[This is another blast from the past (1996), when I was wearing another hat as the President of a finance company in Bombay. Nowadays I simply watch from the galleries the market and the smart Johnnies making the same mistakes over and over again.
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Has the wheel turned full circle for the small investor? If one follows the recent trend, one cannot but come to the conclusion that, at long last, the role of the small investor may no longer be taken for granted. He may – on the other hand – now come to be given his due importance by the market intermediaries. Whether it’s the promoter, or the merchant banker, or the regulator of the capital market, the participation (or the absence ) of the small investor in the greater scheme of things is at last being felt strongly as never before. Will he, eventually, be given his due place under the sun? Will the spectators come back to the stadium to watch the game? Unfortunately, although all the right boxes seem to have been ticked, the light at the end of the tunnel seems nowhere in sight. The elections are over, the new government has settled down to governing the country, and the budget pronouncements have been approved by parliament. A few measures announced recently to cheer up the market have also failed miserably. So what’s left to be done, and more can one do to get the market up and running again like in the good old days? A million rupee question, that!

Just consider the scenario during the past. In the not too distant days of yore, the market players used to work at the grass root levels, interacting through their intermediaries to reach out to the retail investors. One used to talk about having (or building up) a large broker, sub-broker, or depositor network. The capability for placing an issue was linked closely to the solidity of the network one could boast of. A finance company, or a merchant banker took conscious pains to develop and maintain such a network through which they could market any issue the quality, and of which they were confident about. The sub-brokers, and the numerous agents mobilising and procuring funds for a whole host of institutions – be they the UTI, NSC, post office savings bank, LIC, or the like – were valuable intermediaries working at the ultimate consumer levels while being in close touch with the small investors. The small investors gained in the process, as did the other players. The investor relationship was viewed with a long term perspective and pains were taken by all concerned to maintain that relationship.

However, the marketing of issues underwent a change thereafter. The fabric of the capital market was dismantled brick by brick over a period of time. It probably started with the net public offer quantum was reduced from 40% to 25%. Retail market yielded ground to the wholesalers. Pre-issue tie-ups by firm allotments, reservations, private placements etc. became the name of the game. Broker conferences, investor meets, road shows etc. found few takers. After all, if the major part of the issue could be tied up – either through the firm allotment, private placement, or firm commitment route – it was convenient for all concerned. The investor, the promoter, or the merchant banker did not have to take chances with the issue. Allotments were more or less assured. Issue expenses could be reduced considerably. The intermediaries earned a higher fee. It was really comfortable all around. The investor base narrowed in the process. But then, it was not a problem that worried anybody.

To rub salt to the already existing wounds, came the prescription for proportionate allotment. One need not elaborate on either the mechanics of it, or about the impact it had on the process of allotment. Suffice it to say that the small investors – for whom everybody went on shedding copious tears – were further pushed out of the investment arena. He found himself totally marginalised – with not even the crumbs left for him after the big players had claimed their (proportionate) share. As if that step was not enough, the minimum subscription amount was raised to Rs. 5000/-, and the small investor was further marginalised. He got the signal that investment in primary (or for that matter – secondary) market was not really his scene. If the truth be told, he neither had the research capabilities, nor the acumen to sift through the issues or secondary market papers, and pick up stocks of value. After all, he would be matching his wits against the best in the business – the large and trained research teams in reputed establishments who were also in the same stock-picking game, and obviously could not hope to beat them in the same game. In his own interest, and also for reasons x, y and zee, the small investor was well advised to take the mutual fund route.

Well, his interest was not served by the likes of Morgan Stanley & company – with mutual fund issues mostly quoting not only far below their NAV, but even below their issue price. In fact, the Morgan Stanley issue has become a case study for class rooms nowadays. Prescribing an uniform and standardised method for arriving at the NAV has taken its own time to be put in place. But the damage had – in the meanwhile- been done. Investor confidence took further beating when it became abundantly clear when he came to realise that, more often than not, he was being taken for a ride. That, price rigging was more a rule than an exception – everybody did it anyway! An investor could consider himself fortunate if the listing price did not rapidly fall drastically below the issue price – which used to include a hefty premium in most cases. The promoters took advantage of free pricing to allot shares to themselves virtually free of cost. Everyone got away with everything – and the small investor could take the hindmost.

So it is no surprise that he turned his back to the whole game – leaving it to the big players to battle it out. The ripple effect and the chain reaction that followed have left casualties all around. Even issues lead managed by the best of the merchant bankers falling flat. Premium issues have been listed at prices as low as Re. 1/- and Rs.2.50 in the bourses. Good issues have been regularly falling by the wayside – irrespective of their quality. The market has turned to a graveyard for all – including the most brave and the daring. A very recent news analysis states that at least 256 companies – with total fund mobilisation plans of Rs.38.98 billion and holding firm SEBI acknowledgement cards, have allowed these cards to lapse. Chickening out or being prudent – the end result is the same.

According to the same report, of these 256 issues, 229 were public issues, 24 rights issues and 12 were a mixture of both. This is indeed a sea change from the good old days when the issuers used to queue up at the doors of the SEBI for the acknowledgement cards and launch of their issues as early as possible. The race to the capital market seems to have lost all charm and interest. With no more than a mere 60 to 70 scrips getting regularly quoted out of a total of some 6,000 plus listed securities, the investors who took their chances with smaller issues have burnt their fingers badly. Most of these stocks are quoting far below their issue prices, besides being relegated to the B2 groups, and are rarely having any semblance of liquidity. Going by the latest count, 3110 stocks, i.e. about 50% of those listed on the Bombay stock Exchange, are quoting below par, and 1940 scrips, accounting for 30% of the listed scrips, quoting less than half their par value of Rs.5. On the BSE, the market capitalisation has crashed by a whopping Rs.1151.03 billion in the last four months, that is, from May to the first week of September. More than 60% of the mid-cap stocks have lost over 75% in market capitalisation since last year’s peak. They are, in effect, not worth the paper they have been printed on, and selling these scrips in the market makes no sense today – given the loss in value. So most of the small investors have no option but to lick their wounds, and forget about those scrips (and the capital market) for quite some time to come.

The figures themselves tell an interesting tale. The primary market slump started in the beginning of 1995, with the MS Shoes episode – which brought out in vivid detail all the shenanigans the market players had been up to till then. The paradox was that the promoters of MS Shoes had done nothing new, nothing that had not been done before, and in full view of the market players, the intermediaries, and the regulators. Everybody had been doing them anyway, but it was the misfortune of the promoters of MS Shoes that they were the first to get hauled up when the entire rot in the  system became public. One cannot help but wonder whether the powers that be would have acted if the whole incident did not blow up in their faces. All the dirty linen was washed in public. The disenchantment and the lack of credibility of the common man eventually took their toll in the market place.

A recent study shows that in 1995-96 only 86% of the issues under survey attracted less than 5,000 investors, in comparison to 36% in 1994-95 and 20% in 1993-94. 287 issues or 21% of the total issues got less than 500 investors each (in comparison to 2% in 1994-95 and 0.5% n 1993-94). Conversely, just 5 issues in 1995-96 or 0.4% of the total had managed to attract more than on hundred-thousand applications each. On top of that, 19 other hapless ones who could not see their issue through refunded their entire application money to the investors. The aggregate applications from the investors during a year have fallen from the all-time peak of 80.4 million in 1992-93 to 51.1 million in 1994-95, and to a measly 7.2 million in 1995-96.

During January to March 1995, 54 companies shelved their issue plans. Between October 1995 and March 1996, 155 issues got cancelled. Of the 265 issuers to shelve issue plans, 88% were from the manufacturing sector. There are more than 500 issues now in the pipeline, projects and plans at various stages of implementation. It is given to understand that they have not yet bothered to file their papers with SEBI. Compared to 392 issue documents filed with SEBI in April 1996, only 43 have been filed up to August 24, 1996. Presently, whatever issues that are coming to the market are the spill-overs of applications filed with SEBI earlier this year. The diminishing trend is likely to be more pronounced in time to come – as every promoter wish for better times, and quietly defer his plans, with ominous portents.

The consequence? The increasing disappearance of the investors from the primary market has already started to affect adversely the country’s industrial growth. While in 1993-94 public issues had helped to implement projects worth Rs.332.29 billion and Rs.384.83 billion in 1994-95, their contribution fell sharply subsequently. In 1995-96 public issues have helped to implement projects worth only Rs.140.40 billion, while between April and August 1996 the contribution has fallen drastically to just Rs.37.47 billion.

A word about the debt market at this juncture may not be totally out of place. Although the slump in the capital market has given a big boost to the debt market in recent times, the flood of debt instruments have also caused a glut, and symptoms of debt-fatigue. Besides, no financial or resource planning can possibly depend on debt alone.

As a fall out of the above scenario, the merchant banking business has virtually folded up. Underwriting is not a cakewalk anymore. The underwriting business – like the premium on issues – went through the usual metamorphosis of growth. When the CCI closed shop the promoters went about merrily exploiting the new-found freedom to the hilt, and quoted any which premium they could extract from the market as if there was no tomorrow! The fortunate ones collected whatever premium that the market could absorb at the initial stages of euphoria. Then the bottom fell out. Premium issues began to quote far below their issue price, and the price on listing did the same trick. One possible reason – price rigging (or circular trading) became a dangerous game to play. It came to such a pass that any issue at premium today is classified in the ‘untouchable’ category. Its failure is virtually guaranteed – however good the issue. The ‘price on listing’ game having been well and truly exposed, new issues have lost their attractions. The ordinary investors have become extra cautious and decided to stay away from the market, being most unwilling to exploitation any longer.

As with the decision about premium, the underwriting business used to be a one way street. Since success of any and every issue was guaranteed ( the actual issue being the number of times they were expected to be oversubscribed, and thus influence the listing price) the underwriters’ job was to lend names and collect fees. Quality or the success of an issue was hardly an issue to be bothered about. When SEBI loosened their grip about mandatory underwriting, the issuers – being confident about their success – gave the underwriters the thumbs down and charged into the market on their own. When the rules of the game changed, and issues started bombing, the merchant bankers faced huge liabilities and commitments from devolved issues. Underwriting as a ‘business’ became extinct thereafter and remains so since the post-January 1995 plunge of the stock market. Even if the market revives, the business will not be the same as it had been anymore. The lesson has been learned. And, in the end, the capital market is the casualty.

Another casualty has been the innumerable pre-issue placements and bought-out deals struck by a large number of players. Reputed (and not so reputed) finance companies, banks and merchant bankers are stuck with huge amounts of papers for which the exit route is nowhere in sight. The carrying cost is progressively becoming so very prohibitive that the issue price now will have to be unreasonably high for these intermediaries to recoup at least their investments – not to speak of making a decent spread on these deals. The greed exhibited while pricing the deals have become their necropolis. The original promoters who agreed to the bought out deals and the pricing were led to believe that the market could go only one way – that is, up. And, therefore, any premium was good enough. The downside was completely ignored by these experts. The rest, as they say, is history.

The end users – both at the OTCEI and the other exchanges – have turned their face away, leaving the bought-out dealers to hold the baby. The honeymoon with bought-out deals, therefore, is not anymore a bed of roses, but rather being avoided like a high-premium issue for lack of any exit route. Once upon a time, if a merchant banker was not into ‘bought-outs’ he was no merchant banker at all! All that is now history. Assured returns have turned into nightmares.

The domestic biggies like the UTI hardly seem to have the ability to move the market. The last hope of the Indian bourses – the much sought after FIIs – are also nowhere in sight. Some are even talking about leaving the country – if recent reports and utterances are to be given any credence!

Justifiably concerned with the state of the capital market, questions are now being raised about initiating steps to revive the market before further damage is done to the economy. However, to this author it seems that the state of the market is only a symptom, the actual maladies being rooted elsewhere. Attempts to treat the symptom alone – without identifying and treating the cause – can hardly be expected to yield the results desired.

The capital market in India today looks alarmingly like a graveyard. The unfortunate brutalisation of the capital market is complete. The question on everyone’s lips is -’Where have all the investors gone? Why have they lost interest in the capital market!’

No, they are not talking about the big daddies. They are referring to the ‘small investor’, the likes of you and poor me!

First published in The Economic Times, Bombay, India, in two parts on 12 Oct, 1996 and 19 Oct, 1996.

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