Current Economic Statistics and Review For the Week 
Ended May 21, 2005 (21^st Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

BANKING HIGHLIGHTS

• State Bank of India (SBI) has declared a 16 per cent growth in its net profit at Rs.4,304 crore – or nearly a billion dollars for 2004-05 up from Rs.2,681 crore in the previous fiscal. SBI has announced 100 per cent regular dividend and 25 per cent special dividend on the occasion of the 200^th anniversary of the bank.

• Dena Bank has posted a net loss of Rs.39.20 crore for the fourth quarter ended March 31, 2005, as against a net profit of Rs.58.39 crore in the corresponding period of the previous year.

• The draft report of the Reserve Bank of India’s (RBI) internal working group on regional rural banks (RRBs) has recommended a capital infusion of around Rs.3,050 crore in order to wipe out their accumulated losses, provide for non-performing assets and maintain 5 per cent capital to risk weighted asset ratio (CRAR). The capital to be infused is to be shared among the stakeholders i.e. the central government, state governments and public sector banks as per their respective proportions. The group has suggested that RRBs be regulated and supervised by RBI and not by NABARD.

• Public sector banks (PSBs) are increasingly focusing on the educational loans segment. Education loan segment disbursement of domestic banks has surged by 210 per cent to Rs.119.25 crore in 2004-05 up from Rs.38.72 crore in 2003-04. Number of students availing education loans has increased to 9,552 from 2,881. Interest rate on these loans varies from 9 – 11 per cert and depends on the size of the education loan availed. Andhra Bank has sanctioned over Rs.250 crore in 2004-05 taking the total disbursements to Rs.780 crore. Punjab National Bank had disbursed about Rs.258.34 crore in 2004-05, an increase of 38 per cent over the previous year. 

• ICICI Bank is planning to set up mandi branches, kiosks, franchisees and partner micro-finance institutions (MFIs) and non-government organizations (NGOs) to boost its rural finance business. In association with corporates, MFIs and local authorities, the bank is developing supply-chain solutions in the agriculture sector. ICICI Bank has divided the rural market into R1, R2, R3 and R4 categories for identifying the rural markets. R1 and R2 represent the rich farmers, while R3 and R4 represent the poor landless labourers. Currently, the bank has partnered with 45 MFI/NGOs across India with an asset base of Rs.430 crore. The bank’s agriculture portfolio as on March 18, 2005 stood at Rs.6,373 crore. ICICI Bank has designed products for all customer segments and for all components of the value chain. The bank will also provide loans against gold jewellery in rural areas. At present, the bank’s advances against gold stands at around Rs.200 crore. In addition, ICICI Bank, through its insurance subsidiary ICICI Lombard is offering insurance products in the rural market. The insurance company has designed products on the basis of crop cycles, temperature and rainfall data.

• ICICI Bank has acquired Investitsionno-Kreditny Bank (IKB) for an undisclosed amount. Through this acquisition ICICI Bank has acquired assets worth $4.4 million of which $2.5 million are loan assets. The IKB Bank has three branches – one in Moscow and two in Kaluga region. ICICI Bank currently has subsidiaries in the UK and Canada, branches in Singapore and Bahrain and representative offices in the US, China, UAE, Bangladesh and South Africa.

TELECOM

• Bharat Sanchar Nigam Ltd. (BSNL) has announced a 33.33 per cent cut in international long distance (ILD) call rates to Australia, New Zealand, Saudi Arabia, Africa and the SAARC countries. The new ISD tariffs, to come into effect from May 21, 2005, will be charged at the rate of Rs.12 per minute against the existing Rs.18 per minute.

FINANCIAL MARKET DEVELOPMENTS

•        Capital Markets

•         Primary Market

o       Sebi is likely to do away with the discretionary power of merchant bankers to decide allotment to qualified institutional buyers (QIBs) in IPO allocations. The existing Sebi guidelines prescribe setting aside of 50 per cent of net public offer for QIBs, 35 per cent for retail investors and the balance 15 per cent for non-institutional buyers (NIBs), for issues by unlisted companies through book-building route. While the shares are allotted to retail and NIBs investors on proportionate basis, the allocation of shares to QIBs is decided entirely by investment bankers. Also, the QIBs are not required to pay any margin money unlike the retail investors. It has been pointed out that some QIBs, which are affiliated withthe investment bankers or share a close relationship with them have managed to get a good deal. However, the investment bankers justifying the discretionary powers state that this helps in marinating quality in the initial books. 

o       India Infoline has been listed n BSE and NSE on May 17 at Rs 87.15 and RS 80.50, respectively, above its issue price of Rs 76, however, it ended the day at Rs 78.05 on both the exchanges. 

o       Infrastructure Development Finance Company (IDFC) has filed a draft Red Herring Prospectus with Sebi for a public issue through 100 per cent book building of Rs 40.36 crore equity shares of Rs 10 each, comprising of fresh issue of 12 crore equity shares and an offer for sale of Rs 28.36 crore. 

•         Secondary Market

o       During the week, trading in equities has been range bound. Positive factors such as a decline in international oil prices and sobering of domestic inflation, helped the BSE sensex and NSE nifty gain 47.96 points and 4.1 points, respectively, over the previous week’s close. They closed the week at 6499.50 and 1992.40, respectively. Following the banning of UBS securities by Sebi on May 17, 2005 from issuing participatory notes (PNs) for next one year for its role in May 17, 2004 crash of stock indices, the BSE sensex has fallen by 62 points. The market recovered after the Sebi clarified that there was no ban FIIs from issuing PNs,. Among sectoral indices of BSE, the technology indices gained more owing to depreciation of rupee against the dollar. Again the small and medium cap indices outperformed the BSE sensex, while the BSE small cap and BSE mid-cap registered gains of 1.59 per cent and 0.87 per cent , respectively, the BSE sensex rose by 0.74 per cent.

o       Between May 1 and May 20, FIIs have been net sellers in equities on the stock exchanges to the extent of Rs 561.10 crore, with sales of Rs 10,889 crore and purchase of Rs 10,327.40 crore. The net FII inflows in 2005 as on May 20 stands at Rs 1,5120 crore as against Rs 1,6335 crore on 31st March 2005.

o       The total assets under management (AUM) of mutual funds have increased to Rs 158,422 crore in April 2005 up from Rs 154,024 crore in April 2004. During April 2005, Rs 1,525 crore and Rs 70,388 crore were moblised through new and existing schemes, respectively and redemptions have been to the extent of Rs 60,638 crore.

o       Sebi has given an ultimatum to companies to comply with the clause 49 of the listing agreement pertaining to appointment of independent directors on their boards by December 31.

o       Sebi is expected to ease the delisting norms for small companies shares from stock exchanges.

o       ONGC may face delisting from stock exchanges as a petroleum ministry directive appointing additional government directors on the company board has violated its listing agreement. The agreement stipulates that atleast 50 per cent of the board members should be of non-executive directors. For the present ONCG board does not satisfy the condition; as Sebi does not recognise government directors as ‘independent directors’. 

•        Derivatives                                  

• The F&O segment of NSE witnessed some trading activity with the trading volumes rising amid active participation of FIIs. The daily turnover during the week under review ranged between Rs 7,143 crore and Rs 11,358 crore. The rollover activity began from May to June expiry contracts, as the former is set to expire next week.

•        Government Securities Market

•         Primary Market

o       The ‘on tap’ sale of 7.77 per cent 2015 for 26 states was closed on May 18. Against the targeted amount of Rs 7,300 crore, the RBI received bids worth Rs 23,051 crore and Rs 7,554 crore has been retained as the issue had a green shoe option of 10 per cent of the targeted amount.

o       On May 24, the government is to auction 8.35 per cent 2022 for a notified amount of Rs 4,000 crore through a price based auction using multiple price method. 

o       The yields set at the 91-day treasury bills have been lower at 5.16 per cent in the auction held on May 18 as compared to 5.20 per cent on May 11.

o       The RBI has fixed the rate of interest on floating rate bonds 2014 for the period between May 20, 2005 and May 19, 2006 at 5.73 per cent up from 5.59 per cent in the previous year. The rate on FRB 2006 for the period between may 22 and November 21, 2005 has been set at 5.55 per cent against 5.60 per cent in the previous half year.

•         Secondary Market

o       The market sentiments turned buoyant with the fall in domestic inflation rate and easing of international crude oil prices. Also, RBI Governor, Dr Y.V.Reddy’s statement, that the huge market borrowing will be completed without much adverse impact on the financial sector strengthened sentiments. The average deployments under LAF increased from around Rs 12, 000 crore to Rs 17, 000 crore, however, following the outflows due to state loans flotation of Rs 7,600 crore, the size of bids fell. The call rate remained easy and was rangebound between 4.90 per cent and 5.05 per cent.  and the YTM on 7.38 per cent 2015 fell from 7.18 per cent on May 13 to 7.04 per cent on May 20.

o       An internal Technical Advisory Committee on Money Market, constituted by the RBI has made important recommendations, some of these are:

o       RBI may migrate from OF (owned funds) to capital funds (sum of tier-I and tier –II capital) as the benchmark for fixing prudential limits for call/notice money market for scheduled commercial banks.

o       Call/notice money market transactions should be conducted on an electronic negotiatied quote driven platform.

o       The RBI has instructed scheduled commercial banks, financial institutions and primary dealers to use only domestic rupee benchmarks for interest rate derivatives.

•        Foreign Exchange Market

o       As per data complied by the US department of treasury, India’s holding of US treasury securites as of end March 2005 increased to US $ 18.4 billion from $ 16 billion as on end February 2005.

o       The foreign exchange reserves have declined sharply by US $ 1.3 billion and the aggregate inflows stood at $ 140.17 billion during the week ended May 13.

o       The rupee-dollar exchange rate depreciated from Rs 43.43 on May 13 to Rs 43.50 on May 20, as the dollar gained against the other currencies. However, the market sentiments continued to remain positive in anticipation of a revaluation of the Chinese currency and expected buoyancy in inflows from overseas floatations by Satyam and Infosys.    The six-month forward premia has fallen from 1.51 per cent on May 13 to 1.44 per cent on May 20.

PUBLIC FINANCE

o       The finance ministry is likely to exempt a host of services such as shipping and gems and jewellery from the purview of the service tax. The gems and jewellery sector, which is export oriented is likely to be spared from tax, atleast in the case of a few specific services it receives. The commerce department has backed the sector’s demand for service tax exemption. On the other hand, the consideration to exempt services in the shipping industry has been mainly owing to the intense competition the sector has been facing from foreign players.

o       The revenue department is trying to enforce new norms to deter tax evaders in order to improve its revenue collections. The department is working towards better audit laws for both direct and indirect taxes for large companies. As a first step, the audit is proposed to be extended to importers and service sector companies with a turnover of Rs 1 crore. There are nearly 10,000 service sector companies with a turnover of Rs 1 crore or more. So far, the audit has been confined to Central excise. The government is also mulling over the introduction of risk management assessment system for larger companies in the private sector, which included oil companies or services like brokerage. The revenue department is preparing a software to enable online selection of companies for scrutiny in case of corporate tax. Officials said that the Directorate of Income tax (Systems) was working out a software, which would recognize certain financial or accounting ratios.

• The finance minister has proposed to start help centres for the small-scale sector manufacturers. These help centres will focus on non-filers and defaulters of monthly payment of Customs and excise duties. These centres are to be made functional from July 1, 2005. As per a circular brought out by the Central Board of Excise and Customs (CBEC) the primary objective of these centres is to help honest tax payers, small assesses, importers and exporters and service providers by providing them an institutional mechanism to guide and to educate them in all matters concerning Customs, excise and service tax.

o       The government has introduced a number of changes in the double taxation avoidance agreements (DTAAs) with major economic partners. It has also decided to enter into new DTAAs with atleast three countries. The reviews of the existing pacts would lead to a reduction in the withholding tax on dividends, royalty and professional services incomes. Also, the new pacts would result in minimising the cascading effects of taxes.

• The finance ministry is targeting recovery of arrears worth Rs 10,000 crore in direct taxes during the fiscal year 2005-06. The arrear recovery target forms an important part of the “action plan” of the Central Board of Direct Taxes (CBDT) to meet the stiff budget targets of direct taxes during the current fiscal year. The CBDT has proposed scrutiny of income tax returns of charitable institutions, subject to certain conditions. The government has proposed an audit trail for charitable institutions in the proposed taxation amendment bill, to avoid misuse of tax breaks offered to such institutions.

• The government is expected to begin its disinvestment process from June 2005. The process in 2005-06 is expected to start with the sale of government shares in Bharat Heavy Electricals Limited (Bhel) and Maruti Udyog Limited. Other companies in which the government would dilute its stake include Shipping Corporation of India and Engineers India Limited. In Jessop and company, the government will sell its entire remaining stake. Ruias, who had bought 72 per cent in Jessop, have now written to the government their intention to buy the remaining share.

INFLATION  

• Inflation rate, based on wholesale price index has fallen marginally to 5.61 per cent during the week ended May 7, 2005 from 5.67 per cent registered during the previous week. The annual point-to-point inflation rate was at 4.60 per cent in the corresponding week last year.

o       The WPI has declined fractionally to 192 from the last weeks’ level of 192.1 (Base: 1993-94=100) during the week in review. The index of primary articles’ group has declined a tad to 188.4 from the previous week’s level of 188.5, mainly due to a decline in the prices of food articles as well as non-food articles. The index of fuel, power, light and lubricants group has remained unchanged at previous week’s level of 293.2. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight has fallen slightly to 170.6 from the previous weeks’ level of 170.8, especially due to drop in the prices of food products, textiles, chemicals and chemical products and non-metallic mineral products.

• The latest final index of WPI for the week ended March 12, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 189.4 and 5.4 per cent instead of the provisional levels of 189.1 and 5.2 per cent, respectively.

• After a modest increase in the annual point-to-point inflation rate in the month of April 2005, it has softened marginally during the week in review. However, though inflation is contained, there are upside risks to inflation due to volatility in global oil prices, which may in turn necessitate domestic oil PSUs to hike prices of petrol and diesel in coming weeks.

LABOUR

• National Food for Work Programme (NFFWP) is a unique attempt initiated by the UPA government in November 2004, to provide an impetus to the development of the 150 most backward districts of India employment. The Programme proposed to provide employment with a part of the wages (25 per cent) to be paid in cash and 75 per cent to be paid in grain. For this purpose, it requires substantial resources in the form of cash and food grains. However, the cause of concern is that the payment is badly getting delayed in spite of the fact that work got started in November 2004. It takes almost four months for labourers to get their dues. Not only this, the grain component also arrives late. While the scheme is centrally sponsored one, it is the state governments, which were given the responsibility for providing the logistical support in transporting the grains to the various gram panchayats. The genesis of the problem lies in the state governments’ dire financial constraints added by administrative problems and bureaucratic control.

• The total employment in the organised sector has declined by a massive 12.5 lakh or 4.4 per cent from 1996-97 to 2002-03 (from 282.5 lakh to 270 lakh). The job market at home has shrunk over the years despite higher GDP. However, the loss at home has been more than compensated by gains abroad. India is experiencing quite a sizeable flight of intellectual capital to foreign countries. More importantly, unlike in the past, emigration is not restricted to high skilled technical professionals in medicine, engineering or computer sciences. A large number of semi-skilled or even unskilled labourers have travelled abroad of late, reflecting changing destinations of workers where manpower is required mainly for infrastructure building activities, especially to the Gulf countries. Of the 4.8 lakh workers who emigrated last year, 63 per cent emigrated to Saudi Arabia and the UAE. The Gulf countries accounted for three-fourths of the workers emigrated from India in 2004. One of the reasons for this diversion is the stringent emigration norms and conditions enforced by some western countries, especially, United States .   

EXTERNAL SECTOR

• India ’s exports registered a growth of 17.2 per cent in the month of April 2005, valued at $6.5 billion up from $5.6 billion in April 2004. However, the trade deficit valued at $3.2 billion during April rose by a mammoth 66 per cent over a deficit of $2.3 billion during the same month of the previous year. This high deficit was owing to a 51 per cent increase in imports during the month valued at $10.4 billion as compared to $6.9 billion worth of imports in April 2004. Oil imports during April 2005 at $3.2 billion were 41.7 per cent higher than oil imports valued at $2.3 billion in the corresponding period last year. Non-oil imports totaled at $7.2 billion, which is 56 per cent higher than the levels of such imports, valued at $4.5 billion in April 2004.

o       The department of commerce has proposed a 100 per cent FDI in retail sector instead of 49 per cent as proposed earlier. This proposal is part of a comprehensive revised offer in the service sector prepared by the department for the World Trade Organisation. The department of industrial policy and promotion, which is the central department for the FDI policy, is also considering 100 per cent FDI in select areas such as food processing.

• According to the finance minister, there is a need to review the norms on foreign direct investment, foreign institutional flows, external commercial borrowings, services exports and remittances so as to bridge the trade deficit estimated around $30 billion for 2004-05.

• The government has approved a proposal by Mauritius-based Parkville Holdings Ltd and Ensley Ltd to invest Rs 337 crore in Max India Ltd. The proposal relates to health care services, information technology and connectivity solution services along with clinical research in Nawanshahar, Punjab .

• United States exports to India during January-March 2005 registered a growth of nearly 50 per cent. Exports to no other country grew this fast during the period under review.

• Finance minister has allowed Independent Printing Company Ltd, an Irish media company, to acquire a 26 per cent stake in Indian media house Jagran Prakashan, the company that prints Hindi daily Dainik Jagran for Rs 150 crore. This was one of the 37 proposals (worth 354.34 crore) cleared by the minister.

o       Foreign companies operating directly or through joint ventures in India will now be required to furnish information about their reinvested earnings to the Reserve bank of India . The measure aims at bridging the gap in information on reinvested earnings. At present the RBI collates reinvested earnings on the basis of collective data received from its branches at the end of financial year.

o       Under the Comprehensive Economic Cooperation Agreement (CECA), India will commit itself to 100 per cent foreign direct investment (FDI) in real estate development and 49 per cent FDI in telecom from Singapore .

CREDIT RATINGS

• Fitch Ratings has affirmed India ’s foreign and local currency ratings at BB+ with a stable outlook. The agency however, said that despite India ’s external strengths, such as high forex reserves and a declining external debt burden, its high fiscal deficit prevents the country from achieving an investment grade rating in the near term.

• In another exercise, Fitch has also assigned a rating of AA ( ind ) to the Rs. 100 crore non-convertible debenture programme of Dewan Housing Finance Ltd. (DHFL). At the same time, the AA (ind) rating assigned to the existing non-convertible debenture programme of Rs. 100 crore, tAA (ind)/Stable rating assigned to the Rs200 crore fixed deposit programme has been affirmed. The ratings reflect the fairly healthy financial flows from DHFL’s stable residential mortgage business. Meanwhile, it has also assigned a rating of AA ( ind )/Stable to the Jammu and Kashmir Bank Ltd’s (JKB) Rs 300 crore subordinated debt programme. The rating reflects robust capitalisation and fairly strong financials of the bank. JKB acts as a banker to the state government and is authorised by Reserve Bank of India to transact specified business of the central government in Jammu and Kashmir

• CRISIL has assigned a 'FAA/Stable' rating to the long term fixed deposit programme and a 'P1+' rating to the short tem fixed deposit programme of Jammu and Kashmir Bank Limited's (J&K Bank). The rating continues to reflect J&K Bank's healthy capitalisation level, comfortable liquidity position, good earnings profile and improving asset quality. The rating also factors in the bank's comfortable and low cost deposit base within the state of Jammu and Kashmir (J&K) and its dominant business position there.

• Icra has reaffirmed the A1+ rating to the enhanced Rs. 30 crore (from the earlier Rs. 10 crore) commercial paper programme of Premier Instruments & Controls Limited (PRICOL). The rating takes into account the company’s dominant market position in dash board instruments, supported by its successful diversification into other products, favourable growth prospects for the user industries and improved profitability.

o       Icra has also retained the LBBB rating assigned to Rs. 217.7 crore bond programme of Gujarat State Energy Generation Limited (GSEG). The rating continues to reflect the increase in the risk profile of the project following the ongoing re-negotiation of the terms of the Power Purchase Agreement (PPA) with Gujarat Electricity Board (GEB), and the counter-party credit risks associated with sales to GEB.

• Care has retained the AA+ (SO) rating assigned to the Rs. 135 crore non-convertible debenture issue of Videocon International Ltd. The issue is backed by an irrevocable and unconditional guarantee by IDBI for repayment of principal as well as interest thereon and the rating is based on IDBI’s guarantee. IDBI’s long term issues have been rated AA+ by Care.

Theme of the week:

Surge in New Equity Issues*
Continued Dominance of Existing Companies and Issues at High Premium

It was after a decade that the moribund primary market was revived in 2003-04, wherein mobilisations surpassed the all-time high achieved in 1994-95. The buoyancy has continued in 2004-05 and is expected to continue even in 2005-06.  A combination of factors has been attributed to this revival of the primary market: buoyancy in the secondary market; buoyant growth of the economy, especially the industrial and services sectors; and presence of quality issues. This has evoked an interest amongst the retail investors to return to the primary market, after they had withdrawn following the problem of vanishing companies in the mid-nineties. However, it cannot be said with certainty that the capital market has succeeded in establishing a genuinely healthy and attractive environment for the retail investors to return to the primary market. Many of them seem to have been pushed to the market in an environment of reduced interest rates for fixed-income investment outlets and generation of surplus funds through voluntary retirement schemes (VRS) and other regular organised labour requirements. In the primary market itself, there have been some cases wherein the issue prices appear to be manipulated such that the market prices were pushed up to very high levels prior to the issue, which could not have been sustained, in the post-listing period. They have ruled below the issue price thereafter. Undoubtedly, until such market manipulations are put an end to, the investors’ faith in the equity market cannot be restored. 

Nuances in equity offerings

It is through the primary market segment that the capital market performs a dual role: first, providing investible funds to the investing companies and promoting investments and second, nursing safe saving outlets for savers with the balancing of risk and returns.  As per the data presented in Table 1, the primary equities market had mobilised huge amounts during the period between 1993-94 and 1995-96. But that also turned out to be yet another period when there arose the phenomenon of a sizeable number of companies vanishing after raising capital. This was compounded by other irregularities in the operation of the securities market. These factors led to diminished investors’ interest in the primary market after 1996-97 or thereabout. The next six to seven years have been a long cooling period for the primary market when sluggish investment in the manufacturing sector also prevented any demand-side push to the revival of the market. The authorities have used the period to bring about substantial regulatory changes such as stringent entry norms for companies tapping the market and comprehensive disclosure in the ‘Red Herring’ prospectus. Simultaneously, there arose buoyancy in the secondary market due to surging liquidity following large capital inflows and improvement in the growth of the economy - all of which contributed to a rejuvenation of the primary market that began in 2003-04.

However, there are significant differences discernible between the situation in the mid-1990s and that obtaining now. In the mid-1990s, there were a large number of companies tapping the market with a sizeable number of issues priced at par, whereas in 2003 onwards, there are fewer number of issuers mobilising huge amounts per issue and the bulk of them are priced at heavy premium. For instance, as against 1,593 companies that mobilised Rs 17,970 crore in 1994-95, only 55 companies mobilised Rs 24,388 crore in 2004-05. Even in 2003-04, there were only 51 companies that mobilised Rs 18,949 crore.

Of the 1,593 issues in 1994-95, 942 issues were priced at par while 651 issues were at premium. In stark contrast to this situation, of the 55 issues in 2004-05, 49 issues have been at premium and only 6 at par.

Dominance of existing companies

In the recent period, public offers have generally exceeded the IPOs (Table 2). This feature is reflective of the lack of response to greenfield projects or to new promoters. Investors seem to prefer existing companies that undertake fresh investments rather than new promoters or companies. An exception in this respect was in 2003-04 when IPOs exceeded the listed company issue.

Banking and FIs topping the list

An industry-wise classification of capital raised during 2003-04 and 2004-05 shows that the highest moblisation has been made by the banking and financial institutions (FIs) sector. They have been primarily tapping the market to raise their capital in view of the Basel-II norms. In 2004-05, apart from the banking/FIs sector moblising Rs 11,311 crore, there have been five issues from the IT sector that mobilised Rs 5,095 crore and two issues from the power sector that mobilised    Rs.5,854 crore (of which, National Thermal Power Corporation accounted for Rs 5,368 crore).   

Issue by offer for sale by public sector companies

Prithvi Haldea of Prime Database, the only database on primary capital market, has said that the primary market moblisation of Rs 30,511 crore in the calendar year 2004 has been the highest ever in the history of the Indian capital market, more than twice the previous best of Rs 13,887 crore raised in the calendar year 1995 by a record 1,444 companies and significantly almost equal to the collective raising of Rs 32,025 crore during the last 9-years – 1995 to 2003. He further adds that the huge increase in 2004 came about primarily due to offers for sale by 13 companies, of which seven companies have been in public sector accounting for Rs 16,819 crore (or 85 per cent) of the total Rs 19,808 crore mobilised through offer for sale. The balance six offers have been from private sector raising Rs 2,989 crore, of which Tata Consultancy Services (TCS) alone accounted for Rs 2,778 crore (93 per cent).

Fewer rights issues

Also, there has been buoyancy in mobilisation through the rights issues from twelve issues for Rs 431 crore in 2002-03 (Table 4) to 26 issues for Rs 3,616 crore; nevertheless the amount mobilised through such issues has been still lower than the highest mobilisation of Rs 8,923 crore in 1993-94.

Changes in IPO norms

The primary issuances are governed by the SEBI in terms of SEBI (Disclosures and Investor Protection) Guidelines. SEBI framed its DIP guidelines in 1992. Many amendments have been carried out in the same in line with the market dynamics and requirements. In 2000, SEBI issued “Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000” which is a compilation of all circulars organized in chapter forms. These guidelines and amendments thereto are issued by SEBI, under section 11 of the Securities and Exchange Board of India Act, 1992. SEBI (Disclosure and Investor Protection) Guidelines 2000 are in short called DIP guidelines. These provide a comprehensive framework for issuances by the companies.

 Some of the recent changes announced by the SEBI in IPO norms have been quite significant. In order to encourage retail investment in equities, the SEBI has raised allocation for retail investors in book-building issues from 25 per cent to 35 per cent as also revised the definition of retail investors. The market regulator has defined retail investors as those who can apply for shares worth Rs.1 lakh as against Rs.50,000 earlier. At the same time, the SEBI has reduced the share of non-institutional category of investors from 25 per cent to 15 per cent. Institutional investors include foreign financial institutions (FIIs), banks, mutual funds and domestic financial institutions like LIC. These changes have been made in the SEBI (DIP) Guidelines 2000 on the basis of recommendations made by SEBI Primary Market Advisory Committee. The new norms will be applicable to all public issues whose draft offer documents are filed with SEBI as or after April 4, 2005.

 The SEBI has also reduced the bidding period for a book-built issue. The existing norms provided a maximum bidding period of 10 days, extendable by three more days if there was a revision in the price band. The SEBI has now decided to reduce the bidding period from the existing 5-10 days (including holidays) to 3 to 7 days. It has also provided for more flexibility for listed companies to disclose price band/ floor price during their public issues. Listed companies are now allowed to disclose the price band/floor price one day before bid opening. On the other hand, the existing guidelines require all issuers (whether listed or unlisted) making a public issue through the book-building process to disclose the price band/ floor price in the Red Herring Prospectus (RHP) application form.

Ratings of IPOs

The Primary Market Advisory Committee of SEBI has been discussing the concept of mandatory rating of IPOs.  Investors are bound to welcome IPO ratings, especially those who suffered huge losses by investing in fly-by-night operating companies during 1992-1996, or earlier in the mid-1980s. SEBI wants to give investors a tool with which to evaluate new public offerings. It is argued that with too many IPOs crowding the market, investors neither get access to offer documents, nor are they capable of analysing them correctly. They, therefore, end up relying on brokers and friends for advice. The IPO experience of the 1980s and 1990s shows that media analysis of public offerings is also unreliable and dictated by the compulsion of getting public issue advertising. That is one reason why investor groups themselves proposed that SEBI must try and get issues rated through independent rating agencies.

 CRISIL made a presentation to SEBI regarding the rating but said that it was not offering a precise “rating”, as it does in the debt market. It is merely offering an analysis and grading, that too with many conditions and riders. Also, it will not comment on pricing. But, pricing of shares is the most crucial factor in evaluating IPOs, especially for the book-built issues. The shares of most companies are attractive at a certain price. If the rating does not help in deciding that price, it is of limited value.

 CRISIL further says that it will not do a forensic audit. Or, it will not verify whether the information provided in a prospectus is complete and correct.  That means, the rating of an issue like that of Data Access, which was withdrawn by SEBI at the last minute, would not have revealed if the company were hiding key information. In that case, CRISIL is only offering to do what any smart investor is capable of doing on his own.

 CRISIL, too, does not deny that a rating is of limited value in making immediate investment decisions. But, over a period of time, CRISIL argues that it could demonstrate better performance by companies that had a higher rating. Also, given the fact that equity investing is forward looking and involves risk taking, IPO ratings could lull the investors into a false sense of security.

 All in all, there is yet some uncertainty about the market behaviour. It has often been observed that premium held by IPOs used to melt down as the secondary market lost steam. For instance, as many as six out of eight issues were trading at a discount to listing prices as on April 20. Dena Bank, UTV Software, Emami, PNB, IVRCL Infrastructure and Jay Prakash Hydro Power have fallen below the price quoted at issue. Interestingly, SEBI is looking into the circumstances that led to the run on the stock of Punjab National Bank (PNB) ahead of its second public issue and its movement following the listing. The second offering of PNB had hit the market in March 2005. Towards the end of January 2005, the bank's stock price was in the region of Rs 360 per share. The issue opened for subscription on March 7, and by that time the price had gone up to Rs 520 per share. The book-built issue was priced at Rs 390 per share. After the subscription, the price of the scrip crashed to Rs 349 per share. Investors who had subscribed to the issue, or those who had bought from the secondary market prior to the issue, saw substantial erosion in their holdings. Before the issue hit the market, the counter saw average trading volumes of 8-9 lakh shares. However, during the tenure of the issue the trading volume jumped to more than one crore shares daily. On March 7, the day the issue opened, it touched a record turnover of close to Rs 600 crore. After the issue closed, the turnover slumped.

 Some observers suspect that it is not only PNB but also the issues of Allahabad Bank and Oriental Bank of Commerce that need looking into by the SEBI. In both these cases, the trading pattern was similar - a massive jump in scrip prices prior to the issue, fixing of the issue price based on the prevailing market price and subsequent fall in the prices that eroded causing a hit to the market wealth of small investors.

In addition, some companies, namely, 3i Infotech, Jaiprakash Hydro-Power, Shringar Cinema and Allsec Tech were listed at discount (Table 5).

 Interestingly, following the ushering in of Indian primary market in an era of free pricing in 1992, the issue price is decided by the issuer in consultation with a merchant banker. There is no price formula stipulated by SEBI nor does it play any role in price fixation. The issuing company and the merchant banker are, however, required to give full disclosures of the parameters which they consider while fixing the issue price.

 Issues in pipeline

 Incidentally, taking advantage of favourable market conditions, a host of companies are waiting to enter the market including BHEL, Gujarat State Energy Generation, Gujarat State Petroleum, Haldia Petrochemicals, Mahanagar Gas, NHPC, Power Finance, Power Grid, Rashtriya Chemicals, REC, SCI and IDFC. Then, there are at least seven public sector banks waiting to enter the market. Similarly, private sector banks desirous of raising capital include Centurion, DCB, HDFC Bank, Jammu & Kashmir Bank and Yes Bank. Most telecom companies are also looking at primary market, including BPCL Communications, Hutchison, Idea, Reliance Infocomm and Tata Teleservices. In addition, there are a number of private sector companies such as AB Corp, Air Deccan and Bajaj Hindustan that have expressed their interest in raising funds through IPOs.

 An aside – Google IPO

The much talked about ‘Google IPO’ in the US market has made history in the annals of international primary market by auctioning the securities to retail investors and keeping investment bankers out of the whole process. No doubt, there were a few such instances before, but they were unable to attract the investor community’s interest so significantly.  Though Google faced serious criticism from all quarters, its IPO managed to pull through successfully. This is expected to rewrite IPO rules in the US share market. Google had implemented the Dutch Auction System for its IPO. The salient features of this new system are as follows:

1. IPO pricing by Dutch Auction System: Bids start with highest quotes (the clearing price) and move down till all available shares are sold. The lowest price level at which the entire available stock of shares get sold out is declared the “clearing price”. All bidders are allotted shares at the clearing price.

2. Dual share holding structure: Class A share with rights of one vote per share for shareholders. Class B shares for promoter group to have voting rights by a multiple of ten times the class A shares.

3. By control of voting rights: Promoter group would be vastly monopolizing the decision making process. Such near absolute discretion can be looked upon with concern.

* This note has been prepared by Piyusha D. Hukeri and Bipin K. Deokar

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

We will be grateful if you could kindly send us your feed back at epwrf@vsnl.com