Exporting The Capital Market

Companies seem to expect this to continue, and are cutting even finer the costs of raising money abroad by not hedging their currency exposure. Globalising Indian companies like Reliance, which is at the forefront in raising resources overseas, have additional reasons for not being perturbed by the consequences of a depreciating rupee. If the rupee does fall, the landed costs of competitive imports will go up, thus allowing the company to achieve better price realisation on its domestic sales. This scenario is of course changing, with domestic interest rates beginning to fall and talk of a revival of the domestic primary market later in the year. But still, a primary market boom of the kind seen in the past is unlikely to return very soon. The irony is that there is enough and more money sloshing around in the system, searching for suitable outlets.

Which perhaps brings up the other reason for companies to prefer raising resources abroad and foreign investors to use the GDR route to invest in Indian paper, instead of using the FII route: transaction costs in India. The ills of the Indian capital market with problems like bad delivery, low volumes, rigged prices and irregular settlements are well known. GDRs are additionally attractive to companies as they are virtually non-voting shares, but it is doubtful if Indian non-voting shares, as and when introduced, will greatly reduce the charm of GDRs to Indian companies.

The capital market can also be said to have been exported because the majority of cases where a company has changed hands has meant control shifting from Indian to foreign hands. This has been noticed in virtually all the cases where joint ventures fell apart (one recent exception is HCL-HP), and is equally true in the case of companies that are on the block, like NOCIL. Indian business groups dont seem to have the financial muscle to stay in the game, or pull out because they dont think they can defend their market position in the long term.

The capital market cannot come back to India unless Indian real interest rates on bank loans go down significantly. The problem in banks, which makes the downward movement of their lending rates sticky, has to be addressed. The Reserve Bank of India also needs to allow the rupee to fluctuate more naturally so as to remove the illusion of its stability. The relentless effort to modernise Indian stock markets and regulate them better has to go on so as to make transaction costs on them comparable to efficient markets elsewhere. And new instruments have to be developed which will enable businessmen to raise capital more easily. There might even be a case for an Indian junk bond market.