Market realities, the regulator and the FM

Market realities, the regulator and the FM
SUCHETA DALAL

When Finance Minister Yashwant Sinha rushed to suspend an inquiry into tax claims against Mauritius registered Foreign Institutional Investors (FIIs) after the Bombay Stock Exchange Sensitive Index (Sensex) had crashed 361 points, it signalled that stock markets now dictate policy decisions. In his hurry to pacify the FIIs, five of who had received an IT demand of Rs 8.6 crores, Sinha forgot that the Nasdaq had crashed as dramatically and that Indian markets are now plugged in to international trends.

On April 7, a hurriedly convened SEBI board allowed media and telecom companies to make public offers of just 10 per cent of their equity as against the existing 25 per cent public offer requirement for other companies. SEBI sources say that media companies led by New Delhi Television (NDTV) had lobbied hard for the relaxation which will allow them to raise a lot of money by offering very few shares to the public.

The arguments used to justify this move were -- firstly, that money is fungible and good Indian companies would otherwise prefer listing on the Nasdaq. This is an old and fake bogey. Over the last few years, several scores of companies have threatened to list overseas, some even went through listing procedures but dropped their plans. Less than a dozen companies are listed in the US because disclosure standards are much higher (even ICICI Bank was forced to make additional disclosures of non-performing assets which amounted to nearly half of its profits) and the enforcement machinery more ruthless.

The second argument was that Nasdaq has no minimum listing conditions so why should we? In fact there is no comparison between the two. US investors have access to a far better information network, investment advisors are governed by the SEC and their legal system allows aggrieved individuals to also tap the court and expect a speedy trial and satisfactory monetary compensation. American investors may still make foolish investments but their safety nets are far better. Without the same safety nets, comparisons are ridiculous.

The third argument was that the requirement of a minimum public offer of Rs 50 crore and 20 lakh shares took care of the fears of low floating stock leading to ramping of prices. It was the considered opinion of the SEBI board that a nationwide distribution of 20 lakh shares was adequate. That media companies are particularly well placed to generate hype about the market is not even being considered by the policy makers. Only time will tell whether SEBI and the Finance Ministry are correct in their assessment of adequate floating stock, but if they are wrong, only the investor pays the price.

Interestingly, it was even argued that these new economy companies do not need much money and hence should be allowed lower dilution. Nobody asked why these companies did not simply raise money through private placements. After all, several newspapers and magazines have managed to raise funds through private placement in the past even when they have made huge losses.

The fourth argument was that a 10 per cent public offering was already permitted to infrastructure companies and more recently to IT companies instead of frequent exceptions, SEBI should extend the rule to all companies. The meeting, however, restricted the relaxation to the media, entertainment and telecom sectors. It was mentioned that SEBI's Primary Market Advisory Committee (PAC) had discussed and approved the lower public offering for IT companies and had also considered extending it to technology and telecom companies. The assumption was that latest decision met with its approval. In fact, infrastructure companies cannot be compared with the new economy sectors. Their funds requirement and equity is usually very large and they are in no position to post the sort of earnings that lead to a frenzy in the stock market.

As for the IT companies, let's go back to what really happened at SEBI's PAC in the case of IT companies a few months ago. That meeting had 11 attendees (including the SEBI chairman who is not a member). Of these three were investment bankers present only as invitees (Vallabh Bhansali, Shitin Desai and Uday Kotak) and who pleaded their business interests. Of the remaining seven, the National Stock Exchange (NSE) representative voiced no opinion either way. Three of the remaining independent members -- consumer activist Manubhai Shah, Prof V Raghunathan (of IIM Ahmedabad) and Jayalaxmi Jayaraman a Director in the Finance Minister not only registered a strong protest but also recorded their dissent.

How universal does this make the SEBI decision to relax IPO rules for software companies? The SEBI board which met on April 7 did not even ask about this. In fact, it was made to appear as though the move had the tacit approval of the PAC.

Finally, nobody paid attention to the track record of existing entertainment companies. None of them have delivered a financial performance that justifies concessions. If anything, the much hyped and publicised Amitabh Bachchan Corporation Ltd (ABCL) has become a byword for the lack of professionalism on the part of megastars who were personally valued at way above their true worth. In fact, the film and industry has still to demonstrate that it can work professionally.

When the finance ministry and its regulators become obsessed with stock market movements and are influenced by high profile lobbyists, it's tough times for investors. The Consumer Education and Research Centre (CERC) of Ahmedabad now plans to approach the courts to protest these concessions which have made the stock market more dangerous to investors.

Author's email: suchetadalal@yahoo.com