ECONOMIC
HIGHLIGHTS
New Delhi, 15
September 2007
Sensex Sets New
Record
REVIVE PRIMARY
CAPITAL MARKET
By Dr Vinod Mehta
The Bombay Stock Exchange index, commonly known as the Sensex
has crossed the 8000 mark. Experts believe that the economy will be able to
sustain it in the coming months.
This means that the investors have confidence in the economy,
they expect it to grow and that policies will become more market-friendly in
the coming months. But, the rise in the Sensex is mainly in the secondary
capital market where the existing shares are bought and sold. No new industries
are being set up. In other words, the existing companies are becoming more
profitable but the production base is not expanding. It is the primary capital
market, which needs to grow along with the secondary capital market.
The growth of primary capital market is one of the
indicators that the economy is vibrant and growing. However, the primary capital market in the
country has been virtually dead for the past many years. Perhaps, in the early
years of liberalization, many inexperienced and fly-by-night operators entered
it and then disappeared with the public money. This has been a dead loss to the
investors who invested their savings in these companies.
There were other new companies, which entered the primary
capital market in a big way, but their shares are now ruling very low--between
Rs one to five. They did not dupe the public but were unable to perform. Their
bad performance could be either because of the management or the sales
problem.
The few new issues that did come up in the primary capital
market were mainly from the banking sector, especially the nationalised banks.
Even today these banks are coming out with new issues. However, no new issue
for setting up of manufacturing concern by a new company has come up in the
past years.
A growing country like India cannot allow this state of
affairs to continue for long. Policy makers and the regulators of the primary
capital market must put their heads together to revive this market. May be its
revival is linked with the pace of our economic reforms. It is seen, that in
spite of the reforms being a decade-and-a-half-old, a lot of controls on
economic activities continue. On top of it, the procedures for setting up of
new industries are very cumbersome. There has been no change in the archaic
labour, company laws and so on and that these could be holding back new
investments.
The country has been talking of an exit policy and social security
net for the past eight years, but nothing concrete has emerged so far. An exit
policy without a social security net is going to be very painful. The Indian
trade unions are unlikely to accept any such policy without a corresponding
security net. The country, therefore, will need to simultaneously think of the
two aspects so that all the players in setting up of the new industries know
where they stand and what is expected of them.
Setting up of new industries is always a big risk. The time
a project is conceived and is realised, many developments take place on the
political and economic front, both at the national and international level,
which could make all initial calculations go wrong. This happens many a times,
but what makes things worse is that once the calculations go wrong there is no
way that one can get out. In other countries, the promoters could sell off to a
healthy company and get out of it, whereas, here it becomes a sick unit --the
promoters can neither get out of it nor are they able to run it any longer. The
shareholders too are stuck with the shares which cannot be sold in the
market.
In fact, India
has the largest number of sick industries in the world, where a large amount of
public funds are locked. The money lent by the banks to these units becomes
non-performing assets of the banks and financial institutions, while the money
invested by shareholders becomes dead savings for all purposes.
India must get out of this state of
affairs at the earliest. The take-over
code has not been helpful in tackling the question of sick industries. Thus the
exit policy has become very vital. The company laws have been amended. But, as
far as both labour and trade union laws are concerned, we have yet to initiate
a debate on these crucial issues. It is in our interest, to at least start
moving in this direction in a transparent manner. Vested interests in trade
unions in the organized sector are bound to oppose this tooth-and-nail, but a
beginning has to be made at some point. Outdated labour and trade union laws
cannot be allowed to hold the country to ransom. However, the reform process
should not be a one-way affair and that the labour sector should too be taken
into confidence.
At another level, the regulatory authority like SEBI should
become more active and intervene at appropriate levels and at appropriate
times, so that the primary sector market grows at a healthy pace. Established
companies will not always enter the primary capital market in a big way for
their new units, because they can always tap their internal accruals or come
out with rights issue. The new entrants in this market are generally people who
are entering business for the first time. Therefore, it is very difficult to
say whether the promoters are genuine players or not. This risk will always be
there.
However, what the SEBI can do is to create a vast data base
of new promoters, entrepreneurs and their companies which enter the primary
capital market and monitor their functioning. If any company and its promoters
have not done well or have disappeared from the market scene, they should
neither be allowed to enter the primary capital market again, nor be allowed to
set up any new company again. Thanks to computer networking, it is now easier
to keep track of unscrupulous elements in this market.
Apart from this, the Government must develop positive
programmes to encourage young entrepreneurs to enter the primary capital
market. Setting up of a new industry in a competitive environment is always a
Herculean task for them. They have to be mentally and financially prepared for
it. The Japanese have been handling this problem by setting up what they call
science parks.
Even today, when the Japanese industry is highly developed
and diversified, the science parks play a critical role in nurturing young
business. They have all the infrastructure under one roof to help a budding
entrepreneur to start business -- science laboratories to develop new products,
practical tips on setting up new ventures, help search sources of finance,
marketing their product and help enter the capital market. To top it all, the
young entrepreneur is also provided office facilities in the initial stage.
The parks also support a hotel, a number of restaurants,
banks, post office, tourist office, a shopping centre, conference rooms and so
on. They also provide opportunities to bring the new entrepreneurs and
prospective buyers of its products together. In short, the parks prepare the
budding entrepreneurs to face competition at both the national and
international markets. It is for this reason that the success rate of new
entrants in the primary capital market is much higher in Japan.
The States also need to adapt this approach to prepare the
young so as to ensure a high success rate in the primary capital market. The
Centre, as well as regulatory authority like SEBI, along with our management
schools and scientific laboratories can help set up such institutions in every
State.
With the secondary capital market booming, it is high time
the Government does something seriously to revive this primary capital market,
so that new manufacturing industries can come up in the country on a large
scale. It is the manufacturing industry which provides economic strength to the
nation.—INFA
(Copyright,
India News & Feature Alliance)
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