A key reason for the slowdown in the economy is the virtual drying up of public mobilisation of funds.

By V Shankar Aiyar

The truth's virtually staring them in the face, but nobody wants to look at it. For over 18 months now, the Government has worked in tandem with the Reserve Bank of India (RBI) to address the factors dragging the economy down. Interest rates, infrastructure, the secondary market, external commercial borrowings ... every cause that is affecting economic growth has been examined at length. Barring the primary concern -- the primary market.

The correlation is evident. According to the Centre for Monitoring Indian Economy (CMIE) figures, resource mobilisation (public, rights and convertible issues) rose from Rs 14,407 crore in 1991-92 to Rs 49,220 crore in 1994-95. Consequently, industrial output rose from 0.6 per cent in 1991-92 to 11.8 per cent in 1995-96, while exports jumped from -1.5 per cent to 21.4 per cent (see graphic).

Modern and emerging economies are, as a rule, fuelled by public offerings. Between 1992 and 1996, thanks to the primary market, companies were able to raise cheap funds for much of their expansion. Virtually every segment of industry announced new projects, tapped the capital market and built assets funded by resources raised from the primary market. For instance, the steel sector mopped up Rs 3,500 crore from the public while private and joint sector refineries picked up almost double that amount. Indeed, the top 20 corporate groups accounted for 58 per cent of the Rs 1,88,078 crore raised between April 1990 and December 1996.

Says Prithvi Haldea of Prime Database: "Public issues in 1993-94 funded projects worth over Rs 40,000 crore. In 1996-97 the figure was down to Rs 6,000 crore." What's more, this year -- 1997-98 -- it will fall further. Already, for the first six months of the current fiscal, the figure is down by 94 per cent as compared to the record low of last year. In more ways than one, September, which saw just one issue being made -- a Rs 1 crore offer by the Calcutta-based Commitment Finance -- is a telling testimony on the state of the primary market.

It is not as if the primary market has ground to a near-halt overnight. The fairy tale which started towards the end of 1991 encountered the first shocks in the scam of 1992 but recovered to ride the boom in the economy till the end of 1994. The first major drop in the Sensex in January 1995 left many investors wondering whether they had been swindled by companies which milked them using the free-pricing route. By late 1995, it was clear to most primary market investors that they would be left holding the baby. Haldea estimates that the money lost by those who backed issues floated between 1992 and 1995 is between Rs 20,000 crore and Rs 30,000 crore. "Ninety-two per cent of the issues floated in the period (both premium and par offers) are quoting below the price at which they were sold."

Analysts now explain the phenomenon by saying it was fuelled in part by the greed of the investor and also by the wrong sequencing of reforms. Free pricing of issues, which should have followed disclosure norms, actually preceded them. Naturally, in the absence of disclosure norms and punitive powers in the hands of the Securities and Exchange Board of India (SEBI), the "money for jam" crew had boarded the gravy train. SEBI Chairman D.R. Mehta (who took over when the boom was almost over) points out that "today it is acknowledged that disclosure norms in India are among the best in the world". But the damage had been done. Market movers also assert that the damage is too great to be reversed. Says Deepak Parekh, chairman, hdfc: "There is no life in the primary market. People are simply reluctant to come forth. Until that happens how will output grow?" Vallabh Bhansali of Enam Financial can only concur: "People have lost too much money in the primary market and unless they make significant monies things won't change. The market is simply paying for its past sins."

The truth is while there are numerous laws governing companies before they go public, none exist to regulate their post-issue behaviour. Even though the Sensex soars time and again, the fact is that the shares of not more than 2,000 companies are traded regularly. Over 600 scrips have not been traded since 1996, and over 111 since 1995. bse officials reveal that more than 2,000 companies had till July-end failed to file balance sheets for 1996-97 and some 300 hadn't done so for over three years.

There is nothing any authority can do. Or so it seems. On their part, exchanges reveal that they have two weapons -- suspension of trading or delisting. And, as bse chief M.G. Damani puts it: "Both are patently anti-investor. The companies are not bothered." Or take the question of post-issue utilisation of funds. It has been bounced between SEBI, the Registrar of Companies and the Department of Company Affairs by Finance Ministry mandarins for over four years now. Top corporates -- the Sensex blue chips -- hit by the slide are not even considering the primary market as they fear they will either have to underprice their issues or face a failure. The better options seem to be gdrs and foreign debt that are coming cheap. Moreover, with the current slack in demand there are no new or significant projects being launched. Says S.K. Shelgikar, adviser to the Videocon Group: "Only companies that can find a venture that is viable or can justify sustainable earnings in a global sense in the new open regime of gatt and wto will dare to hit the market with a public issue."

What are the solutions? SEBI on its part has suggested to the Government that companies floating gdrs be asked to float a part domestically, float idrs or even more interestingly be allowed to accept Indian investment in gdrs. The bse board believes restoration of badla would improve liquidity and increase the exit routes for investors stuck with illiquid paper. Some even believe that retailing of PSU divestment could do the trick.

There is a glimmer of hope, though. Some like Pradip Shah of Ind-Ocean Fund see a revival in product sales in the next quarter and feel that "maybe the primary market will revive with that". Others see hope in the fact that issues such as ICICI, Corporation Bank and some PSUs did well. But Haldea disagrees. "If anybody feels so, they are perpetrating a myth. Whatever investment has happened is in banks and PSUs. The investor has lost faith in the private sector." The need of the hour: restoration of confidence. V.R. Srinivasan of Imperial Finance believes that the market needs "psychiatric treatment not economic". Parekh believes that "the Government must kick-start the primary market. Unless it does that there is little hope of output rising, of robust economic growth".

Easier said than done? True. But if the Government means business it will have to walk its talk. Especially if Finance Minister P. Chidambaram wants to keep the dream he wove on February 28, 1997, alive.

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