Primary market and PSU divestment

The recent failure of PSU public issues lies in the present character and structure of the primary market, says Pratip Kar.

Some time ago, the pink papers carried headlines lamenting that the follow on public offer of the National Thermal Power Corporation , for the divestment of 5 per cent of NTPC's shares, by the president acting through the ministry of power, had met with a lukewarm response from retail and foreign institutional investors .

Though NTPC has around 800,000 shareholders1, it was still difficult to manage 637,500 retail applications. The FPO was just fully subscribed, thanks to domestic financial institutions, like LIC, SBI, other Indian banks and FIIs. All this happened despite the reported assurances and expert advice of some of India's leading investment bankers and optimistic brokers, who were responsible for advising the government and managing the deal. The not-so-joyous ending of the first divestment by the government, after a long lull (nearly four years) and that too of a listed central public sector enterprise, also a Navratna, had the government worried. And rightly so. After all, the government had to complete its divestment programme before the financial year ended in March. The response to the issue of the Rural Electrification Corporation, another CPSE, which followed NTPC issue, was also lacklustre. The retail investors displayed little interest. The issue gained some respectability, thanks to salvaging operations by public sector banks and insurance companies.

The sages of the securities market mulled and shook their heads and began to advise governments to change the auction procedure. Readers may not be aware that according to Wikipedia, there are currently 11 classes of auction, of different Occidental and Oriental hues, ranging from English, Yankee, French, Dutch to Japanese and Chinese. Some said: Why choose the French style only, when so many choices are available? Some of the more radical thinkers offered appointment of a committee for a quick-fix solution. Others said off with QIBs and XYZ and all that, let's go back to old-style book building.

At this stage, I cannot help but narrate to the readers a story by a brilliant Bengali satirist, Rajshekhar Bosu (Parashuram). The title of the story is "Chikitsha Sankat" (medical crisis)2. It went on like this. Nanda Babu, a Bengali bachelor, was carrying some bundles under his arms and jumped from a slow-moving tram on Beadon Street in Kolkata. His foot was caught in the folds of his dhoti and he fell on the road. His close friends immediately showed great concern over his ill health and advised him to consult doctors from different branches of medicine -from allopathic to homoeopathic, to Ayurvedic to Unani and even psychiatry. Each of the doctors made different diagnosis and gave different prescriptions. The last one - a psychiatrist - happened to be a spinster. She advised that all Nanda Babu needed was someone to take care of him. The real cause of Nanda Babu's fall was forgotten but Nanda Babu changed his bachelor status.

In the primary market, we have a situation similar to that of Nanda Babu. We are looking for solutions to the recent failure of the public issues in the correct pricing of the issue (as if anyone knows how to correctly price an issue in any market), in the auction procedure and in the issue process. But the root cause of the malaise lies deeper. It lies in the present character and structure of the primary market itself, and we are perhaps looking at wrong places. Perhaps we need to break away from our dominant logic and think differently.

So far, we have sold public issues by direct selling. We have advertised, as if public issues are shampoos and detergents. Retail investors have flowed; sometimes burning their fingers. The flow ebbed and it came back again; the issues were oversubscribed and the media, especially the electronic media, hyped it; prices went up on listing; the retail investors made money and exited. This cycle has been going on like Shankara stotra: "Punarapi jananam punarapi maranam, Punarapi janani jathare sayanam." (Be born again, be dead again, and find a place in mother's womb again.) Essentially, our model in the primary market has been centred on the retail investor. It may have worked till now, but it may not work any longer. So, why don't we think of moving away from the dominant logic and change the model? Any attempts in the past to change the model used to meet with stiff resistance from those who thought of introducing socialism in the capital market, and believed that all Indians had some kind of a Constitutional right to invest in primary issues, sans the risk. But the same people also cried when the retail investors burnt their fingers.

But for the above to happen, we need strong institutional investors - mutual funds, pension funds, FIIs et al. This is absent. Our mutual funds are weak. Easy access to corporate money has made them less innovative. They are unable and unwilling to take up the challenge thrown up by regulatory changes and exploit opportunities, develop agent network and reach out to the investors across India. We have limited active pension funds. So, the market looks to the benevolence of FIIs like the Indian farmer looks to the sky. This will not work and a solution has to be explored to build up a strong foundation for institutional investors. In any case, aren't the institutional investors bailing out issues?

The primary market is what aids capital formation. The secondary market gives it currency and helps measure wealth. We cannot have a thriving securities market only on the basis of a secondary market, keeping our gaze fixated on the Nifty, the Sensex and the number of paper billionaires these numbers produce every day. We need to examine why in spite of the savings rate in India being as high as 32 per cent, in which the household sector's contribution is around 23 per cent; and why despite the "phenomenal" growth of our securities market, not more than 5 per cent of these savings are in securities market, except for one year in the decade of 1990s.

Our tax structure creates distortions across savings instruments and biases an investor towards certain instruments. Risk aversion among Indian investors is generally high, compounded with tax incentives, which create perceptions and biases.

The best regulations are those that are co-created with the players, the issuers, the intermediaries and the investors. Our stock markets have moved from one milestone to another in a facile manner, because we believed in co-creation. Piecemeal strategies will no longer take us far. We need to to go back to the drawing board for a while, bring everyone on the same page and take a hard look at our primary market. It will be a long haul, it will need patience, but we will get there.

Did Romain Rolland not say, "The rains will come. Patience! Things will be greener"?

1 Shareholding pattern as of 31.12.2009

2 Taken from Selected Stories of Parashuram, Penguin Classics, translated by Sukanta Chaudhuri and Palas Baran Pal

3 RBI Report on Currency and Finance 1991-92 to 2007-08

4 Romain Rolland - Prophets of The New India (1930)

The author is a former executive director of Sebi and is currently associated with the Global Corporate Governance Forum of the International Finance Corporation and the World Bank.

Views expressed are personal.