THE ECONOMIC WEEKLY December 3, 1955

Recent Developments in Capital Market

S I G N I F I C A N T changes have t aken place in the s t ruc ture and w o r k i n g

of the cap i t a l m a r k e t In recent years. U n t i l recent ly, the cap i ta l m a r k e t had remained l a rge ly d o r m a n t , but w i t h the m a r k e d r e v i v a l in the s tock m a r k e t th is year, the capi ta l m a r k e t has also been s h o w i n g welcome signs of l i f e . The cont inued upsurge in s tock prices on a wide f r o n t t h r o u g h ­ou t the year has created buoyant condi t ions i n the inves tment m a r k e t such as has no t been witnessed since 1946. The inves tor has regained his los t confidence w i t h the r e t u r n of a favourab le inves tment c l ima te and the essential precondit ions f o r an ac t ive new issue m a r k e t are now present.

The p r i nc ipa l new issues of the year include debentures by the N a t i o n a l R a y o n Corpora t ion ; o r d i n a r y and preference capi ta l by M a h i n d r a and M a h i n d r a : preference cap i ta l by J aya j i r ao Co t ton M i l l s , B i r l a Jute M a n u f a c t u r i n g Company and Great E a s t e r n Sh ipp ing Company; o r d i n a r y cap i t a l by H i n d Cycles and D i g v i j a y Cements; and preference a n d o r d i ­n a r y cap i t a l by D h r a n g a d r a Chemi­cals. W h i l e a l l these issues are of f resh cap i ta l by ex i s t ing concerns, issue of preference a n d o r d i n a r y c a p i t a l by the West Coast Paper M i l l s is an instance of a ma jo r new floatation of the year.

M a n y Successful Floatations

A p a r t f r o m the pr iva te investors ' response, the success of these issues can be a t t r i b u t e d to several new fac­tors w h i c h mus t p lay an increas ingly s igni f icant pa r t in the fu ture capi ta l m a r k e t i n I n d i a . F o l l o w i n g the Shrof f Commit tee ' s recommendat ion fo r s e t t i ng up a consor t ium of lead­i n g banks and insurance companies fo r u n d e r w r i t i n g i n d u s t r i a l issues, the Handoo Commi t t ee was appoint­ed to examine th i s suggestion in de t a i l . T h i s Commi t t ee genera l ly f avoured u n d e r w r i t i n g o f debenture c a p i t a l by banks but was divided on the question of u n d e r w r i t i n g share c a p i t a l on the g r o u n d t h a t i n the present s tate o f I n d i a n b a n k i n g , i t w a s n o t prudent fo r banks to t ake such r i sks .

W h i l e no consor t ium even w i t h l i m i t e d funct ions has since come in to being, i n pract ice banks a n d insur­ance companies have begun adop t ing a bo lder l end ing pol icy and are com­i n g f o r w a r d read i ly t o u n d e r w r i t e

in pa r t i cu la r debenture and prefer­ence capi ta l . The N a t i o n a l Rayon debenture issue and the Sr i J aya j i ­rao preference issue were both under­w r i t t e n by banks wh i l e some insur­ance companies underwrote and subs­cr ibed besides debentures preference capi ta l of many of the companies ment ioned earlier, But for such un­d e r w r i t i n g by banks and insurance companies, m a n y of these capi ta l issues would not have gone t h rough . These developments m a r k a change in the out look of the credit i n s t i t u ­t ions in the count ry who are now coming f o r w a r d to take r isks w h i c h in earl ier years were reckoned as no par t of their leg i t imate functions. I f the new approach is mainta ined, it must make a ma te r i a l difference to the s t ructure a n d w o r k i n g of the capi ta l marke t in the future.

ICICI

Perhaps even more i m p o r t a n t than the en t ry of credit in s t i tu t ions in the f ie ld of investment u n d e r w r i t i n g is the coming in to existence of the new specialized corpora t ion , the I n ­dus t r i a l Credit and Inves tment Cor­porat ion of Ind ia L t d . , w i t h a t o t a l i n i t i a l capi ta l of Rs 12 1/2 crores and the manner in wh ich i t has handled new capi ta l issues as far.

The I n d u s t r i a l Finance Corpora­t ion of Ind ia , set up in 1948 as a Government body to provide capi ta l to pr iva te indus t ry , has no doubt done useful w o r k so far, p a r t i c u l a r l y in fu rn i sh ing long- t e rm loans to many new enterprises at a t ime when they w o u l d not have obta ined loans f r o m any other quarters , be­cause both the stock m a r k e t and the capi tal m a r k e t were passing t h r o u g h depression. Just as the h i g h hopes w h i c h this body aroused in the beg inn ing were exaggerated, i ts present eclipse, f o l l o w i n g heavy los­ses on some loans, and severe c r i t i ­c ism of its ac t iv i t i es in par l i ament , is l a rge ly undeserved for such bodies are set up for the ve ry purpose of t a k i n g r i sks some of w i n c h are bound to result in losses.

The ma jo r g round for c r i t i c i sm in pr inciple aga ins t th is corpora t ion , however, is t h a t i t has no t so far assisted in provis ion of any venture cap i ta l and above a l l that, i t has kept i t se l f completely a loof f r o m the capi ta l m a r k e t of the count ry . Under I n d i a n condi t ions i t is v i t a l tha t a specialised body set up for p r o v i d i n g

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capi ta l to i ndus t ry should so c a r r y on i ts ac t iv i t ies as to enlarge and nurse the ex i s t ing capi ta l m a r k e t and thus help to a t t r ac t a l a rge r flow of savings fo r i n d u s t r i a l develop­m e n t I t i s in th i s respect t h a t the new I C I C I , t hough on ly a year In operat ion, has begun to make i t s i n ­fluence fe l t by so d i r ec t ing i ts p o l i ­cies as to b u i l d up a large and bet ter organized cap i t a l m a r k e t .

A Good Start

In i ts shor t period of existence, the new corpora t ion has handled one majo r public capi ta l issue of a new enterprise, apa r t f r o m other issues w h i c h i t has t aken up w i t h o u t publ ic of fer ing. B u t the procedure adopted in respect of this issue w h i c h , i t is expected, w i l l be fo l lowed i n the case of subsequent issues, is a welcome ind ica to r t h a t i ts a t t empt is d i rected to f o r g i n g a bet ter in tegra ted cap i t a l m a r k e t . In i t s sc ru t iny of a propo­sal, i t seeks to collect exhaust ive and accurate data , much to the chag­r i n of the promoters who are not ready for such a detai led a n d t h o r o u g h examina t ion . Th i s i s an educative process in i t se l f f o r the I n d i a n enterpreneur w h i c h can b r i n g n o t h i n g but good. Secondly, in a large sized issue, the Corpora t ion appears to fo l l ow the practice, a f te r u n d e r w r i t i n g equi ty or other cap i ta l , of r e q u i r i n g the issue to be offered to the public so t ha t the public gets a f a i r and equal oppor tun i ty to sub­scribe to capi ta l .

I t has been cus tomary in I n d i a to a r range for p r iva te subscript ions even of large issues among directors and friends of the promoters or t h rough brokers w i t h o u t g i v i n g any oppor tun i ty for subscript ion to the general public. This is an unhea l thy and un fa i r practice. F o r instance, i t was unfor tuna te tha t debenture issues of a l l the three o i l refineries t o t a l l i n g I t s 14 crores should no t have been offered to public subscrip­t ion but should have been placed pr iva te ly , l a rge ly w i t h b ig i n s t i t u ­tions, so tha t smal l investors go t l i t t l e oppor tun i ty to subscribe in the beginning and could on ly purchase subsequently in the open m a r k e t at considerable premium. I t i s s t range t h a t Government should have taken no notice of this practice w h i c h has acted to the disadvantage of the common investor. H i t h e r t o under­w r i t i n g a n d p lac ing of new Issues

H T Parekh