|
notjustinfo.com |
||
|
|
Knowledge centre for MBA students. |
|
|
|
Catalysing the Capital Market growth – The need of the hour
Na Vijayashankar
1995 The success of capital markets in a country depends
largely on the communication link between the capital market and the investors.
Press obviously is the medium for this communication. With increasing curbs
on corporate advertising, particularly in the New Issue scenario, press
reports are becoming critical in recent times. Warning the prospective investors about various
malpractices the promoters may indulge in, or revealing facts, which have
been deliberately or ignorantly suppressed by the Merchant Bankers is an
essential aspect of financial journalism. However, the press also has a
positive role to play in the capital market development. Investor protection
ca, not only be achieved by preventing losses but also by increasing their
overall gains. During the times of the capital market boom, in the CCI days,
the need for investor protection was not felt as much as it is now because
want an investor lost in a couple of issues, was more than made up elsewhere
due to the conservative pricing mechanism then prevalent in the market. Today, the margin of profits in successful investment
decisions is coming down due to aggressive pricing, institutional investors
are taking the first cake where opportunities are good and therefore the
average return of an ordinary investor is coming down. While SEBI’s intention
of creating an institutional market for IPOs has some logic, it is impossible
to imagine that such a wholesale institutional market will exist in the
absence of a fertile retail market. If an exclusive wholesale market is to be
created for IPOs then the retail investor should feel that the wholesaler is
adding value to the product, which could happen only in Bought out Deals.
Otherwise, the two markets should be allowed to thrive together. Encouraging
retail investors would therefore be essential to keep both the wholesale and
the retail markets alive and kicking. The role of press in terms of satisfying the needs of the
institutional investors and the retail investors is different. While
institutional investors look at press to provide news inputs, which they
would analyse themselves, retail investors need analytical prescriptions.
Informed investors are able to digest the detailed analysis carried out in
any report where as a large number of lay investors would absorb the cryptic
message contained in the captions ignoring what is written inside. When it
comes to influencing a lay investor, the sub-editor who creates the headlines
wields more power than the analyst who writes the report. In order to
satisfying the differing needs of the institutional and the retail investors,
the press may have to adopt niche market focus. This could either be as a
specialized publication dedicated to the common interest or the institutional
interest or through specific supplement / columns. There are two major contributors to the pathetic stage of
the capital markets today, which can be eliminated / curtailed with the
efforts of the press. They are:
Demand and Supply Imbalance
In the last few years, the Indian capital market has developed
without a planned regulation of capital demand and capital supply. In the
early days of the CCI, its main function was to regulate supply to the
available market potential. This was subsequently forgotten since the supply
of capital exploded with the boom conditions prevalent in the market place.
SEBI has not been focusing on this subject. Even if they so, perhaps SEBI
would restrict its role to preventing capital issues or deferring them. This
would be a less desirable means to achieve the desirable. The press on the
other hand could contribute more positively and increase the supply of
capital to match the needs of the capital issuers by creating new investors
and encouraging existing investors. It is necessary that people who are interested in investor
protection should immediately focus their attention on expanding the investor
base and prevent breaking of the system. At present the focus of the
regulatory agencies is towards promotion of institutional investors, which
can only further shrink the investor base. The reduction of public issue
component from 60 per cent to 25 per cent of issued capital, reduction of
mandatory collection centres from around 58 to around 4, forcing issues into
OTCEI, encouraging aggressive pricing etc. can by no stretch of imagination
be construed as measures that would contribute to the growth of the investor
base. In fact, it can only have an opposite effect hastening the breaking of
the over-stretched demand-supply relationship. The press therefore has a vital role in carrying the
message on the benefits of investing in the capital markets to the nooks and
corners of the country. In fact, the vernacular press has a critical role to
play in this aspect. For example, the recent studies by CMIE and the UTI
Institute of Capital Markets have clearly indicated that sustained
investments in IPOs have given returns of over 100 per cent to the investors
from offer date to one year after listing. This has been a trend over the
five year period 1990-95 as well as during the period 1992-94. The short term
benefit from offer price to listing price has in fact provided an average
return of over 300 per cent not only for the above 5 year and 2 year terms,
but also as recently as the month of October 1995. The studies also indicated that the secondary market
investments in the same securities yielded returns of around 50 per cent per
annum. The secondary market returns of other companies (other
than newly listed companies) who are small in size also showed a distinctly
positive divergence compared to the mega companies who showed a substantial
fall. We all know that fall in the value of mega company prices leads to the
fall in the SENSEX and creates a feeling of gloom in the market. The
divergence indicated that even in the falling markets, small companies formed
a profitable niche. The press does not seem to have highlighted the facts of
the above studies, which indicate “Fabulous Returns for IPO investors” and
“Attractive returns in Secondary Markets in small company shares”. Instead,
the few reports that have appeared on the subject have highlighted that
“Indian IPOs are still under-priced”. It is difficult to understand why press
should be so pessimistic. It is possible that if any investment weekly had
highlighted the study and indicated “Ignore SENSEX Fall – Invest in New
Issues on offer or 6 months after listing”, it would be dubbed as a motivated
writing written in self-interest. But this is the kind of optimistic outlook
that is perhaps necessary for the growth of the markets. Imbalance in the perspective of
Investors
The above studies also reveal another interesting aspect
that even in the IPO scenario, short-term investors appear to make more money
than the long-term investors. It is strange that investors in new issues who
hold on to the investments for the project completion period should earn less
returns than those who merely hold it on up to the time of listing. It
appears that bearing the “Public issue success risk” is more profitable than
bearing the “Project implementation risk”. This trend is not conducive to the long-term growth of the
capital markets. The market need investors who take project implementation
risks to invest in new issues and also investors who later on speculate in
the secondary market on “How the project is progressing” and subsequently on
“ How the business is being managed”. The second and third category of
investors would be buying the shares listed in the secondary markets and
provide liquidity to the shares. The first category of investors is the
long-term new issue investors and they should get the maximum average
returns. This balance in the investor configuration can be brought about by
an effort from the press who should indicate the ideal time perspective for
every new issue and also systematically report on project progression. Today
there is no information flow on the progress of a project once the issue is
subscribed until the company announces the financial results. In fact the research analysts who report in the press
should systematically visit the project sites after the issue and report on
the project implementation status. In this connection it is pertinent to suggest that between
the date of preparation of a draft prospectus for a public issue and the
opening of the issue itself there is substantial time gap in which the
project could have taken a few steps forward or backward. It is necessary for
SEBI to make it mandatory for companies to announce through a newspaper
advertisement the “Status update” highlighting the progress made in the
project from the date of prospectus and the impact on the schedule of
implementation as indicated in the prospectus. This would be vital
information for investors to assess the progress of the project and the
likely time span of project implementation. In the absence of such mandatory
report, press should perhaps fill in this gap with a special repost on the
issue opening date on the recent progress made on the project. To summarise:
|
|