SEBI moves to make Primary Market vibrant
The need of the hour — Orderly share market
When the country smelled a Modi victory, the share market began to roar. The Sensex went up and up touching a new high. The rupee strengthened simultaneously, perhaps bolstered by the large inflow of funds from Foreign Institutional Investors (FIIs). Scratch the surface, and you will see that the soaring Sensex and the stronger Rupee do not signal a return of investor confidence – the thing the ailing economy so direly needs as the elixir.
The Sensex rose because there was frenzied buying in the Secondary market. The bull run has not affected the Primary Market, which continues to remain insipid. Traders, share holders and institutional investors are no doubt cheerful because of the profits they make in the short term through buying and selling, but this hardly helps the economy. For faster growth, investment must flow into new industries, businesses and green field ventures at a fast enough rate. The Primary Market is the gateway for new investments in new and existing companies with expansion plans. When ordinary small investors, mutual funds and large players come into invest, the Primary Market in share market looks up. This, sadly, is not happening. So, the euphoria seen now will not translate to sustained growth of the economy.
Why is the Primary Market still sluggish? Perhaps, the shadow of slow economy still shrouds the share market. The investors are in the wait and watch mode. They are waiting for more initiatives from the Modi government, and the annual Budget due on July 10 to be presented. Such caution on the part of investors is logical.
The other factor that scares the small and big investors is the history of un-ending scams in the Indian share market. Scheming brokers have ravaged the share market through frauds. Some crooked individuals have floated dummy companies with fake brochures to offer shares to un-suspecting small investors. These share offerings are done through Intial Public Offering (IPO). After they collect sizeable amounts from the gullible small investors, they vanish into thin air leaving the investors high and dry.
Despite the abominable criminality involved in these practices, and the frequency of such frauds, the law of the land has so far failed to nab the perpetrators. These cases of fraud have dealt a severe blow to the stock market activity in the country. No doubt, there are multiple checks and balances to ward off the crooks from the share market, but the fraudsters manage to get around the rules somehow and dupe the investors.
In the light of the above, the recently announced slew of measures by SEBI are most welcome. They should have the desired corrective impact in the investment market. The long neglected but increasingly important small investor will get some effective safeguards through the SEBI led reforms.
In the short run, no dramatic improvement of investor confidence should be expected. New share issues will continue to be hampered by the negative inertia of the past. All round efforts must be made to entice the shy small investors to the share market. Unlike developed countries, small investors have shied away from the share market assuming it to be too intriguing and riddled with crooks. For these investors, good quality IPOs must be available to the public. If lured into the stock market, this group of middle class Indians will prove to be the bedrock of the share market. But, it needs continuing focus to re-build their confidence and make the share market operations simpler to understand.
The latest SEBI initiatives are meant to achieve the above objectives. Some of the features of the SEBI moves are
a. The insistence on a 25 per cent public float for Public sector undertakings must offer 25% of their new public offerings to small investors. This is up from the 10% minimum presently in force. This move will substantially improve the total quantum of such PSU IPOs presently available for buying by the public. It is to be noted here that private companies are obliged to follow the 25% norm presently. The PSU disinvestment programme is going to get a boost under the Modi government. This will supplement the availability of PSU IPOs in the market.
b. There is a provision for reservation for retail investors in the Offer for Sale (OFS) route. Additionally, there is a provision for a discount for the retail investors too.
c. The limit for anchor investors has been doubled. It will boost confidence in individual issues. Consequently, it will breathe new life to the primary market mechanism.
The above moves are well-intentioned and should be welcome. However, it is worth remembering that the OFS and the IPP (Institutional Placement Programme) were created to hasten the process of large divestments of shares. Retail investment, by definition is slow and cumbersome. When large quantum of shares are to be divested, asking the retail investors to do the buying is impractical.
Therefore, even if many more healthy PSUs companies will take the OFS route, the tangible benefits of this relaxation to small investors may not quite substantial.
SEBI is taking the right initiatives, but making the primary market vibrant is going to be a long haul. Faster economic growth will add the desired impetus to the SEBI drive to revive the primary markets. Good over-all sentiments will usher in a healthy share market.
Contributed by … Ansuman Tripathy