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STOCK MARKETS Has Primary Market Revived? Infotech companies have charmed small investors. But a boom is still far away By V Shankar Aiyar, Rohit Saran and Sumit Mitra The good news in 1999 was that the moribund primary market revived, performing much better than it did in 1998. Most public issues of equity shares were oversubscribed several times, implying a keen investor interest. The Times Bank's offer of equity shares was oversubscribed 17 times. Polaris Software's public issue was also oversubscribed while TV 18's offer of equity shares, each with Rs 170 premium, was sold out many times over. The HCL Technologies' equity offer too had people queuing up in hordes to apply for shares, even though the company had followed the newly allowed book-building route to the public issue which most small investors do not understand. In all, 38 public issues of equity shares raked in Rs 2,237 crore in 1999. That was a marked improvement over a piffling Rs 365 crore raised by 19 public issues in 1998.
While that's impressive, it's nowhere close to the heydays of the early '90s. In 1995, for instance, a whopping Rs 13,887 crore was collected through 1,444 public issues of equity shares. Moreover, in 1999 the primary market was dominated by infotech companies and banks. Together these two sectors accounted for 84 per cent of the issues floated during the year. Just two manufacturing companies entered the market to raise a meagre Rs 104 crore. In fact, equity issue of one of the two companies -- the Calcutta-based Swill -- was undersubscribed. Says Prithvi Haldea, president, Praxis Consulting and Information Services: "It's too early to talk of primary market revival. The companies raising money are too few in numbers and belong to just two or three sectors."
True, many manufacturing companies are not very hard-pressed for long-term funds right now. After all, the three-year-old demand recession, which is now coming to an end, had left many companies with excess capacities. These idle capacities are only now being fully utilised. As that happens, many companies would like to raise funds from the primary market. Besides, unsure of the response of small investors, many companies have tapped the debt market. In 1999, companies borrowed Rs 5,645 crore from the debt market, more than twice the amount raised from the primary market. In addition, a substantial amount was generated through private placement of debt and equity (a mechanism under which companies simply offer equity or bonds to financial institutions for subscription). Comments Vijay Mehta, chairman, Mefcom Securities: "It's not that non-infotech companies don't need funds. But since primary market has shut them out, they are resorting to borrowing or private placement." The dominance of software and telecom companies in the primay market is likely to continue for a few more months. Of the 22 companies that have been allowed by SEBI to make a public equity issue in the coming months, 15 are infotech firms. And since successful infotech companies can now raise money from venture capitalists on better terms, experts like Haldea fear that only average and below-average infotech companies will enter the primary market. That's bad news for small investors. They had turned away from the primary market after they lost money in dubious equity issues of the early '90s. The solution, however, is not greater control by government, but better discretion by investors. Two developments hold out hope that a full-fledged revival of the primary market is round the corner. As industrial production gathers strength, some blue-chip manufacturing companies will tap the market. Such issues will revive investor interest in industries other than infotech. The Government can help by modifying the entry barriers erected in the mid-'90s to prevent fly-by-night firms from entering the primary market and cheating small investors. Though these measures have prevented dubious companies from entering the market, good companies have also suffered. The increased presence of mutual funds in the market will also help revive the market. These funds will pick up a large amount of equity on behalf of small investors and thus reduce the need for big public equity issues. Their knowledge of the market and companies will also prevent small investors being taken for a ride. Logically, the boom in the secondary market should spread to the primary market. Generally, investor interest is first roused by rapid gains in the value of what is called the "forward group" shares (the pick of most valuable shares on a stock exchange). When the initial rally makes them prohibitively expensive, investors turn to second category of shares (say, B-group shares), and then to third category of shares (B2-group) and finally the focus turns to the primary market. So far, the current rally in India has followed this pattern. Hopefully it will finish the course. |
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