everything was cloaked in mystery. When BSE Index fell by 8 per cent from 6194 to 5700 points, ONGC, GAIL, IBP shares fell sharply by 20-30 per cent. Ultimately government fixed the offer price of IBP at `620 per share, 30 per cent lower than the peak price and that of GAIL at `185, lower by 37 per cent and in case of ONGC the range was fixed at `685 to `750, a whopping 32 per cent down from the peak price of January 2004. On February 24, 2004, Shourie publicly proclaimed that some manipulators had formed a bear cartel to hammer down the share market to bring down share prices of ONGC, GAIL and IBP, and they had been identified. On February 25, after consulting prime minister, and deputy prime minister, he sat with merchant bankers and a few of the 'manipulators' to give them what the media termed as "a good dressing down." Conspiracists had a field day while people lost their shirts.
Ten years later, over supply of government sponsored paper remains an issue with nobody having learnt the lessons from history. Pushing this paper requires a staggered approach rather than a bunching up. It is a no brainer to have a government entity save these issues from devolving. Perceiving these PSU offers as a milk cow to bridge the fiscal deficit is even worse, but using the proceeds towards capital expenditure for the financially sick Indian Railways is equally baffling.