R Balakrishnan
A confused regulation

If a company does not want to adhere to the proposed rule of a minimum public holding of 25%, SEBI cannot do anything about it

Indian capital markets have always been a joke. Anyone can list. All you need is a business plan or a friendly merchant banker. And you start with a 10% dilution at stage one and after a few years, the promoter holding can be zero. No one will know.

Our stock exchanges have absolutely no gate-keeping, with regulators generally not having a clue about anything. It is a travesty that companies like National Mineral Development Corporation/ Minerals and Metals Trading Corporation (NMDC/MMTC) are given the status of 'listed' companies, with a handful of shareholders. Our stock exchanges are a great place for raising venture capital (VC) and have been the principal reason that venture capitalists find it tough to get decent deals in India.

Anyone can list at any price on the stock exchanges. And the processes are designed to hide things from the investors and also make sure that the investor never gets time to read anything about an initial public offering (IPO). Hence, one fails to understand why the finance minister (FM) wants to tinker with the stock markets. Surely, the stock markets are supposed to serve the interests of the issuers and the bankers. The investors do not mind manipulated prices nor do they care a fig about it.

Our octogenarian finance minister mentions that the move to increase public shareholding to 25% will deter price manipulation. There, he is mistaken. Any share price can be manipulated, if one has enough money. There are many listed companies which on paper have more than 25% holding with 'non-promoters' and included in the 'public' category, but in reality happen to have benami holdings which are included in the public category. So, this move in no way will put an end to manipulation of share prices.

The latest diktat of having a 25% public holding is one more joke. It is a rule that cannot be complied with and if a company or promoter does not want to comply with it, SEBI cannot do anything about it. Yes, they can threaten to not give permits to new entrants, but soon they will relax these, with several catches.
The first demand will come from the PSU undertakings. When the regulator does not understand what the markets are all about, he is but a tool in the hands of industry and investment bankers. After having debased the concept of 'listing' it does not make any sense to put in new entry barriers. After you have given permission to companies to list with minimal free float, the Securities and Exchange Board of India (SEBI) cannot deny the continuance of listing by executive action.

I would rather urge a carrot-and-stick policy to encourage broader public participation in businesses. For instance, one or more of the following steps could have been looked at:

i) Shifting of companies with less than 25% public holding to the Over The Counter (OTC) exchange. This will preserve some sanctity for a stock exchange (this will also give some life to the OTC exchange);

ii) To start with, ensure that stocks where the public holding is below 25%, cannot be traded in the forward and options (F&O) segment;

iii) Deny inclusion of such illiquid stocks into any sort of index;

iv) Increase the fees payable to the exchanges/regulator by such companies;

v)  Restrict trade in these stocks on cash basis only.

vi) Permit open market sale of promoter holdings through block deals, with institutional buyers (in fact this is the typical route that has been used by many promoters to dump their shares);

vii) Insist on a minimum of 100,000 shareholders with a minimum holding of 1,000 shares each, for permission to be listed on the main board of an exchange. Otherwise, the OTC is always there for the illiquid companies. (I recall that the NYSE used to have this criterion);

viii) Have a higher rate of taxation for companies that do not have 25% non-promoter holding. However controversial it sounds, it is the only way to ensure compliance. Once this is done, suddenly promoters will cease to worry about market timings for dilution of equity.

The idea is that these companies are encouraged to dilute. SEBI is foolish in prescribing a 5% per year dose of dilution. That simply will not work. A promoter will sell only when he gets a price that he is happy with. Market conditions do not remain stable for any length of period. Hence, you cannot force disgorgement.

An interesting fallout will be what happens where the promoter has gone in for increasing his shareholding and reduced free float. Similar will be the case in companies, which have gone in for buyback and reduced the free float. Many MNCs have gone in for buyback with a view to delist. How can a regulator force them to disgorge once again?

The other fallout will be the argument of experts that the markets cannot absorb so much. It will nail the argument that India has a vibrant investor community, when the truth is that it is a shrinking universe. Listing has become a joke with the permission of this anachronism called 'Qualified Institutional Placement' (QIP) issuance, warrants to promoters, preferential issues, etc.

It is interesting that the regulators find a way of cutting their own noses to spite their faces, time and again!



Narendra Doshi

7 years ago

Very good observations / solutions for ALL THOSE involved in this.

Africa’s greatest problem: Free money

 Free money creates bad government and bad government is the root cause for most of the continent’s anaemic economic growth

There is a great debate why Africa has not enjoyed greater economic growth. For me, the answer is simple: free money. Free money creates bad government and bad government is the root cause for most of anaemic economic growth.

The free money comes from two places, natural resources and aid. Africa has been blessed with vast mineral wealth. The small country of Guinea with a population of only 10 million holds up to half the world's reserves of bauxite.
It also has more than 4 billion tonnes of high-grade iron ore, significant amounts of diamond, gold deposits, uranium and even rare earths. Yet its per capita GDP of $991 is one of the lowest in the world. It ranks only 145th.

Even the relatively rich, democratic South Africa has problems. It ranks as the 26th wealthiest nation in the world. It has extraordinary mineral wealth, with 90% of the world's known platinum reserves, 80% of its manganese, 70% of its chrome and 40% of its gold, as well as a large amount of coal. Yet 50% of its citizens live below the poverty line. Its GINI coefficient (a measure of the relative equality of wealth) is the second highest in the world signifying that few of its people benefit from the geologic bonanza.

The free money from mineral reserves is known generally as the curse of oil. The paradox is that instead of generating wealth for the country often income from exploitation of commodities is squandered or stolen and the country ends up poorer. Perhaps the poster child for the curse of oil is Nigeria.

Nigeria has the 10th largest oil reserves in the world. Nigeria produces almost two million barrels of oil a day, and could potentially increase that by over 35%. It could refine the oil. Nigeria has four refineries that could produce around 500,000 barrels of oil a day, but only one is operational. Like Iran, Nigeria produces immense quantities of crude, but must rely on imports for much of its refined products.

Despite the vast flow of oil income, Nigeria has one of the lowest life expectancies in the world. It ranks near the bottom of the list in education spending (177th) and 70% of its citizens are below the poverty line. It ranks at 130 on the corruption index, which is at least above Guinea at 168.

Why does this happen? Why is such wealth wasted? Simple, the money belongs to the people. The people are represented by the government. So the money goes to the government and gives politicians colossal economic incentives to take it. This is not a question of national morality or culture. Politicians everywhere are caught with their hands in the public treasury.

The best method to stop them is a free press which has financial incentives to expose them. Scandals sell newspapers, television shows and websites. It is also good if the information unearthed by journalists is backed up by prosecutors with strong incentives to enforce the law. Government without a free press is like a football game without a referee. Without the red cards of legal disincentives, investment is impossible.

Sadly these disincentives rarely exist in Africa. On the contrary, the politicians often use the funds from natural resources to insure that any legal disincentives are suppressed either by building and paying for security forces to intimidate dissenters or by buying off the opposition. These problems are exacerbated especially in post-socialist countries where bureaucrats have economic incentives to maintain a discretionary regulatory infrastructure that serves their ambitions to become permanent rent-seekers.

The result is the same whether the money comes from mineral wealth or in the form of aid provided by well meaning, but foolish developed countries. Over $1 trillion of development aid has been given by rich countries to Africa in the past 60 years. Presently the gifts amount to about $50 billion a year. This free money has the same effect on governments as does the income from natural resources. It corrupts.

Of course if you can win using the Paradinha, you have a large incentive to keep doing it. The politicians who create weak legal infrastructures have enormous strong incentives to keep them in place. In addition, countries with poor legal systems tend to be more relationship-based than rule-based. So politicians need extremely large amounts of patronage to reward friends, family, party members, security forces and anyone else who keeps them in power.

The investment climate is changing, but at a cost. President Johnson-Sirleaf of Liberia forced her own brother to step down because of corruption and President Jakaya Kikwete of Tanzania is at least trying to curb corruption. But the really successful players are those most familiar with the pitch. The best ways to invest in Africa are through home grown companies, many from South Africa, who are aware of how the game is played on the continent and can navigate its problem successfully.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).


Fortnightly Market View: All at Sea

Bears aim for ‘top kill’, bulls hope for a durable bottom

The short-term top I had called, when the recent market decline started on 15th April, is still in place and looks likely to stay for quite some time. And there are only vague signs that we are about to get a short-term rally. Two weeks ago, as I was writing this column, the Sensex did stage a strong rally—650 points. I had mentioned that the market is not headed anywhere, despite this rally, and despite the fact that global markets had all rebounded nicely. Indeed, the Sensex is at the same level after two weeks of trading. I had marked that rally of two weeks ago as a short-term uptrend. This uptrend fizzled out at the Sensex level of 17,150 the following Friday; the index has given up 600 points thereafter and is trying to rally again.

There is absolutely no conviction among investors. Foreign institutional investors are continuing with their alternative bouts of buying and selling; but, over the past few days, their investment volumes have shrunk. Are they keeping their shrinking powder dry or are they waiting to bolt at every rally? The way the bulls have been ambushed by fierce selling at every rise, especially on the days when the global markets were down, should now make them fearful of the market taking away the gains of last year.

After all, the bulk of ‘smart investors’ has invested after mid-May 2009, when the Sensex was already around 15,000. As the fear of losing their gains spreads, bulls will have one thought uppermost in their minds: who bags the gains first? At every fall, real losses start kicking in. When fearful bulls make an exit in the same direction as confident bears, we know how low the market can go. It’s mob psychology, pure and simple, that happens in the market again and again. On the other hand, for the bears to gleefully enjoy a waterfall decline, they must find ways to break 16,500 and then 16,000—the lines on the sand that separate hope from chaos for the bulls. We have sailed dangerously close to those levels but since the market has so far turned higher, we have no prediction—just a probable scenario to keep in mind.

The only silver lining is that pessimism about the global economy is running deep. This always sets the stage for a snapback rally that seems to have started. The rally may take the Sensex all the way to 17,300. And beyond that?


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