Margin funding needs more regulation: Vivek Seth

MARKET MOODS - VI

The primary market for shares has witnessed a lot of action in the last few months, with the government alone mopping up more than Rs 15,000 crore.

Investors made a decent bundle through initial public offerings (IPOs) as most of these shares debuted at a premium and continued to trade above the offer prices.

However, huge volatility amid political and reforms uncertainty has led to a loss in investor confidence and has lopped off a significant value from shares.

Investors who had leveraged their positions seem to have been the biggest losers. This has highlighted the need for a better regulated margin funding business, which is now mostly grey.

Vivek Seth of Birla Global Finance spoke to Business Standard on the primary market and the the greater need for a regulated margin funding business in the country.

How do you see the markets after the recent spate of volatility?
Nothing much has changed fundamentally in the last few months. Though the markets may have fallen off their recent highs, the undertone is still positive. Most investors who had invested in IPOs have made money and will be looking to invest further.

Many potential IPOs seem to have been put off for now?
IPOs will continue to happen in a big way even though we are seeing a lull now. Good quality companies will continue to tap the markets, while weaker ones will stay away.

Recent records have shown that investors are much more aware now and will not invest blindly. But a lot of work needs to be done to increase investor confidence and better the system.

The primary market is the indicator of the secondary market. In the recent past it has been observed that when the secondary market is doing well, the investor needs more avenues for investments.

It is better for the investors to diversify the risks at this stage; hence the role of the primary market to provide a decent investment opportunity becomes important.

What kind of issues is the IPO industry facing? How they should be addressed?
Some past IPOs have been mismanaged and action must be taken against those responsible. Regulators need to play a bigger role here and the Sebi seems to be on the right track.

Post issue activities, such as allotments and refunds, that created a huge problem recently need to be institutionalised.

The Sebi's SMILE committee is a step in the right direction in bettering the market. Policies should be framed keeping the small investor's interest in mind. Rating of IPOs is also a good idea.

We should get the IPOs rated on the basis of the issuer's financial performance, track record, promoters background. Rating agencies can definitely manage this.

This will be a revolutionary thing in the primary market. It will help investor in judging an offer in a better way. It will protect the investor interest and will keep the bad companies out of such offers.

What role do NBFCs have in the market?
NBFCs are no more a bad word in the market, as was considered couple of years ago. Fly-by-night operators have come and gone and the ones who have survived are the ones who are ethical, believe in corporate governance and respect the law of the land.

As one of the key financial intermediaries, NBFCs have a vital role to play. NBFCs should be seen as complimentary to banks rather than as competitors. Whenever the markets are growing, the financier plays a major role in meeting the demand.

As of date, margin funding is becoming the key word for both the markets (primary and secondary). A right push by the regulator at the right time may create the competitive environment in the lines of financing done by the financiers across the globe, especially in developed countries.

Is margin funding good for the market?
We have seen in the past how consumer financing and car financing have played a big part in expanding the markets. Regulated leveraging of any kind, whether it is for housing, consumer items or shares, is becoming more of a necessity.

As of date, financing available in primary market is too low comapared with the total collection for any IPO.

We feel that approximately 5-8 per cent of the total collection comes with financial assistance and the balance comes from clients' own resources, while it should be other way round.