The Yo-yo Feeling

THE relation between Finance Minister P. Chidambaram and the country's stockmarkets appears to be jinxed. The first time was a few years ago when the infamous securities scam made him quit as commerce minister in the Narasimha Rao government. Chidambaram owned some shares in the scam-tainted Fairgrowth Financial Services. Though he had bought these shares perfectly legally, he resigned on moral grounds.

Then came the 1996-97 Union Budget a fortnight ago, when Chidambaram refused to give any sops to the capital markets. Worse, he introduced the 12 per cent minimum alternate tax (MAT) plus surcharge which would affect the profitability of many blue-chip companies. Various other measures appeared to hurt market-mover Reliance Industries and a host of giant corporations in the core and raw material sectors. The markets slid.

As if this wasn't enough, his admittance a few days afterwards in an interview with a national daily that he did not understand the stockmarkets well was indeed ominous (though to be fair, Dr Manmohan Singh had also admitted to the same several times during his tenure). Almost on cue, the minister, who prefaced his Budget speech with the hope that $10 billion worth of foreign investment would flow into the country every year, set off a selling spree by foreign institutional investors (FIIs). The markets nosedived.

In the week following the Budget announcement, the BSE Sensitive Index (Sensex) dropped by over 350 points. From 3807.6 on Budget eve, by July 30, eight days after the Budget, the Sensex had fallen to 3448.3. FIIs, who had cumulatively put in $6 billion (Rs 21,000 crore) into the Indian bourses ( see 'Who's afraid of FIIs?', July 31 ) unloaded shares worth over Rs 400 crore in a week. The average monthly net purchases by FIIs through Indian bourses during the first half of 1996 has been placed at $350 million. Between July 23 and July 31, the net outflow of foreign funds through the bourses had already exceeded $100 million.

The immediate bones of contention seem to be the MAT and Chidambaram's budgetary announcement allowing companies to issue non-vot-ing shares up to 25 per cent of their paid-up capital. Says James Marks, sales trader of Jardine Fleming India: "There is a strong possibility of companies misusing the issue of non-voting shares in order to retain control. The guidelines are still vague, but it is a fact that FIIs are apprehensive of this clause of the Budget. The introduction of MAT, which will affect the profitability of several zero-tax blue-chip companies, has also added to the market woes." 

Almost concurrently with the FIIs' selling spree, the bears have also gone in for the kill, especially in Reliance stock which had witnessed an unprecedented spurt before the Budget ( see 'Reliance: Faith Accompli', July 31 ) on unsubstantiated rumours about promoter-prompted buying. Says another FII dealer: "The bull run on the Reliance scrip a few days before the Budget had caught a lot of bears on the wrong foot. So after the Budget, since the company would be affected by MAT and import duty cuts on petrochemicals, it was a good opportunity for the traditional Reliance bears to go in for the kill." The scrip, which had crossed Rs 230 before the Budget, fell to Rs 202 on July 30.

And then there are also individual considerations like the story doing the rounds that Jardine Fleming was shedding a lot of State Bank of India (SBI) stocks. The Bombay markets were rife with the speculation that Jardine Fleming's hackles were raised at not being appointed the lead manager of SBI's proposed GDR issue. As retaliation, it decided to sell off a whole chunk of SBI stocks. Denying this, Marks told Outlook : "I can safely guarantee that Jardine Fleming India hasn't traded in a single SBI share over the past week." But market sources claim it was Jardine Fleming's Hong Kong office which had custody of large SBI stocks. And the sale could have come from there. But there are other factors as well. And they appear to be as important, if not more. Admits Mark: "The emerging markets currently are slightly depressed all over." The US equity market is also down, while the bond market has gone up with yields of 7 per cent and more. A lot of money is going into the US bonds market. The fact is that most India-related funds are absolutely short of cash. Says Narendra Nagpal, assistant director, BZW Asia: "Most India-related funds are left with less than 10 per cent liquid cash. A majority of the money has already been invested in India and other emerging markets. These funds are desperate to go liquid in view of the GDRs that are opening up in the near future."

 Indeed, over the next few months, Indian corporates are going on a spree raising money from international markets. This week, ICICI goes on a roadshow to sell its $200-million GDR issue. Next week, Tata Engineering and Locomotive Company (Telco) will be criss-crossing the globe to sell its $200-million GDR issue to fund its ambitious expansion plans. Kesoram Industries was so keen to steal a march over the others that it took its roadshows for the $50-million GDR issue four days before the Budget. Three Indian companies will be raising over $450 million over the next few weeks from the global market. And, just weeks before Europe's top managers take off for their summer vacations in August.

INDIA'S top corporations are scheduled to raise nearly $2 billion (Rs 7,000 crore) this year in a cash hunt that won't stop this side of Christmas. Soon after the summer vacations, in September, SBI's mega $400-million GDR issue is slated to hit the global markets. Says Mark: "The global fund managers are also expecting the long-delayed VSNL GDR issue to hit the roads this year. That alone could be in excess of $750 million."

 The late Aditya Birla's flagship company Grasim Industries is also planning a $125-million GDR issue this year, as is Indian Petrochemicals Corporation (IPCL), which hopes to raise $175 million through a global bonds issue in September. A string of companies including Gujarat State Ferti-liser Corporation (GSFC), India Cements and Varun Shipping have already announced plans for GDR issues while Asian Paints, Indian Aluminium (Indal) and Tata Chemicals are waiting in the wings for the right opportunity to hit the global markets. Says Nagpal: "The point here is that a lot of fund managers will have to book profits in their emerging markets portfolio in order to subscribe to these GDR issues." 

And since the FIIs have put in enough money into Indian stocks over the past months, some of their stockholdings have to be liquidated to subscribe to the slotted GDR issues over the next few months. Admits Sanjay Jha, vice-president at ITC Threadneedle which is launching its mutual fund on August 19: "Though the selling spree by the FIIs may weaken during the vacation month of August, it is unlikely that a huge amount of FII money will flow into the Indian bourses at least till the GDR spree is over."

 However, some good news is bound to alter the depressed mood of the market. shares not to be included in the 24 per cent FII limit in the capital of a company was expected to perk up FII sentiment. The investors themselves are waiting for the detailed guidelines. While a rumour at the BSE on Wednesday, July 31, about a sharp cut in MAT aided by a sustained buying spree by the domestic financial institutions did enthuse the market to the extent of 88 points, the stock exchanges of the country will continue its yo-yo swing for some more time, according to market analysts.

 Further, with Chidambaram's stockmarket jinx and his admitted ignorance about the same, what is for sure is that the days of retail trading in stock exchanges are almost over. Says Jha: "The irony is that while the depressed market is a good time for the mutual funds to build up their portfolios, the same market also makes it difficult for the funds to garner the corpus." And on August 19, two foreign mutual funds, ITC Thread needle and Templeton, are being launched, both with a targeted corpus of Rs 50 crore.

Will the FIIs bite the bait?