Sucheta Dalal :Converged Interests
Sucheta Dalal

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Converged Interests  

June 2, 2009


On Tuesday, 27th May, even as finance minister Pranab Mukherjee was being interviewed by CNBC, the Sensex had lost a couple of hundred points – it ended the day almost 300 points below its previous close. No, Pranabda’ said nothing that caused the Sensex to drop. In fact, he was discretion personified and would not say a word that could be misinterpreted as a pre-Budget leak. If anything, he assured the nation that finance ministry mandarins, after a prolonged election-cum-summer break, were hard at work and confident about presenting a full Budget in the first week of July.

Pranab Mukherjee’s reticent style is welcome in the current situation. The government desperately needs to dampen exaggerated expectations about reforms as well as growth to avoid an India-centric speculative bubble. We certainly don’t need another finance minister who is completely focused on the Sensex, even though the world has begun to call an end to the recession on the back of positive economic indicators. Nobel-winning economist Paul Krugman, a trenchant critic of the Bush Administration, has said that the worst is over.

In these circumstances, India is in a peculiarly positive situation. It wasn’t very badly hurt by the global meltdown and the stable union government voted in at the general elections is just what is required for a variety of vested interests to converge again to create another speculative excess.

Starting from television anchors/owners to investment bankers, fund managers and brokers who are their expert guests, everybody wants a repeat of 2006-07. After all, their business, their lifestyles, their ESOPs and, in case of media companies, their very ability to survive by fresh fund-raising that is de-linked from their losses, is only possible in a bull market. The convergence of vested interests was best exemplified by the CNBC anchor, Udayan Mukherjee, who had lost all sense of balance and was deliriously hugging and kissing his computer on 18th May – a display that made even cynical market watchers cringe with embarrassment. Another of the channel’s favourite pundits, who was predicting that the Sensex would dip to 6,000 just a couple of months ago, has done a sharp about-turn and says it could scale 20,000 before year-end. So, everybody now projects the same view.

By all means, let’s celebrate the end of the downturn, but do we really want another irrational rally where dubious realty companies trade at sky-high prices, pick up easy money and ramp up property prices in our cities? It is up to the Congress government to discourage a return to excessive speculation. Although it has another four years before it begins to worry about what the people want, it would do well to remember that unaffordable housing was one of the downsides of the pre-2008 stock bubble. In Mumbai, a lottery for 3,862 affordable flats floated by MHADA (Maharashtra Housing and Area Development Authority) saw 4.33 lakh applicants; some of them even turned suicidal when they failed to win an apartment. The applicants included lawyers, actors and businesspersons and other segments who are presumed not to need subsidised homes. Affordable housing ought to be a priority on the government’s social agenda.

Unfortunately, this is the sector that is getting ready to make the most of the bull run. Indiabulls Real Estate is among those who ‘lucked out’, as the Americans would say, when it timed its badly-needed fund infusion for 18th May. If one were to go by the exit polls and opinions of political pundits (who were, without exception unapologetically and dramatically wrong again), then things could have gone really bad for Indiabulls. Instead, investors who were reluctant to commit $20 million for its qualified institutional placement (QIP) until that morning were suddenly ready to invest twice as much allowing it to raise $565 million. Immediately, the most hammered-down realty stocks shot up and a slew of companies announced plans to jump on to the QIP bandwagon. So an Opto Circuits, Parsvnath, HDIL and a Sobha Developers, along with banks and some housing finance companies, are all on a fund-raising spree. The promoters of these companies were only focused on enhancing their personal net worth based on the high market-cap of their shares.

Now that the market is booming, the game of pumping up prices has begun with renewed vigour; it is no secret that a large swathe of companies with fund-raising plans is directly or indirectly involved in ensuring a high offer price. These freshly issued shares will sit in the books of funds, banks or insurance companies and foreign institutional investors (FIIs) who can justify their purchase, at absurdly high prices, as long as the upward move continues for a while. Media reports are already justifying QIP-buying with the logic that it helps institutions average their price downwards, since they are stuck with higher priced shares acquired at the peak of the bull market. Any decent book on investment warns investors against the temptation of buying more shares to average prices; yet, this is apparently a justification for subscribing to QIPs! In addition, investment bankers are already lobbying with the regulator to relax pricing norms (already it is the average price of the past two weeks only) and allow close to market pricing. This only creates an incentive for price ramping, especially since the regulator’s surveillance mechanism does not seem to work.

Apart from QIP of around $40 billion planned to be raised, companies are also furiously lining up plans to issues themselves fresh warrants to take advantage of the turnaround, while mutual funds are working at news schemes to grab retail money at a time when deposit rates are dropping and inflation is slowing inching up.

Well, we only hope that this finance minister makes frequent television appearances to splash some cold water on a heated stock market. It will be a welcome change from his predecessor who rushed to talk up the market at any hint of a price correction and pretended like the bull run would last forever.


-Sucheta Dalal



-- Sucheta Dalal