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Sensex Sets New Record:REVIVE PRIMARY CAPITAL MARKET, by Dr Vinod Mehta,15 September 2007 Print E-mail


New Delhi, 15 September 2007

Sensex Sets New Record


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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