Traditionally, the best business policy in India was to manipulate netas, babus and markets. Manipulating netas and babus yielded contracts, clearances, and financing from banks and financial institutions. Manipulating stock markets raised money at fancy premia from unsuspecting investors.
Those days are now over. Even the most expert manipulators today find it difficult, sometimes impossible, to raise money for new projects. They blame this on moribund stock markets. But the Sensex today is actually a shade higher than at the start of 1996. Some companies have taken a terrible beating in 1996, but others have fared very well (see the accompanying table).
Something revolutionary is happening. Markets are for the first time telling businessmen that certain sorts of behaviour will be rewarded and others penalised. It no longer matters much how big you are, how much influence you have, on how blue-blooded your ancestry is. What matters today is whether a company promotes value for shareholder or caters to the private interests of the promoters. If you are shareholder-friendly, your market price will zoom upwards, and you will be able to raise money at will. If not, you will suffer,
| The change is largely due to the hard-headed attitude of foreign institutional investors (FIIs). They have emerged as the first institutional investors to actually care about shareholder value. In the old days, the market was dominated by government financial institutions and UTI. These were instructed to finance and support ‘good managements’ which in practice meant every management, even sick ones. Increasing shareholder value was never an explicit part of their agenda. Indeed, they encouraged strategies that eroded shareholder value.
If a company constantly raises new equity to finance new projects, neither earnings nor book value per share will rise. This strategy helps a promoter build an empire using other people’s money, but does not benefit shareholders. Yet this is precisely the business strategy that government institutions eagerly financed for decades. Better from a shareholder’s viewpoint were companies (like Bajaj or TVS) that grew on the basis of internal profits rather than fresh equity, that stuck to their lines of expertise instead of constantly diversifying into unknown areas simply to avail of tax breaks, that aimed at maximising earnings per share rather than the size of the group. Yet they were not given due importance by government institutions.
Then the FIIs arrived, and by now have poured over five billion dollars into the market. Unlike government institutions, FIIs made no pretence of nurturing companies or financing the expansion of every company with a licence. On the contrary, they were shareholders in search of profit, and sought out managements that maximised shareholder value.
In the old days UTI ruled the roast, while small investors also flooded in during bull runs (like Harshad Mehta’s). But after being taken for a ride small investors have pulled out of the market and also out of mutual funds, starving UTI in the bargain. This has left the FIIs as the leading players in the stock markets. Critics complain that foreigners have taken over. Not really, FIIs have been net investors every month for two years, yet the Sensex has crashed in that period. They have not caused the crash but reduced its magnitude.
FIIs have dumped some companies and piled into others. The sufferers claim there is a flight of money from the markets. In fact, there is a flight to quality. And quality no longer means a company with the most licences or expansion plans, but one that maximises shareholder value.
We must welcome this. Earlier, the Ambanis believed they could flout any rules with impunity, but no more. Initially FIIs regarded Reliance as a world-class company, strongly recommended its shares to their clients, and helped it raise a big GDR issue. They asked, routinely, for a pledge that Reliance would not make a fresh issue for two years, so that the company’s equity did not get diluted further. The Ambanis thought they could renege on this pledge with impunity, and made a large private placement with UTI. In the old days, they would have got away scot-free. But now the FIIs dumped their shares, declared them untrustworthy, and said they would not support further equity issues. For the first time the Ambanis could not manipulate their way out. They have been obliged to finance further expansion through debt, abandoning their old strategy of constantly diluting their equity through new issues, for Mr Ratan Tata to strengthen
Essar, Jindal, Videocon and his control over the group at the other groups have suffered the expense of shareholders. The same fate. No longer can such group’s shares fell 9.10 per cent in groups grow by constantly hitting value during 1996. Another blue-the markets for new equity, blooded family, the AV/BK Birla regardless of its adverse impact on group, suffered a market decline of 21.14 per cent in 1996. The markets disliked what it saw as the diversion of funds from existing companies to promote new ones, the hiving off of subsidiaries at low prices, non-transparent balance sheets and unwarranted – diversification.
On the other hand, the market supported groups seen to be trans parent and promoting shareholder value – Mahindra, Baja), TVS, Hindustan Lever.
Thus the opening of our capital markets to foreign portfolio investors has produced blessings that we could never have imagined. We believed initially, that portfolio investment was simply a device to earn some foreign exchange. Now we find we have brought in an institutional force that obliges companies to enhance the shareholder’s interests rather than the promoter’s. It has share value, induced even UTI to change its Not even the Tatas have been attitude, and dump dud shares in immune. The markets disliked Mr recasting its portfolio. So the culture of investor- friendliness has spread to Indian institutions, and too are heeding the rights issue of Tata Sons at a huge message. That, is quite an as ways achievement.
|Change in market capitalisation in 1996|
|Business Houses||Change %|