Sucheta Dalal :Make the most of the bull run
Sucheta Dalal

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Make the most of the bull run  

Dec 6, 2004

Government must bring good quality stocks to the market through divestment of PSE navratnas

On May 17, 2004, better known as ‘Manic Monday’, panicky investors caused a meltdown in stock prices on irrational fears that economic reforms would not only be halted but that Left parties may force a reversal of economic liberalisation that had happened over the last decade. The ‘India Shining’ campaign may have failed to vote the National Democratic Alliance (NDA) back to power, it had captured the imagination of the investing class, which was now worried. That is why AB Bardhan’s comment “bhaad me jaye disinvestment ministry” (the disinvestment ministry can go to hell) in connection with disinvestment of public sector enterprises (PSEs) was probably ringing in traders’ ears that Monday morning.

At that time, I had pointed out that one needs to look at stock indices in perspective. While the Bharatiya Janata Party-led coalition was basking in the goodwill of a bull run from January to March 2004, things had been very different until a year earlier. Exactly one year before the general election (May 7, 2003), the Sensex had been at a low 2,980. The bull run began after that and the Sensex touched an all-time (intraday) high on January 9, 2004 (6,249.6). That was approximately when the NDA began to push PSE disinvestment in earnest and raised money to meet budgetary targets and keep the fiscal deficit in check.

On May 31, 2004 I wrote that it was important for the Prime Minister and finance minister to remember these Sensex trends and “not allow the Sensex to become a daily referendum on the performance of their government”. Instead of worrying too much about the short-term movement of stock prices, the government had to focus on delivering results. “Stock prices will then zoom again and the short-term fall will be forgotten, just as the first shaky years of the NDA government have been obliterated from investors’ collective memory”.

Six months later, it’s time to make the same suggestion, but in a different context. The Sensex touched an all-time high of 6,361 and threatens to rise further. Happily, there is no sign of a scam either. The rally is more broadbased and foreign institutional investors (FIIs) are pouring money into Indian stocks and corporate debt. If at all, investors are complaining about the lack of depth in the market and paucity of quality investment opportunities. As KV Kamath, CEO of ICICI Bank told me recently, “This seems to be India’s moment. And it will be a pity if we fail to take advantage of it”. Consider these numbers. India’s forex reserves are growing at the rate of approximately a billion dollars every three days in the last few weeks. Much of this is coming from foreign portfolio investment. FIIs bought a whopping Rs 876.9 crore (net) of equity and Rs 375 crore of debt on December 1. In fact, over the last 10 days, they have, on an average, invested a net Rs 500 crore every day in equities.

• There’s no sign of a scam and the current rally is more broadbased

• India’s forex reserves are growing at a billion dollars every three days

• This seems a good opportunity to develop the corporate debt market

So powerful is the impact of their interest that the debilitating war for control between the Ambani siblings also didn’t impact the market. After minor jitters, the market ignored the Reliance scrips and continued to move northwards. A day later, even the Reliance scrips joined the bull wagon as more investors decided (rightly or wrongly) that the Ambani brothers would not be foolish enough to damage their own interests by hurting the company. The new stars of the market are oil PSEs, infotech blue chips and what were derisively dismissed as “old economy” stocks but have acquired a new life.

What should the government do in this situation? Well, this seems a good opportunity to develop the corporate debt market. In order to do this, the finance ministry must end the ridiculous turf war between the Reserve Bank of India and the Securities and Exchange Board of India (Sebi) for control over debt trading and the former’s threat to fragment the market. Sebi must regulate the market and the government must request the Clearing Corporation of India to provide connectivity to the two national stock exchanges to encourage anonymous, order-matched trading in debt securities.

This is especially important for giving a much-needed fillip to the corporate bond market. In this connection, I learn that Sebi has recently capped FII investment in corporate bonds at $500 million. It is not quite clear why this was done and what are the regulator’s fears, but by limiting FII interest in private corporate bonds right now, we are probably missing an opportunity to grow this segment of the market. It is even more curious that this should have happened at a time when the debt market has lost its shine and volumes have tumbled 40%.

Second, the government must bring good quality stocks to the market through divestment of PSE navratnas. This is a good opportunity for the government to raise money without controversy, by diluting its stake without real privatisation. So great is the demand for good stocks, that even these shares will be picked up without too many questions about control and autonomy. The then disinvestment ministry under Arun Shourie had lined up several good issues of simple dilution of government holding, it may be a good idea to pick up those cases without giving them a political colour.

And third, as everybody in the financial sector will concur, the biggest issue that the India economy needs to address in the next five years is infrastructure development. Otherwise, the lack of physical and social infrastructure will be the biggest factor that would hold back India’s growth. M Damodaran of IDBI Bank recently told us that this is the time to “suspend moral judgment” and find the resources to finance infrastructure development in a hurry. It is only when the government gets cracking on these fronts, that we can claim the right to be bracketed with China or to be a part of the BRIC (Brazil, Russia, India, China) club.

-- Sucheta Dalal