Capital For India Inc

The following post appeared on http://www.birdinfo.net on 29th Dec 2009 and is being reproduced here. The Manmohan Singh Govt has faltered since then and we see the result as bad for markets and economy. The moot point is that capital raising is the important thing for India’s economy and should be encouraged. Tinkering with interest rates at drop of pin is a bad policy. Please read on:

Tuesday 29 December 2009

Higher overall return on capital for India Inc

India Inc has raised capital through various means ie IPO,QIP and Rights during the last six years. It raised Rs 34K crs in 2004, Rs 27K crs in 2005, Rs 32K crs in 2006, Rs 83K crs in 2007, Rs 52K crs in 2008 and Rs 65K crs in 2009.

It is remarkable that it could raise Rs 52K crs in 2008 which happened to be an year with worst of sentiments but substantial portion of it came through rights issues (Rs 31K crs), it means that the promoters did not like to reduce capex and preferred to raise money from the shareholders themselves. Since majority of the public shareholders were in no mood to take the rights, the promoters cornered most of it. It was for this reason that a very big percentage of promoter holdings were encumbered for meeting fund needs and was a matter of concern for SEBI which laid down rules for making a periodic disclosure about this fact.

Though the promoters had to undergo a high level of strain in 2008 but this proved to be chance for them to raise their stakes at much lower cost than would have otherwise been possible. It is a dampener for the markets when a lot of offering comes in market right at a time when it is ruling at high level and when in 2007 Rs 82K crs were raised, it was the responsible factor for seeing the kind of damage market suffered in Jan 08 which enlarged losses in Oct 08 due to financial turmoil in USA.

The second leg of damage was an unreal one for at least the Indian stocks and therefore when the nerves were cooled down, the rebound was equally forceful. In light of above when we analysis the strength of Indian Stocks and markets, we should be ignoring the period between Oct 08 and Mar 09 as an aberration. When we do this, the market at 5200 Nifty seems to have added a total of just about 1000 points from its lows.

Since the fund raising in 2009 has been only at premium and around the market prices in most cases, it is not something that can be viewed as a negative. In fact this imparts strength, stability and depth. Similarly, future plans for fund-raising in 2010 would not be damaging either. The freshly injected funds in the businesses would enable the conduct of business on better scales and reduced costs. It will be ensuring higher overall return on capital and incremental return on the additional capital. This is the way to prosperity, much more than the Chinese style of export thrust at whatever cost.

The more efficient capital here will invite more of funds form abroad and will see more hands getting jobs. The GDP growth with greater employment is what we should be looking for. Indian conditions are such that the policy makers should not intervene through monetary policies changes and under fear of inflation in food prices. The more ground we cover while the going is good, the better.

I am also pleased about the way Indian companies are gearing up the management effort. They are more inclined now at achieving goals in better ways than was the case earlier. The politicians also seem to have learnt to be pragmatic and equally enthusiastic. This is happening due to everybody having a share in what the economic prosperity is providing. The political stability provided by the second stint of Manmohan at the helm is also a fortunate happening. For want of it, our fate would have been different.

Hariom,

krsnaKhandelwal

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