July 29, 2007

If the resource-starved government doesn’t reap the benefits from the stock markets, it’s calculated stupidity!!!

While the country was engrossed in sticky issues – like that of Indians for the first time being involved in a global terror plot, or our Presidential elections, or even the daily rumbling of our polity – the Sensex quite surreptitiously surpassed the magical figure of 15,000. It was barely one and a half years back that it crossed the 10,000 mark and brought India to the league of nations with the highest market capitalization in the world. Though for any lay Indian, this milestone might not make any sense as stock markets were never a barometer for social performance of any country, the essence of this particular milestone cannot just be ruled out as a mere mindless gambling of punters.

One of the most interesting facets of this meteoric rise of the Sensex is a killing dichotomy – while on one hand, India Inc. has gone about in a spectacular manner successfully tapping this boom, on the other, our ‘efficient’ government and ‘more efficient’ public sector enterprises have spectacularly failed to do the same. One such glaring example is the Indian banking sector. Leading private banks like ICICI used the capital markets to mop up capital like no one else. ICICI metamorphosed itself from a typical sloth-like developmental banking entity to the one that inculcated the concept of universal banking in India. Now consider this: ICICI and IDBI started almost at the same time. Though IDBI followed a similar path of a reverse merger with IDBI Bank to transform itself into a universal bank, the severe restrictions placed on it – due to the bank being a government entity and the corresponding rule that the government’s shareholding cannot come down below the 51% mark – the bank’s ability to expand beyond a point was restricted owing to lack of capital and the inability to maintain the Basel norms.

In the recent past, ICICI showed the art of capital jugglery, when it transferred all its holdings – in both its life and general insurance business – into a new holding company; and then went for an IPO for its new entity called ICICI Holdings. This was a masterstroke to mop up $5 billion for expansion of their insurance business as the cap of 26% puts severe restriction on the part of the foreign partner to bring in capital. Incidentally, the whole public issue of ICICI Holdings was subscribed within twenty minutes of its opening, showing the level of confidence investors – both institutional and retail – have on this company, which is no more a government owned entity.

Contrast this with most of the Public Sector Banks (PSBs), which are still begging the government and their trade unions to allow them to merge with each other to have the size to compete in this era of ‘scale’. Most of the PSU banks have a majority of government equity, making it difficult to mop up any extra capital (as in that case, the government equity comes down below 51%, which, by our Indian government standards and ideology, is sacrosanct and cannot be breached). So, the gross effect of such rigidities is a country, where 50% of the population doesn’t have access to banking.

Under given circumstances, it has been the stock markets that have come as a messiah for the likes of Dhirubhais and Narayanmurthys of the country. The saga, which started in the 1980s, continues till date for Reliance. Each stepping stone of theirs has been a testimony of the helping hand of the stock markets – be it the commissioning of the Reliance Petroleum plant in Jamnagar, or the recent formation of another subsidiary with the same name (incidentally, Reliance Petroleum had previously been merged with Reliance Industries). And how can one forget the way Mukesh Ambani went for a pre-IPO private placement of 5% stake to Chevron – a move that created an intrinsic value of $30 billion – and then went for an IPO for the expansion of the Jamnagar facility from 33 MTPA to around 60MTPA.

In the last few years, scores of private companies like Suzlon, Jet Airways, Bharti, Infosys, TCS, DLF, Idea Cellular and more, have tapped the capital markets to fuel their global ambitions. What more, most of the issues have been extremely successful. But unfortunately, the tale does not spin the same for our PSUs, barring a handful like the NTPCs, ONGCs and BHELs. So, while the Bharti group from nowhere has become a group with one of the highest market capitalisation, BSNL is still floundering with every passing day. And it is because of exactly this mentality that it takes years for the same BSNL or an Indian Airlines to finalise a deal for purchasing crucial components on which their businesses survive, leave alone having the vision to unlock their intrinsic values. What is more amazing is the fact that a mere 20% stake sale in BSNL is good enough to provide telephone connections in half the villages of this country. A mere 30% stake sale in IOC would give our government enough money to build schools and hospitals in every village of this country and still leave them with more for further re-investment.

In the given environment, if the resource-starved government and its enterprises don’t reap the benefits from the market, it’s simply calculated stupidity, nothing else!!!

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