All The Kings Men...

Every year, the stock markets go through a phase of depression immediately after Diwali. The post-festival slump has to do with the fact that the majority of the brokers tend to take time off for vacations. And trading volumes and prices tend to fall during November and December before coming back to normal with the new year.

This year, market observers are not even speculating whether history will repeat itself. It has become a foregone conclusion given that the market has been sliding steadily week after week since the Budget. And the point bothering the government is: just what can pull the market out of the longest bear grip in history? For the past six months, the finance ministry, the RBI and the Securities and Exchange Board of India (Sebi) have, in turns, tried everything they could to push the market up. But despite their combined efforts the market keeps slipping down.

 

Between July 22, 1996, the day of the Budget, and today, a whopping Rs 1,50,000 crore has been eroded in terms of market capitalisation, according to statistics presented by M G Damani, president of the Bombay Stock Exchange (BSE), to substantiate his case.

But what precisely is going wrong? And why havent all the steps that were supposed to perk up the markets working?

To understand that, one needs to go through the various theories that were proposed about the markets depression and what the government did to address those issues.

Consider the theory by M G Damani first. According to him, the latest statistics show that almost 66 per cent of the stocks listed on the BSE are not being traded at all. The reason, says Mr Damani, is that most of the upcountry investors have their investments in B1 and B2 group stocks. And unless the BOLT is expanded, they are not going to trade regularly.

The government decided to try out the efficacy of that theory as well a couple of weeks back, when it agreed to let BSE expand the BOLT system. How well Damanis theory of trading activity picking up once BOLT is expanded will be tested out soon enough. But quite a few market players feel that even the expanded BOLT will not do the trick. They point out that the other prescriptions put forward from time to time, and implemented by the government, have failed to pull up the market. For example, one of the pet theories was that the markets would start rising if the foreign institutional investors (FIIs) were allowed greater flexibility while investing. The government has tried that too. Any FII can now pick up upto 10 per cent of a companys paid up capital. Moreover, FIIs have been permitted to dedicate 100 per cent of the fund money into debt markets as against the 30 per cent earlier. But those announcements did nothing to pull up the market.

Another point that had been put forward to explain the bear grip was the absence of enough money with the big domestic players to put into the market. The credit policy announcements about allowing banks to invest up to 5 per cent of their incremental deposits in the secondary market was supposed to do precisely that. But that failed to do anything to the indices either.

Another widely held view was that the markets were down because corporates were affected by the liquidity crunch and high interest rates. The credit policy made sure that interest rates inched downwards. And again, the CRR cut of 2 per cent for banks as announced in the credit policy made sure that enough money came into the system. But the markets have continued to remain down despite that.

Finally, even the theory about the markets being down because of the unfriendly attitude of Sebi was addressed recently. The capital market watchdog besides giving its green signal to the expansion of the BSE, gave up vetting of offer documents, removed the restriction of Rs 100 crore on book-building, and has formulated a takeover code to smoothen the process of takeovers and cleared all regulations pertaining to the depository which will commence operations on November 8, 1996 and so on.

None of these steps have enthused the market. So despite all those positive steps whats hindering the market. While most market players give the government credit for its initiatives, they point out its efforts are not working because of external factors. As Vinay Kamat, head of research, JSB Securities puts it: The government should not be denied due credit for initiating steps to remove the imperfections in our capital markets. However, the market has been unable to rotate the money. The government cannot be blamed as things that are hitting the market sentiment hard are external factors.

He feels that the rate at which both politicians and industrialists are getting arrested and raided by various authorities is creating a climate of uncertainty and preventing the flow of investments into the market. The retail investor is just not getting the requisite comfort level from the market. The recent raids on the ITC offices have raised doubts about the seriousness of the Indian corporates on the issue of corporate governance, adds Kamat.

At a recent gathering, brokers unanimously criticised the ITC management for what they called a mockery of the corporate governance. And all of them agreed that this sort of behaviour on the part of erstwhile blue chip companies may lead to further drop in the confidence level. Not only are investors scared of putting money into the market, even lending institutions are chary about giving money to corporates because of the absence of good quality borrowers, they feel.

As Chandrashekhar Tilak of Indsec Broking points out, in the prevailing circumstances companies have bank finance as the only affordable option. But, he says: Paradoxically, this option is also not that easy to tap despite the fact that banks are having the necessary funds and are willing to finance on one hand and companies are in need of money on the other. Because bankers are unanimous in proclaiming that no sound proposals are forthcoming. This is mainly because corporates are finding it difficult to meet the bank requirements like book-value market capitalisation, P/E ratio due to depressed market conditions.

Intermediaries agree that regulators cannot be blamed for the present state of affairs, as the upswing or downtrend in the market need not be a cause of concern for them. However, intervention is necessary in areas where regulations are coming in the way of smooth functioning of the market. A section also feels that the finance ministry is keen to see that the markets are propped up because Rs 5,000 crore worth of PSU stocks have to be sold. However, they also concede that the steps that they have taken are in the right direction and will only clean up our markets.

Adds Kamat: Our markets are presently passing through a phase of consolidation and quality will be ensured with stricter entry norms for companies for raising funds. We are optimistic about 1997, as more steps will be taken to ensure vibrancy in the market by introducing the concept of buy-back of shares, stock lending and so on.

The BSE is also working on another game plan to bring back the traditional badla system, to improve the efficiency of the market. As Mr Damani puts it: With the screen-based trading system and monitoring mechanism, the old badla system can be brought back in the market.

There is also some hope that FII investment will pick up again. The FIIs were not very enthusiastic about the state of the market for much of this year. But people are hoping for a recovery early next year, when the fund allocations for the emerging markets are decided upon.

What is keeping the FIIs from putting in large sums of money is not government regulations, but the general state of affairs in the political and corporate world. According to global investment banks the further opening up of the capital markets would have their long term pluses, but factors like political uncertainty, the illiquidity at the domestic markets, the lacklustre half yearly corporate results in diversified sectors and poor sentiment due to fears of a slowdown of the economy are all creating a negative sentiment.

The ITC controversy, if sustained, will affect not only the domestic stock prices but also the GDR markets. While the ITC GDR has slipped in recent days, the foreign investors may keep away from Indian GDRs if the poor sentiment prevails. In fact all eyes are now on the forthcoming mega telecom GDR issues of BPL and Bharati Telecom. If they do well, it would be a sign that foreign investment sentiment in Indian companies is becoming better again. Says Amit Ghose, corporate finance chief of HSBC James Capel: The revival could come about but only in the first quarter next year...with a clearer signal after the next budget. The optimism then, is only in the minds of the law makers and not in the minds of the investor or the market.

In conclusion, the regulations are being put in place. And in the right manner. But that will not be enough. Somewhere along the line, all these well intended measures have lost their impact within scams, mergers and takeovers. The message is clear - that no change will come about at the markets until the mindset of the investor is changed.

The government cannot be blamed as things that are hitting the market sentiment hard are external factors.