Disinvestment is important for the government which needs funds and the stock market which lacks depth.
Financial markets are known for mood swings ranging from extreme hysteria to irrational euphoria, underpinning what Galbraith calls “the pathological weakness of the financial memory”. Currently, our stock market seems to be in a state of euphoria nurtured by hope, expectancy and anticipation. The Bombay Stock Exchange announced that the market capitalisation has crossed $1 trillion. Experts who were under cover for sometime have resurfaced to hail the return of the new bull market and have begun predicting the way the indices will move. The sale of Cliff Richard’s ‘Congratulations and Celebrations’ has reportedly increased.
But has anything significant happened on the ground in terms of the so-called ‘fundamentals’ of the economy to warrant such exuberance? True, that there is now the hope and the possibility of a cohesive government policy to take the country forward on the path of reform and progress. The government has been cautious in its statements. But what the market seems to be saying is “to hell with the fundamentals, let’s make some money by interpreting whatever little indication government is giving so that we can make a clear bull run up to the Budget”. If only expectations are driving the market and the rise is not predicated on realities, then we are building castles in the air. There is clearly a need for the government to temper the mood for, let us not forget that it took only a few hundred people to engineer an unprecedented transfer of wealth from the taxpayers and pensioners to another few hundreds and thus bring the world’s financial markets to their knees.
Let us look at some numbers. Our stock market despite its infrastructure, risk management system and a fine regulatory system is still narrow, lacks depth and is, therefore, unable to absorb easily even a manageable inflow of funds, leading to unexpected swings, volatility and vulnerability to manipulations. The volatility of the Sensex and Nifty has been the highest when compared to major indices in the world. It is not enough to say even the Dow or Hang Seng is also volatile. Instead, we need to ask why it is that we have the highest volatility and can we do something about it. We also need to examine the causal relationship between derivative trading and market volatility. Derivatives are the ‘unknown unknowns’ for the financial markets, and there’s no harm in being watchful.
We should also not be deceived by the rise in market capitalisation. Market capitalisation is a measure of the total wealth of a company for the owners of capital only. It matters little to the investors (not shareholders) unless they are able to participate fully in that wealth which they would if the whole of the share capital is available for trading. Therefore, the stock exchanges calculate something like the free float market capitalisation on the basis of floating stock which is available for trading.
For example, on June 3, when the total market capitalisation of Sensex was Rs 2,252,680 crore, the free float market capitalisation was just half at Rs 1,073, 908 crore. Let us take a blue chip like ONGC. Its total market capitalisation was Rs 252,526 crore on June 5, 2009, though only 14.5 per cent of it is available for trading because the government holds the remaining 84.5 per cent which it will not sell. So the rise in the total market capitalisation only results in an expensive stock for a prospective investor.
Therefore, there is a case for greater disinvestment by the government, a process which was stalled in 2004 due to compulsions of multi-party coalition politics. Now those pressures are apparently non-existent. Disinvestment could happen in two ways: One by the government disinvesting new companies (the ‘mini ratnas’ for example) and two, by selling more of its holdings in already listed companies. From the market point of view the first process will bring new companies into the market. The second will increase floating stock of the existing listed PSUs and hence increase the liquidity and depth in these securities.
If for example, the government sells up to 49 per cent of the shares of all the listed PSUs and banks, it will still be in a win-win situation. At the same time, it would be unlocking wealth and putting it to alternative use like healthcare, education, cheap housing, drinking water, and infrastructure by using the ‘family silver’ more productively. It will allow the aam admi, the proletariat as well as the bourgeois common investor, to share the wealth of the company, which even the revolutionaries cannot object to. More importantly, the government can do all this without losing control. And finally, isn’t it time that the government made up its mind whether it still wants to be owner, entrepreneur and manager of an enterprise, guardian of public good and also a regulator? These are mutually conflicting roles. But for disinvestment to happen, it would need a significant change in mindset and strong political will.
The market wide circuit filters have been breached on four occasions in the past — in 2004 (May 17), 2006 (May 22), 2007 (October 17) and 2008 (January 2008) — when trading was halted because of the downward movement of stock prices. Those occasions caused a lot of anguish in the market, gave rise to conspiracy theories, followed by futile investigations. On May 18, 2009, there was a trading halt when the market was rising. This halt was celebrated in the ‘Come on Barbie let’s go party’ style by the market and media. But a trading halt is a trading halt. It is a serious matter. So if it happens at regular intervals rather than once in a blue moon there is need to examine whether there is something wrong with the filters themselves or if there is a fundamental problem with the market.
The last point is on board governance, which is an essential part of corporate governance. If Sebi is to champion the cause of corporate governance, its board must follow the highest principles of corporate governance. It does no good to an institution like Sebi and its chairman, who has more than proved himself by giving the country its first modern electronic bookkeeping system, if a Board member has to go public on what his views are on the sensitive Sebi-National Securities Depository Ltd (NSDL) issue. The government appointed the chairman of Sebi after due consideration. It is now for the government to decide how the Sebi-NSDL matter should be brought to a close in a manner that does not undermine the authority of Sebi or that of the chairman. This should be done sooner than later.
The author was executive director of Sebi and is now associated with the World Bank and the IFC Global Corporate Governance Forum pratipkar21@gmail.com
