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Maruti IPO a success story

Maruti's IPO went off on a flying start and helped the entire PSU sector buck the trend and boosted prices.

india Updated: Jul 08, 2003 15:56 IST
Dr Bhaskar Dasgupta
Dr Bhaskar Dasgupta

The India Babble
Still the trend continues upwards, the markets were trading in a narrow range of about 70 points, but with depth and ended up at 3354.

Maruti's IPO went off on a flying start and helped the entire PSU sector buck the trend and gave a fillip to the prices. But the emerging concerns and uncertainty about the privatisation front still remained and the sector was quite
volatile over the week.

In addition, the SEBI investigation on the Public sector bank market prices put in a damp cloth over the movements and most showed a downward trend. The finance minister also expressed his concern about the pricing of the shares and the market was apprehensive about the premium at which the government will return its shares to the bank. All in all, a pretty dim time for the banking sector.

By all accounts, the Maruti IPO was a success across the institutional as well as the retail front. It may well be that the fact that this IPO is one of the rare good ones in a long time and people have just piled on to get a piece of the action. All in all, given the sharp rise in car finance, the reduction of the interest rates and a host of new financing products have given a boost to the automobile sector with most of the firms enjoying a breath of fresh and bigger sales for a change.

Another piece of news, which shows that the government is on the ball keeping up with a good legal infrastructure for the new economy, is the announcement that the draft of the Data Protection Act is nearly ready. This act will protect data provided by foreign companies to Indian firms who sub-contract to them. Good one there, lads.

The Times of India covered a report out by the Federation of Indian Stock Exchanges about the liquidity of the various exchanges in the country. Some of the reported figures are rather distressing, only 1 per cent of all the shares listed in the country are regularly traded, and the top 10 per cent of this 1 per cent accounts for 8 out of 10 trades! The report is particularly scathing towards a raft of measures that SEBI and others have introduced, such as reduction in the percentage of minimum public offer, proportional allotment and the
book building exercise.

If the government is serious about getting the ordinary investor diversifying their investments away from bank deposits and unit trusts, then a good framework will be better. Perhaps we should take the bureaucrats away from the IT sector temporarily and plug them into SEBI and Ministry of Finance, just a thought!

Arun Shourie was much in the news this week, announcing transparency over purchasing of equipment by the state owned telecommunications companies and that the assessment for the BPCL advisor was complete and it looks like the privatisation process is still on (slowly, slowly!!).

The government seems to be working with debt retirement in its mind, with news reports talking about the government aiming to retire high interest domestic debt held by domestic banks as well as use the bludgeoning foreign exchange reserves to reduce the private sector external foreign currency denominated debt. Good show indeed!

The Babble in the Ivory Towers
This week, we check out a paper by Robert Parrinoa, Richard W Siasb and Laura T. Starksa in the Journal of Financial Economics, entitled "Voting with their feet: Institutional ownership changes around forced CEO turnover".

The authors tried to determine what and how institutional investors in the USA behave, when dissatisfied with a firm's management, by analysing the changes in equity ownership around forced CEO turnover. They found that the aggregate institutional ownership as well as the number of institutional owners declines in the years before a forced CEO turnover.

They established that the holdings of the institutional investors decline, while there is an increase in the shareholdings by individual retail investors and this can be due to the institutional investors being better informed or preferring to hold prudent securities or could also be investing on the basis of momentum trading.

The data set used by the authors is from 1982 - 1993, so the results relate to the period before the bull run as well as the significant changes in regulations emanating from the post Enron, Xerox and the recent investment banking crisis. Still, the results would have hopefully strengthened after the crisis and the attendant regulatory changes. The study also found that the change in institutional ownership may influence the board of directors to change the CEO.

Quite interesting results and this is something which retail investors don't usually keep track of. It would help for the retail investors to keep an eye on the institutional investments and its turnover, for a decrease in turnover is a good indicator that the share price is going to tank. On the other hand, if one of the most developed, liquid and regulated markets in the world shows this kind of divergent behaviour, the lesser developed markets, such as India, need to be aware of this difference between the investing behaviour of institutions versus retail.

In any case, forced CEO turnover is pretty rare in India as well, off the top of my head; I cannot recall any situation in recent times. Our boards need to be strengthened and appropriate regulatory control embedded. In addition, proper publication of voting records, share holding patterns and institutional holdings should be made compulsory, available publicly on the net or through the listing exchange. That should avoid situations where the retail investor is left holding the can, while the institutional investors have long gone.

Details of this paper are available on

The World Babble
The week started on a downward note but started to pick up by Tuesday, which continued till Friday, when the mini rally ran out of steam following the publication of bad consumer sentiment figures. This caused investors to lock in profits.

The University of Michigan's Index of Consumer Sentiment dropped from 92.1 in May to 87.2 for June. Consumer confidence leads consumer spending and since this is worth almost 2 out of 3 dollars spent in the US economy, the impact of this figure was pretty severe.

The commerce department released export figures which showed that the US exports had fallen to a 13 month low in May, imports fell by a greater amount and that made the monthly deficit a tad lower, at $42 billion. The producer price index slipped as well in May. All in all, a bit of gloom around the place, but the trend seems to be maintained. Overall, the DOW ended up 0.6 per cent up at 9,117, the S&P500 up 0.09 per cent to 988 and NASDAQ dropped 0.06 per cent to 1,626.

The other impact of this news is that the expectations that there could be another cut in interest rates later this month is high.

Europe followed the Dow's path, with the FTSE Eurotop 300 ending at 853. The European markets were unsettled with the Euro gyrating as well as the US confidence numbers. Thomson helps in the general tech malaise after announcing restructuring as well as cutting its outlook for this year.

The Footsie 100 closed down a tad. The automobile sector is getting a hammering after the European Automobile Manufacturers Association said that the sales of new cars in Europe is 5.2 per cent lower year-on-year in May. The Euro is not helping, Sir.

The Euro dived a bit on Monday and Tuesday, at one point being below 1.17 and then moved up, ending at 1.1868. The Nikkei is still powering up and closed at 8980, and seems like there is a resistance level at 9000, the index approached 9000 four times and only once it broke through, but fell back.

The European Union Farm Ministers are still moaning about the reform of the farm subsidies and battling Franz Fischler, the EU farm commissioner. France and Germany are protesting and stonewalling against the proposals to decouple the payments to production. Somebody should tell these guys to get real and see the wood from the trees. Inspite of their economies going down the tubes, they insist on holding on to archaic processes which cost them more.

Germany is at least trying. There is significant momentum building up for reforms with tax cuts in the offing. On the other hand, France is beset with strikes protesting against the pension reform. Prime Minister Raffarin is beating them off, but just barely, one hopes he will succeed in holding on to his guns.

Sterling slumped on the back of UK Chancellor Gordon Brown's Euro Entry report and ended up several points down because the rate at which the Sterling is expected to enter into the Euro is much lower than the current rate.

As expected, Gordon Brown delivered the verdict of "not now" on the Euro Entry and it looks likely that the Euro referendum will be held early in the next parliament. Mind you, given the level of opposition to the Euro, it is doubtful that it will be passed.

The bond market is still moving on ahead with even more expectations of rate cuts in USA as well as in the Eurozone. As we discussed a couple of weeks back, the rate cut by the European Central Bank was too little, too late and it is quite evident that another cut will be required. All the wonderful growth figures would not mean anything till inflation picks up a bit, and that is the worry which the central bankers have to target. Worrying about money supply at this time is missing the wood from the trees!

On the institutional front, India has approved the GM potato which is supposed to have 1/3rd more protein than the normal potato and the ministry of bio-technology claims that this will be given free to millions of children at government schools to target the problem of mal-nutrition. All
these GM issues are rising to the fore, given the mass of starvation and food problems in a vast swathe of the world.

The European governments' refusal to accept GM foods is slowly becoming even more strange to comprehend. African countries are appealing to the EU and USA to compensate them for their cotton subsidies. Although the African countries are quite efficient, they cannot cater for or cover the European/American subsidies. A pretty fair point but to expect Europe/America to drop subsidies, ha!

It costs 82 cents to produce a pound of cotton in Mississippi while it costs 23 cents to produce it in Mali. The cotton price is dramatically driven down and the American farmer is pushing cotton on to the markets at a subsidised price, which the Malian farmer cannot compete against.

The WTO Secretary General has been reported to be worried about the up and coming trade ministerial meeting in Cancun, stating quite forcefully that the preparations don't seem to be coming along as well.

(Dr Bhaskar Dasgupta will be writing a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.)

First Published: Jul 08, 2003 15:56 IST