HANDBOOK OF INDIAN SECURITIES
Gautam H Parikh
Bloomsbury India
374 pages; Rs 799
When we think of the capital market we normally look at the stock indices and the price movements of various scrips. This subject is well researched and there are several theories that go into the daily madness we see in the market. Rarely, however, do we think much of how these shares get on to the market. This is where Gautam Parikh adds value not just to the literature on the subject of primary issues but also in providing a detailed analysis of the genesis of the stock market and the various ways in which companies bring these shares up for trading.
In his book Handbook of Indian Securities Gautam Parikh goes into the finer nuances of what an IPO (initial public offering) or an IDR (Indian depository receipt) means and then elucidates why these routes of raising capital are chosen by a company. He then examines the procedures to be followed when bringing this effort to fruition. Through an individual discourse on 10 such issues, he explains the "why" and "when" of these preferences. By giving examples of which companies have used a route like, say, preference shares or a rights issue, he is able to theorise as to why companies do what they do.
Hence, an issue called QIP (qualified institutional placement) has an appeal because it is faster and does not require permission from the market regulator, the Securities and Exchange Board of India (Sebi). Rights issues, too, have the charm of being faster and relatively less expensive than an IPO. While all of us have heard of this terminology, rarely do we stop to ask ourselves what they mean precisely and why they are used by companies. The author fills this knowledge gap.
Mr Parikh also provides a comprehensive view on the evolution of the stock market and correctly points out that the concept of economic reforms was not the idea of an individual or the prime minister or the government but a necessity that was imposed by the International Monetary Fund when India needed a loan to tide over a foreign-exchange crisis. The capital market went through a renaissance with the abolition of the Controller of Capital Issues and the opening of the bourses to foreign institutional investors that, along with changes in infrastructure, let the market grow. This includes the creation of the National Stock Exchange, a regulator (Sebi), and the entire clearing and settlement infrastructure that strengthened the ties between the primary and the secondary markets. The concept of brokers changed and a till-then hereditary business became more open for the market. Technology was, to use a cliche, the major game changer.
Let us look at some insights Mr Parikh provides. He avers that a close and cosy relation exists between the management and the board with each one owing a lot to the other; which is the reason it has been mandated that, at least to begin with, all listed companies should have 25 per cent public holdings. While the author does refer to public sector companies here, his observation would hold for all companies irrespective of ownership. The author also believes that the government's huge divestment programme is largely responsible for the monopoly-like situation arising in the secondary issues market because it crowds out private players.
He also says IDRs have lost their sheen today, with citizens also being able to buy shares of overseas companies in foreign currencies under the liberalised remittance scheme. Therefore, although the idea of having IDRs was to be beneficial for both the foreign company operating in India and potential domestic investors, current account liberalisation has made it less attractive. On foreign currency convertible bonds (FCCBs), the author points to the exchange rate risk that calls for hedging as the principal to be returned often becomes more expensive over the tenure of the loan. He also believes that bonus shares should not be treated as a proxy for dividend, as it often is. More importantly, it cannot be used as a lead or a lag indicator of economic growth.
Along the way, Mr Parikh also provides some insights into the relatively more difficult ground of participatory notes that could be a conduit for black money, though it is debatable whether this is often the case.
The reviewer is chief economist, CARE Ratings
Gautam H Parikh
Bloomsbury India
374 pages; Rs 799
When we think of the capital market we normally look at the stock indices and the price movements of various scrips. This subject is well researched and there are several theories that go into the daily madness we see in the market. Rarely, however, do we think much of how these shares get on to the market. This is where Gautam Parikh adds value not just to the literature on the subject of primary issues but also in providing a detailed analysis of the genesis of the stock market and the various ways in which companies bring these shares up for trading.
In his book Handbook of Indian Securities Gautam Parikh goes into the finer nuances of what an IPO (initial public offering) or an IDR (Indian depository receipt) means and then elucidates why these routes of raising capital are chosen by a company. He then examines the procedures to be followed when bringing this effort to fruition. Through an individual discourse on 10 such issues, he explains the "why" and "when" of these preferences. By giving examples of which companies have used a route like, say, preference shares or a rights issue, he is able to theorise as to why companies do what they do.
Hence, an issue called QIP (qualified institutional placement) has an appeal because it is faster and does not require permission from the market regulator, the Securities and Exchange Board of India (Sebi). Rights issues, too, have the charm of being faster and relatively less expensive than an IPO. While all of us have heard of this terminology, rarely do we stop to ask ourselves what they mean precisely and why they are used by companies. The author fills this knowledge gap.
Mr Parikh also provides a comprehensive view on the evolution of the stock market and correctly points out that the concept of economic reforms was not the idea of an individual or the prime minister or the government but a necessity that was imposed by the International Monetary Fund when India needed a loan to tide over a foreign-exchange crisis. The capital market went through a renaissance with the abolition of the Controller of Capital Issues and the opening of the bourses to foreign institutional investors that, along with changes in infrastructure, let the market grow. This includes the creation of the National Stock Exchange, a regulator (Sebi), and the entire clearing and settlement infrastructure that strengthened the ties between the primary and the secondary markets. The concept of brokers changed and a till-then hereditary business became more open for the market. Technology was, to use a cliche, the major game changer.
Let us look at some insights Mr Parikh provides. He avers that a close and cosy relation exists between the management and the board with each one owing a lot to the other; which is the reason it has been mandated that, at least to begin with, all listed companies should have 25 per cent public holdings. While the author does refer to public sector companies here, his observation would hold for all companies irrespective of ownership. The author also believes that the government's huge divestment programme is largely responsible for the monopoly-like situation arising in the secondary issues market because it crowds out private players.
He also says IDRs have lost their sheen today, with citizens also being able to buy shares of overseas companies in foreign currencies under the liberalised remittance scheme. Therefore, although the idea of having IDRs was to be beneficial for both the foreign company operating in India and potential domestic investors, current account liberalisation has made it less attractive. On foreign currency convertible bonds (FCCBs), the author points to the exchange rate risk that calls for hedging as the principal to be returned often becomes more expensive over the tenure of the loan. He also believes that bonus shares should not be treated as a proxy for dividend, as it often is. More importantly, it cannot be used as a lead or a lag indicator of economic growth.
Along the way, Mr Parikh also provides some insights into the relatively more difficult ground of participatory notes that could be a conduit for black money, though it is debatable whether this is often the case.
The reviewer is chief economist, CARE Ratings