Monday, June 8, 2009

Prospects for Recovery of Capital Markets

Now that green shoots are visible in the Indian markets with some encouragement from the formation of the new Government, there is an expectation that capital markets are poised for recovery. There seems to be a steady flow of foreign capital into the Indian markets, and Indian companies too seem to be raising capital, albeit from institutional sources. If the trend were to continue, there could be signs of greater primary market activity. But, the question, as we often ask on this Blog, is whether the regulatory regime is attuned to foster such market activity. Incidentally, there are several recent discussions through columns in the business press stating the need for reforms on various aspects of capital markets.

The first column calls for a uniform par value on shares. More specifically, the recommendation is for SEBI to issue a guideline mandating a one rupee (Re. 1) par value on all shares. While this approach is useful, having a small par value of Re. 1 could dilute the effectiveness of having a par value at all. Instead, the preferable approach may be to abolish par value for shares as we have previously argued (here and here).

The second calls for an overhaul of the primary markets regime so that price discovery in public offerings and rights offerings is possible in a timely manner. In the past, offers have failed due to the delayed period for effecting such offerings, as market prices of the stocks have moved adversely in the interim rendering the commercials of the offerings unviable.

The third, pertaining to the bond markets, laments the lack of a guarantee mechanism for corporate bonds issued to retail investors. In the absence of adequate credit protection, such bonds may not be entirely palatable to retail investors.

All of these are fairly significant issues that demand attention of the regulators in boosting capital markets through appropriate reforms.

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