Engineering bullishness

Print edition : November 07, 1998

The nature and timing of the new package to revive industry suggests that the BJP has realised the need to refurbish credibility through concessions to big capital.

DESPERATE to refurbish its badly-damaged economic profile and prevent a meltdown in the financial markets, the Bharatiya Janata Party Government has announced one more economic policy package. Using the occasion of the 71st annual session of the Federation of Indian Chambers of Commerce and Industry (FICCI), Prime Minister Atal Behari Vajpayee unveiled the package that is ostensibly aimed to cope with the "difficult times" through which the Indian industry is passing, because of which "confidence is low and expectations from the government (are) high." However, a close scrutiny of the package suggests that its real aim is to provide significant concessions to big business with two objectives. The first objective is to revive the Government's sagging image, especially before the Assembly elections in Delhi and the States of Madhya Pradesh, Rajasthan and Mizoram, and the second, to try and stave off a potential run on the Unit Trust of India's (UTI) US-64 scheme, consequent to a collapse in its net asset value.

The announcement bundles together three sets of policy measures. Prime among them is the effort to encourage private sector corporations to buy back their own shares and resort to larger volumes of inter-corporate investments with the ultimate intention of takeover. To that end, significant changes have been introduced in the code governing share acquisitions in existing companies. Hitherto, promoters seeking to consolidate their holdings in a company were allowed to acquire shares, without having to make an open public offer, at the rate of 2 per cent of the total in a year, until their block of shares touched 51 per cent. This ceiling on "creeping acquisitions" without a public offer has been raised to 5 per cent a year, and the provision is being extended to promoters holding anywhere between 15 per cent and 75 per cent of a company's shareholding. However, in a half-hearted effort to protect the interests of the ordinary shareholder, the new policy requires promoters to notify the Securities and Exchange Board of India (SEBI) when their acquisition crosses the 2 per cent level in any year.

TWO private sector objectives are being furthered through these changes. First, domestic and foreign promoters with a minority shareholding would be interested in increasing the size of their controlling block, so as to acquire a majority shareholding. They are now to be allowed to do so at a faster pace. This would be particularly true of foreign investors in ex-FERA (Foreign Exchange Regulation Act) companies seeking to increase the size of their controlling block, who would possibly be able to circumvent clearance from the Foreign Investment Promotion Board under the new dispensation. Second, promoters holding either a minority or a majority of shares as part of their controlling block may be interested in acquiring a larger proportion of shares at the present time, when share prices are well below the peak levels they touched a few years ago. They too are to be allowed to acquire shares at a faster pace.

Having provided this opportunity to promoters, the Government has decided to extend a similar concession to firms with predatory intentions. Companies that were hitherto allowed to purchase up to 10 per cent of the shares of another firm through inter-corporate investments, before triggering the requirement that they make an open offer to all shareholders, have now been allowed to acquire up to 15 per cent before touching the trigger level.

This again has the principal advantage of allowing for share purchases, at the expense of ordinary shareholders, without forcing disclosures that may render further acquisition expensive.

It should be clear that by allowing cash-rich companies or investors to acquire additional shares without "much fuss", the Government is expecting to trigger a bullish trend in the stock market and push up share prices.

The stated intent is, in fact, to help "revive" the capital markets. But that objective is unlikely to be realised. To start with, even if the Government's expectations of a large stock price increase materialise, this "revival" would only occur in the secondary market, or the market for shares already issued. The slump in the stock market is most severe in the primary markets, with corporates unable to go in for an issue of additional shares in existing companies or new shares to finance new projects. It is obvious that changes in the ceiling on creeping acquisition or inter-corporate investments leave that problem untouched. Second, a true revival of the stock market, including in the primary equity market, would occur only if the economic fundamentals, as opposed to the market for corporate control, improve.

However, the second component of the package, which is aimed at those fundamentals, appears to be no more than a hasty, politically motivated declaration. The Government has announced its decision to start work within the year on a 7,000-km, six-lane road corridor connecting Kashmir and Kanyakumari and Silchar and Saurashtra. The total cost of the project, which has been on the file for quite some time now, is currently placed at Rs.28,000 crores, but it is unclear how much investment would occur over the next year.

On the surface, this decision has two possible objectives. One is to undertake expenditures that could be used to reconstruct the BJP's dissipated vote bank. That the principal objective behind the scheme is to please voters is partly reflected in the decision to spread resources thin and start work at 21 different centres across the country. The other objective could be to increase demand and spur an industrial recovery directly (through purchases from the cement industry, for example) and indirectly (by generating additional incomes).

This reflationary component of the package is, however, nebulously defined. How much is to be spent? Is the expenditure to be undertaken by the Centre or the private sector? Is the corpus of more than $4 billion mobilised through the issue of Resurgent India Bonds (RIB) to be deployed for this purpose? If RIB funds or private money is to be deployed, what are the means through which an adequate return is to be ensured for such investment? These and other questions remain unanswered. And by the time answers are found the year during which work on the project is to begin is likely to pass. So would have the elections, the results of which could threaten the stability of the Government.

Having laid out these two principal planks of the new package, the Government has added on a number of supplementaries. These amount to reiterating promises of concessions to foreign and domestic big business made much earlier, which have been awaiting final notification by a government that often makes controversial pronouncements and then retracts them or fails to implement its promises for months on end. Thus, foreign investments are to be facilitated in sectors such as insurance and airports and long overdue policy decisions in sectors such as telecommunications and the provision of Internet connectivity, which would encourage private investment in these sectors, are to be implemented. There are unlikely to be many takers for the airport offer after the experience of the Tatas in negotiating an airport project.

Thus the real "advance" here is the decision to open up the insurance sector to foreign investment, which is also the most controversial. When this policy was announced in the Budget, many commentators argued that there exists enough evidence to suggest that allowing large private players into that sector could increase the fragility of the system substantially.

Overall, a large part of this package, observers have been quick to note, amounts to little other than mere pre-election rhetoric. Stripped of that, the only substantial part of the package, which the Government has been uncannily quick to implement, is the set of measures ostensibly aimed at reviving the capital markets through concessions being provided to big domestic and foreign capital. One consequence was an immediate rise in share prices. This has encouraged the view that the real intent of the package is to engineer a rise in the prices of stocks that are currently traded.

There are very pressing reasons from the Government's point of view why this is needed. The slump in the stock markets has reduced the value of the portfolio of most mutual funds to an extent where their viability is being challenged. The most seriously affected has been the UTI's US-64 scheme, which has been experiencing an exodus of unit holders who expect a fall in the repurchase price. If this is to continue, the UTI would be forced to unwind some of its positions, triggering a collapse in the market. From the Government's point of view, therefore, an engineered bout of bullishness in the stock markets, which temporarily creates the impression of a healthier capital market as well as raises the net asset value of the UTI and other mutual funds and helps stave off a potential crisis in the financial sector, is a soft option.

But that is not all. Two other considerations have prevailed upon policymakers: a desperate need to show that this is a Government that works and a need to please domestic and foreign big business. The latter is important to the BJP's two-track political strategy: whipping up chauvinistic sentiment to garner votes and winning the favour of big business to establish that despite its chauvinistic image it is a party that can actually govern in a democracy. This strategy did yield some results in the last election. The nature and timing of the Prime Minister's new package suggests that the party itself recognises that its has lost that credibility, and needs to refurbish it through concessions to big capital. But whether one more appeal to big business can make much difference on the ground is yet to be seen.

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