macro trends in the new issue market and corporate...
TRANSCRIPT
CHAPTER III
MACRO TRENDS IN THE NEW ISSUE MARKET AND CORPORATE FINANCING IN THE 1990S
3.1 Introduction
The analysis of historical trends in the Indian capital market in Chapter II brought out
that the role of the new issue market (NIM) as a source of financing private sector
investments in India was increasing during the 1990s. Inferences drawn from the
analysis also suggested that the growth of the NIM till the nineties was affected by the
investment activities of the household, private and public sectors, by policy shifts, and
by the overall macro economic performance. The present chapter analyses the
structural changes in the NIM during the 1990s and examines the various factors that
affected its performance during this period. This chapter is therefore, a link between
the previous chapter on historical trends and the analysis of data yielded by a survey of
private corporate firms in India between 1989-95 (Chapters IV to VII).
The opening up of the economy in the nineties resulted in a structural shift in
the financing pattern of the corporate sector in India. This was initiated through a
series of changes in industrial, monetary and fiscal policies and t~e liberalisation of
capital markets, thus providing an active role for mark~t forces. 1 One of the major
changes in the capital market was the abolition of the office of the Controller of Capital
Issues (CCI) and the creation of the Securities and Exchange Board oflndia (SEBI) in
July 1992. Therefore, for the purpose of analysis in the chapter, this period 1989-95
would be further sub-divided into smaller periods, viz. the period 1989-1991 (the CCI
phase) and the period 1992-1995 (post-CCI phase). This is to capture the variation in
trends within the era of liberalisation, as a result of the devolution of powers of the
CCI to SEBI in July 1992. The first section of this chapter mainly focuses on the
socio-economic and institutional factors which helped in the growth of the NIM during
the 1990s.
A priori, increased activity in the NIM can take two alternative directions On
the one hand, it can lead to a relative increase in the corporate sector's debt, if
Refer Appendix VITI for details on various capital market, credit and external sector reforms
Chapter - III
debenture issues predominate. On the other hand, it can lead to an expansion of the
paid-up capital of the private corporate sector, if equity issues are dominant. Thus,
with the shift in funding activities from credit-based financing to capital market-based
financing, the pattern of investment funding was largely dependent on the capital
structure decisions of corporate firms, especially after the liberalisation of the NIM in
1992. Both the above mentioned outcomes have different implications for capital
structure of firms and industrial performance. An understanding of the effects of the
massive growth in investment activities through the NIM in the nineties, therefore, has
to take into account the structure of such investments.
An analysis of the characteristics of the NIM would show how the
transformation from a predominantly credit-based system to a capital market-based
system leads to a change in the financing and investment pattern in a developing
country like India. The second section of this chapter, thus, also looks at the macro
characteristics of the NIM, and will form a prelude to the understanding of the
structural changes that took place in the 1990s. With this purpose, the total population
of public and rights issues during this period is analysed based on the data from
PRIME database. The macro characteristics examined in this chapter include the
value2 and number of issues3 raised, preferences of corporate firms for various financial
instruments, and firms' response to demand and supply changes in the NIM. All these
aspects are discussed in detail using the sample data collected for 3127 firms, and thus,
the results of this chapter should be used as a benchmark to understand the sample
analysis in the following chapters.
3.2 Structural Changes And Socio-Economic Factors Behind the Equity Boom
Although most of the growth in the NIM in the 1980s was due to an increase in
debenture issues, the role played by equities even during that period cannot be
underestimated. In the early 1990s, however, the role played by equities became much
more significant. This is clearly exhibited in figure 3. 1 below. While equities 4
accounted for 10 per cent of the total value of NIM in 1989, it increased to 66.5 per
2 The amount mised through various channels like rights and public issues represented in crores of rupees. 3 The number of issues made through the NIM during this period. 4 Equities here include premium issues also.
102
Chapter - Ill
cent by 1994. Similarly, in terms of number, the share of equities rose from 77.0 per
cent ofthe total number ofissues, to 91 per cent during the same period. Hence, the
period between 1990 and 1995 can be referred to, as one characterised by an equity
boom.
However, since the market was dominated by existing (old) companies during
the 1980ss, it becomes crucial to understand how this boom occurred in the early
nineties. A number of factors enter into an explanation of this. These include : a) the
foreign exchange crisis~ b) secondary market activities~ c) changes in the attitudes of
investors from semi-urban areas, and d) decreasing bank credit and lower public sector
investments in comparison to total production in the economy~ etc. Needless to say,
some of these factors are inter-related. This section seeks to highlight the role of these
factors.
Figure 3.1 : The Share of Equities in NJM for the Private Corporate Finns : 1989-95
100.0
90.0
.--------------------- ---------- 100.00
~---...... ----r9o.oo 10.0
70.0
60.0
~0.0
40.0
30.0
20.0
t. • 1! ~
10.00
- 70.00
- 60.00
- ~0.00
40.00
30.00
. 20.00
10.0 -Equity (no) . IO.OO
0.0 Year - Equity(amt) +------+------+-----+----L__ ___ :_:_ ___ _j..-f- 0.00
1919 1990 1991 1992 1993 1994 199~
Note : Both trends are percentage to total public issues. Source : Compiled by the researcher from the Prime Database report from 1989 to 1997.
3.2.1 Foreign Exchange Crisis
In the early 1990s, the economy started experiencing a crisis, which was a result of
government's fiscal indiscipline as well as other exogenous factors such as the 1990 Gulf
war, which led to an oil crisis that worsened India's foreign exchange position. Mainly due
to these factors, India was left with just a week's requirement of foreign exchange for
imports. To deal with the forex crunch and the inflationary crisis in the domestic economy,
India chose to tum to the IMF for credit and opted for a strategy of economic liberalisation
and reform, along with a devaluation ofthe rupee by 19.5 per cent.
5 As suggested by the large nwnber of debentures issued during the period of 1980s.
103
Chapter - Ill
The government's liberalisation attempts created a sense of euphoria and a
significant change in expectations in the market. This opened up the NIM as a source
of capital for the deficit sector, even though an active role was still being played by
intermediaries like banks, insurance firms and developmental financial institutions.
This led to a growth in equity issues from 1992 to 1995.
The growth in equities was also due to the liberalisation of equity pricing and
the initial underutilisation of this source of financing by a large body of private and
public limited companies. As mentioned earlier, since the launch of development
planning in 1951, the government had actively promoted a 'credit-based system' of
resource allocation, with private industrial financing largely dominated and controlled
by banks, insurance companies and development financial institutions. Thus, the
growth of equities in the nineties can be seen as the effect of a pent-up need, expressed
by different sections of industries, leading to a spurt in capital raised through NIM.
3.2.2 Secondary Market Activities
The euphoria generated by liberalisation kindled speculative activities in secondary
markets as well. Two new national stock exchanges were opened during this phase,
viz; the Over the Counter Exchange of India (OTCEI) in August 1989 which became
operational in September 1992, and the National Stock Exchange (NSE), which was
also set up in ·1992 and became fully operational in 1994. The dominance of the
Bombay Stock Exchange (BSE) in secondary market trading came under challenge,
and trading activities moved on from floor to on-line trading.
One consequence was a speculative boom during the last two years of the CCI
phase (1989-1992), with the monthly log-linear growth rate in the BSE index
registering 1.72 per cent between July 1990 and July 1992. This early post
liberalisation enthusiasm in the stock market, specifically in the secondary market was,
however, driven not by fundamentals but by speculative euphoria. This became clear
when a major speculative 'scam' was detected in early 1992 leading to a collapse of
the market. As a result, the monthly log-linear growth of the BSE index fell to 0. 18 per
cent during the post-CCI phase (1992-1995).
3.2.3 Change in Attitude of Investors
Since the early 1980s itself there had been signs of a change in investor attitude to the
secondary market and the NIM. The market which remained a predominantly
104
Chapter - Ill
speculative investment alternative in a few metro cities showed .signs of dispersion to
other parts of the country. An increase in the participation of investors from smaller
cities and towns became visible. 6 The number of shareholders in India increased from
0.24 crores in 1980 to 0.90 crores in 1986 and finally reached nearly 1.35 crores in
1992, pointing to an increasing trend from the 1980s which continued through the
1990s. 7 Further, movements in the proportion of investments out of personal
disposable income (PDY) in shares and debentures, revealed a shift from efficient and
safe investment options to risky investments (refer Table 3.5). Simultaneously, there
was an increase in the number of stock market-related support organisations like
brokerages, registrars and merchant bankers.
A study conducted by the Society for Capital Market Research and
Development, New Delhi, showed that places which were outside the top 25 metros in
India in terms of shareholder percentage to total population, registered an increase in
investment in shares along with an increase in the number of shareholders. The
combined share of these towns and cities increased from 16.9 per cent of total shares
in 1983-84 to 26.6 per cent in 1992, i.e. an increase of 57.4 per cent over 1983-84.
Most ofthe small towns and cities (1060) also showed a 2 to 3 per cent increase in the
number of Shareowners during this period. 8
3.2.4 Decreasing Credit Availability
The change in the investment habits of the smaller towns can also be explained by the
movement in household sector's asset composition in the 1990s. The shift was largely
in favour of assets like NBFC deposits and investments in shares and debentures of the
private corporate sector. The effect of the movement ofhouseho1d savings away from
bank deposits, combined with increased government borrowing from commercial
banks (reflected in increased banking sector investments in government securities),
resulted in decreased credit availability from the banking sector after 1987, for the
private corporate sector (Fig 3.2). This trend was aggravated by the problem of
increasing non-performing assets (NP As) in the banking sector, which led many
commercial banks to tum cautious in their lending.
6 L.C. Gupta, Naveen Jain., Yash Kulshreshtha, 1994, Shareowners · Geographic Distn"bution: City-wise. Urban-rural and State-wise, Society for Capital Market Research and Development, Delhi.
7 ibid., page. 3. 8 ibid., page. 31.
105
Chapter- m
There are four broad trends reflected in Figure 3.2 : a) an increasing trend in all
bank credits from 1970 to 1997, though there are variations across time; b) a decrease
in credit availability relative to total production in the economy from 1987 onwards; c)
a decreasing trend in RBI credit to the central and state governments and bank credit
to the commercial sector in the 1990s; and d) an increase in bank investments in
government securities.
The decreasing credit availability in the 1990s could be seen from the trends in
the ratio of credit to GDP at market prices9, which decreased from 65.7 per cent in
1987 to 58.3 percent in 1990, and further to 48.8 percent in 1997. Credit availability
from banks, thus, dropped by nearly 17 percentage points over a span of 10 years.
This put a lot of pressure on the economy, especially since GDP at market prices grew
at 6.94 percent during 1990-96, compared to 5.67 in the 1980s and 4.66 in the 1970s.
Such a high GDP growth pointed to an actual increase in credit requirement during
the 1990s, whereas there was a drastic drop in credit availability in those years.
Figure 3.2 : Bank Credits in Comparison to GDP : 1970-97
70.0 .--------------------------------------------------------,8~ .. 60.0
.. .. ~ 0
50.0
40.0
30.0
20.0
10.0
0.0
1970 1973 1976
r=::J Total Credits ---0-- Govt credit to GDP rnp
1979
---{1-- Net RBI Credit to C. Govt to GDP rnp -oM - Oth. Bks. lnv. in Govt Securities to GDP mp
1982 1985 1988 1991 1994
~- T.credit to GDP (rnp) /). Conunercial Credit to GDP rnp o Bank Credit to States to GDP rnp
---:=- Share of Govt. Credit to Total Credit
700000
~
200000
1997
] Note: All the variables are taken as percentage share to GDP(mp) except for total credit which is in Rs. crores. Sow-ce : From the data provided by EPW Research Foundation, compiled from RBI Bulletin, various years, "Money and Banking and Finance", Economic and Political Weekly, vol. 34, no 3& 4, January 16-22 I 23-29, 1999, p.218-240.
The credit crunch was comparatively greater for the commercial sector than for
government. The trends in figure 3.2 suggest that while the ratio of bank credit
9 GDPmp here refers to Gross Domestic Product at market prices (current value).
106
Chapter - Ill
available to the government to GDP at market prices (GDPmp) fell from 26.2 per cent
in 1990 to 21. 1 per cent in 1997, that available to the commercial sector dropped from
30.48 per cent ofGDPmp to 27.64 per cent, over the same period. At the same time,
the share ofinvestment ofbanks in government securities increased from 36.6 percent
in 1990 to 59.1 per cent in 1997, a rise of nearly 23 percentage points over a span of
seven years. This clearly suggests that a high growth of investment by banks in
government securities in the 1990s resulted in a movement away from their regular
lending activities.
Table 3.1 shows that while GDPmp recorded the highest rates of growth
during the 1990s when compared to the other phases, the growth of bank credit to
government and the commercial sector decreased in that phase. Credit to government
registered a decrease in growth rate (se~-log linear) from 16.9 per cent in the 1980s
to 12. 1 per cent in the 1990s, while the growth of credit to the commercial sector
dipped from 16.10 per cent to 13.7 per cent. In both sectors, RBI credit showed the
highest deceleration. With the decrease in total credit growth affecting the commercial
sector more than the government, private corporate firms moved to the stock market
to meet their credit requirements. All these factors contributed to the extraordinary
growth of the NIM in the liberalised phase of the 1990s.
Table 3.1: GroWth Rates in Bank Credits During the Period, 1970-97 (In percentage)
SL. no. Credit Availability 1970-79 1980-89 1990-97 1970-97 I Net Bank Credit to Government 13.0 16.90 12.1 15.8 a Net RBI Credit to Central Govt. 10.5 17.05 5.96 14.5 b Net Bank Credit to States Govt. 5.8 0.06 2.6 7.7 c Other banks' investment in Government 18.6 17.90 18.9 18.0 II Bank Credit to Commercial Sector 17.6 16.10 13.7 15.7 a RBI Credit to Commercial sector 25.3 14.2 1.6 13.5 b Other Banks' Credit to Commercial sector 17.3 16.2 l·lO 15.7
Total Credit 15.6 16.5 130 15.7 Source : Calculated from RBI data collated by EPW Research Foundation.
3.2.5 Dynamics of the Stock Market and the Role of Support Organisations
As mentioned earlier, the 1990s were characterised by a greater interest in primary
markets rather than secondary markets. At an impressionistic level. this was evident in
the spread of stock market-related activities, from the floors of stock exchanges to the
pavements in many metro cities across the country. The number of stockbrokers,
merchant bankers and investors increased during this phase. Although there was a
large increase in market capitalisation, the growth is also attributable to a rise in the
107
Chapter - Ill
number of companies listed in stock exchanges after the 1980s. Without entering into
the debate of which of these trends preceded the other, we tum to an examination of
some of the changes that characterised the NIM and the secondary market for
securities, in the nineties.
The number of stock exchanges that had increased from 5 to 8 between 1946 to
1970, increased further from 12 in 1984 to 20 in 1991, and finally to 28 in 1995. There
was also an increase in the number of firms listed at various stock exchanges, thus
increasing the equity base in India and leading to an increase in market capitalisation.
One of the trends noticeable from table 3.2 is the growth of stock exchanges
facilitating the expansion of listed companies. During the 1990s, India came to rank
second after the United States, in terms of the number of companies listed in its stock
exchanges. Although Bombay topped the list accounting for more than 90 per cent of
the companies listed, the growth of regional stock exchanges also contributed
significantly to the phenomenal increase in the number of companies listed in the stock
exchanges. The number of listed companies increased from 1203 in December 1961 to
3882 in December 1984, 5968 in March 1990, and 6480 in March 1992.
Table 3.2: Growth of Stock Markets in India During 1946-92
Year 1946 1961 1975 1980 December
Companies listed {_ excl. double coWltillgl 1125 1203 1852 2265 Total Assets (In Rs. crores) 270 735 2614 3972 Speculative indicator 0.28 0.57 0.80 0.59 Market Value • CI!!_Rs. crores_l 971 1292 3273 6749 Note : • =Includes eqwty, preference stock capttal and debenture/ bonds Source: CMIE report, August 1993.
1990 1991 1992 March
5968 6229 6480 27761 32041 40796
0.39 0.29 0.12 70521 110279 354106
T,he growth of regional stock exchanges, by increasing accessibility and liquidity, had a
major impact on the 'confidence' of the investor, and led to an expansion of 'equity
culture' in India. Prominent examples are stock exchanges of Cochin and Coimbatore
in Kerala and Tamil Nadu, respectively. The increase in listing in the regional stock
exchanges led to a growth in total paid-up capital in the market and the opening up of
a new channel for raising capital for the existing and new companies listed in the stock
market. This was one of the factors that led to the overall growth of the NIM.
Along with the an increase in the number of companies listed in the stock
exchanges, there was an increase in speculative activity as well. An index of
speculation, calculated by dividing the total assets in the stock market by market value
108
Chapter- III
ofstocks, decreased after 1975 from 0.80 to touch a low of0.12 in 1992 (Table 3.2).
The trend in the indicator points to an increase in speculative activities till 1992, which
was mainly due to 'scam' -related trading activities which initially started in the 'A'
category shares and spread to 'B' category shares10. The NSE index also recorded an
upward trend. 11 This spurt in trading and prices was facilitated by practices such as
forward trading and 'badla', which encouraged speculative trading of many 'A' and
'B' category shares. This trend was exaggerated during the 'scam' period as reflected
in the BSE during 1990, 1991 and 1992 (Fig 3.3).
Figure 3.3: Monthly trend in the NSE inde:~ in India: 1990-1997
~~----------------
'tal)
1(lX)
W)
Em 4D , _______ _...
an Mnh o~~~~~#H~H#~~~~~~~~~~~~~rn
.Jd.-00 ~~~ Mr-91 .Jm.93 N7.<-93 S:p-~ hl-95
Source : Based on data from BSE, Bombay (Mumbai).
Two other noteworthy developments in the secondary market since the seventies were the
following: a) trading activities were increasingly concentrated in a small number ofissues12
despite an expanding equity and debenture base in the capital market; and b) the stock
market index was broadened to incorporate larger companies under category "A".
Although the average market value of shares increased due to speculative activities, a large
number of small companies which were excluded from the daily trading activity were
unaffected by this trend. Thus, the increase in secondary market activity did not yield
capital gains to shareholders in these companies, which could have generated resources for
future equity investments.
I 0 BSE had categorised the shares in two categories 'A· and 'B • baSt.-d on the voltune of trading in each share. Titus, the largest and very frequently traded were put in 'A' Category.
I I Refer to earlier section in this chapter. I 2 An analysis by the Patil conunittee found that out of 340 I companies listed in the stock exchange in "A ..
and "B'' category shares 959 companies were traded once a year, 954 companies once a montll. 3% companies once a fortnight, 538 companies once a week and 207 companies traded daily. In the case of "non specified" shares where 60 per cent of the total voltunc of trddi.ng in India takes place, nearly 50 per cent of scrips were not traded at all, while 30 per cent of the scrips were traded on 50 per cent of the trading days. Patil committee, "Report of the High Powered Committee 011 Stock Exchanges Reforms", Government of india, Ministry of Finance, p 17.
109
Chapter - Ill
Table 3.3 : Expansion of Stock Markets in the Nineties : A Comparjson with Earlier years
Year 1961 1970 1984 1991 1995 No. of Stock Exchanges 7 8 12 20 28 No. of Listed Companies 1203 1203 3882 6500 8000 ( Ap) No. of stocks (a) 2111 5485
No: of debenture issues (b) 149 541
Paid-up Capital of Listed Companies (Rs. cr.) 675 5082 -Market value of PUC ofListed Comp.s (Rs.cr.) 1216 9984
No. of investors (Crorcs) 0.01 0.15
Secondary market trend (speculative) 0.55 0.51 -Note: (a) ts the total, mclustve of eqwty and debentures. Debentures are separately represented m (b). Source: Stock Exchange Foundation. Bombay.
-
Taking the first half of the 1990s, the BSE sensex13 registered a rising trend smce
1991, except for 1993 (which was the immediate post-'scarn' year) and 1995 (which
witnessed a primary market slump). Another index of secondary market performance,
viz., market capitalisation, rose sharply from 10 per cent ofGDP(mp) in 1991 to 32.1
per cent in 1992, and stood at approximately 3 0 per cent during all subsequent years,
except for 1993, when it fell sharply to 18.9 per cent, and 1997, when it rose sharply to
52.3 per cent. On average, there was a considerable rise in market capitalisation
during this period compared to the 1970s when it was approximately 5 per cent of
GDP. This was the result of an increase in the price and volume of trading in the
secondary market in India, in the 1980s and 1990s.
Table 3.4 : Market Capitalisation and Other Related Indicators of Stock market Jln Rs. crorcs)
Years 1990 1991 1992 1993 1994 1995 1996 1997 cov BSE 1e11sex (50) 21458 72258 45258 84615 80460 87159 162931 55.6 -
Annual Growth 236.7 -37.4 87.0 -4.9 8.3 86.9 157.7 - -%agetoGDP - 10.0 32.1 18.9 32.8 29.1 29.4 52.3 44.8
PIE Ratio (50) • 15.1 19.7 44.3 29.3 46.8 30.4 17.3 13.0 45.7
BSE -100 37560 112041 73075 . 146176 141263 144852 209331 45.2 -Annual Growth - 198.3 -34.8 100.0 -3.4 2.5 44.5 167.6
%toGDP 17.6 49.7 30.6 56.7 51.2 48.8 67.1 36.1
PIE Ratio I 00 15.5 19.1 41.9 27.1 46.9 34.7 18.1 12.4 45.5
Note : • = Month average of March each year. Source : Economic And Political Weekly, May 1998, p. 1147.
However, when the performance of the BSE-50 is compared with a broader index of
100 stocks, we find that the broader index registered a slower rate of growth. This
suggests a larger dispersion in trends across the stocks taken for calculation, with low
variation of price in shares included in the index of 1 00 stocks. An examination of the
13 The BSE sensex is an index of the 50 largely traded shares, and thus provides an index of activities in the stock market. The BSE index is treated as a National index as more than 90 per cent of all quoted Indian stocks arc traded there.
II 0
Chapter - Ill
coefficient of variation also reveals that the BSE broader index showed less variation
than the narrow index. The market capitalisation of firms included in the BSE-1 00 as a
percentage to GDP, registered approximately a five fold increase between 1991 and
1997, indicating a trend similar to that displayed by the narrow index. To summarise,
the 1990s show an increase in activity in the secondary market, but this increase
appears to be limited to less than 5 per cent (approximately) of the firms listed in the
stock exchanges. This concentration was also visible in the 1980s, as was mentioned
in the Patel Committee report.
A study by L.C. Gupta notes that the increase in activity in the primary market
was accompanied by a rise in the participation of investors. The study reveals that
shareowner incidence (i.e.~ the number of Shareowners in total population) increased
to 1.5 per cent in 1992-93 compared with a meagre 0.4 per cent in 1983-84. The
study also found that the western region of India had a shareowner incidence almost
three times higher than the other regions of the country. 14
Table 3.5 : Incidence of Shareowners in India (In percentage
Cities Per Cent of Shareowners Accounted for by Each City
Year 1992 1983-84 Difference Bombay 27.3 35.3 -8 Calcutta 8.6 10.0 -1.4 Delhi - 8.3 9.5 -1.2 Ahmedabad 7.6 7.4 0.2 Madras 3.5 3.9 -0.4 Total 55.3 66.2 -10.9
Source : L.C. Gupta et.al., p. 4.
The distribution ofshare ownership in 1992 as revealed by Table 3.5 points to a strong
urban bias and metropolitan concentration, which would have contributed to
speculative tendencies in the secondary market. However, the share of the five major
cities in total shareownership dropped from 66.2 per cent in 1983-84 to 55.3 per cent
in 1992-93, pointing to the increasing significance of other smaller towns and cities
across India and the spread of the equity and debenture culture. The difference
between these two years reveal that Mumbai faced the maximum drop in incidence of 8
percentage points, but Calcutta and Delhi faced a drop of less than 2 percentage points
14 L.C. Gupta, Naveen Jain., Yash Kulshreshtha, 1994, Shareowners' Geographic Di.~tribution: City-wi.~e. Urban-rural and State-wise, Society of Capital Market Research and Development. Delhi, p. 7.
111
Chapter - Ill
and Madras less of than one half of a percentage point. While the incidence of
shareownership in big cities was decreasing, that of small ones like Ahmedabad was
rising, albeit marginally. This tendency did contribute to the growth of the NIM across
the country in the nineties, especially through expansion into smaller towns and rural
areas, from where surplus funds could be garnered through this channel and directed
into investment.
The nineties was· also a 'phase of expansion' in terms of growth in various
support institutions 15 associated with the. NIM. As figure 3. 4 shows, there occurred a
massive increase in the number of support institutions in the market. For example, the
number of merchant bankers increased from 120 in 1989-90 to 1099 in 1995-96 and of
registrars increased from 46 to 307. The largest increase was recorded among
brokers. Their number increased from 517 in 1989-90 to 4795 in 1995-96. These
increases, which were phenomenal, were inter alia due to : a) an increase in demand
for their services in the market; and b) changes in the policy of government to promote
these institutions.
The growth m support institutions was contributed by an increase in the
participation of public sector commercial banks, financial institutions and large
corporate houses in the 1990s, especially in the merchant banking and brokerage
business. Large and small public sector commercial banks came to account for a major
share of the merchant banking market. 16 The participation of large corporate houses in
the brokerage business was another feature of the nineties. The Reserve Bank of India
opened up this activity by liberalising the restriction on corporate firms' participation in
brokerage activities. This was done to ensure better management, reduce speculative
activity and also to safeguard the interests of large corporate companies which faced
the brunt of the inefficient brokerage system in India. This change in the composition
of support institutions was possibly one of reasons for the increase in confidence of
the general investor.
15 Support institutions here refer to stock brokers who help in ensuring marketability and liquidity of the secondary shares, and registrars and merchant bankers who help in the process of public issues.
16 The Praxis Report rated various public sector banks as the top perfonners in the merchant banking business.
112
Chapter- m
Figure 3.4 : Growth of Intermediaries in Stock Market in India
7000
6000 4795
5000
4000 c:) z 3000 Data Not Available
517 2000 1099
1000
0 1989/90 1991/92 1993194 1995/96
Year OMer.banker. 0Registrar 0Broker
Source : Extracted from Prime Annual Reports.
Another factor that increased the confidence of investors in the NIM was enhanced
awareness of investors and technological improvement in the form of better
communication modes. This provided for a strengthening of the superstructure of the
capital market. Finally, a social factor behind the growth of the NIM was the
'demonstration effect', which led to large investments by the educated middle class in
small cities and by the rural elite, who invested in this market encouraged by the
environment of euphoria.
3.2.6 Saving, Investments and Production : Analysis of the 1990s
Since the household sector is the largest contributor to gross domestic saving (GDS) in
India, this section would concentrate on trends in the distribution of savings in this
sector in the form of various financial assets, during the 1990s. The distribution of
savings by households in various assets like currency, deposits, shares and debentures,
claims on government etc., highlights the prevailing expectations of returns and
perceptions regarding risk. Although it can be expected that the general mood of
euphoria during the 1990s would have influenced household asset composition, this
does not immediately emerge from an examination of the composition of household
savings.
During this period, it is observed that there was a marginal increase in deposits
held by households and a decrease in investments in shares and debentures. The yearly
average share of household deposits increased from 31.1 per cent of savings in the CCI
113
Chapter - Ill
period to 43.7 per cent in post-CCI phase, while the shares of all other financial assets
showed a decreasing trend (table 3.6). However, a closer scrutiny of the composition
of household financial assets does indicate that though the decrease in the contribution
of shares and debentures was the highest, the composition of investments in shares and
debentures reveals a shift from efficient and safe investment options to risky
investments. The proportion of private corporate shares and debentures increased
from an average of 28.2 per cent in the CCI phase to 65.3 per cent in the post-CCI
period, at the expense of units of UTI, public sector bonds, and mutual funds
instruments. The latter assets recorded a significant decrease in share during this
period. Other assets which showed a decreasing share were provident and pension
funds. As there was little growth in organised sector employment, the share of these
assets almost stagnated, though they still accounted for a large portion of total
household savings in India.
Table 3.6 :Composition of Household Saving in Financial Assets : 1989-95· In percentage)
Variables 1989-90 1990-91 1991-92 CCI 1992-93 1993-94 1994-95 1995-% Post-Period CCI
Assets of Household Sector GFAasPDY 48233 58967 68135 58445 80449. 109537 1.co875 123506 113591
1.1 Currency 15.9 10.6 12.0 11.8 8.2 12.2 11.3 13.3 11.2
l.l Deposits 31.2 33.3 l8.9 31.1 4l.5 42.8 47.1 41.6 43.7 1.2.1. Banks 88.7 81.7 73.6 81.3 79.0 65.6 82.0 61.6 72.0 1.2.2. NBFCs 12.2 6.6 11.3 10.0 17.7 24.9 17.7 32.4 23.2 1.2.3. Co-op &; societies 4.1 14.1 17.2 11.8 7.4 12.1 2.7 5.4 6.9 1.2.4. Trade dcU oct -5.1 -2.3 -2.1 -3.2 -4.1 -2.5 -2.4 0.6 -2.1 1.a Shares and DebentUres 10.0 14.3 l3.3 15.9 17.2 13.5 8.8 5.0 11.1 1.3.1. PERCENT .Business 30.3 28.8 25.6 28.2 48.8 55.5 60.1 97.0 65.3 1.3.2.Co-op.Bmks&Soc:iet.ies 1.3 1.1 0.6 1.0 0.6 0.6 0.7 1.8 0.9 1.3.3. Unit Trust of India 45.1 40.9 57.2 47.7 40.6 31.9 31.6 4.3 27.1 1.3.4. Public sedor bmds 7.0 5.9 3.3 5.4 0.7 3.4 0.8 2.7 1.9 1.3.5. Mutual FIDlds • 16.2 23.2 13.4 17.6 9.3 8.6 6.8 -5.7 4.7 1.4. Claims on Government 14.0 13.5 7.2 11.6 4.9 6.2 9.4 8.8 7.3 1.4.1. Government Securities 1.0 1.6 -5.1 -0.8 -0.2 4.9 0.9 4.3 2.5 1.4.2.Sma11Savinr;; 99.0 98.4 105.1 100.8 100.2 95.1 99.1 95.7 97.5 1.6. Insurance Funds 9.2 9.5 10.3 9.6 8.8 8.7 8.1 11.2 9.1 1.5 .I. Life insurance FID!ds 90.2 89.8 91.2 90.4 90.5 92.0 91.8 93.2 91.9 1.5 .2. Postal Insurance 2.5 2.4 2.4 2.4 2.6 2.3 2.3 2.4 2.4 1.5 .3. State Insurance 7.3 7.8 6.4 7.2 6.9 5.7 5.9 4.4 5.7 1.6. Provld. & Pension Funds 19.7 18.9 18.3 19.0 18.4 16.6 15.4 19.1 17.4 Note : • = Excludmg lJTI mutual funds. Source: Based on data from various issues of The Report on Currency and Finance, RBL Bombay.
The composition of the most important asset, viz; deposits, reveals a shift to NBFCs
from banks and co-operative banks and societies. There was a rise in the share of
NBFCs from 10 per cent in the CCI period to 23.2 per cent during the post-CCI
period as shares of both commercial banks, and co-operative banks and societies
showed a decrease of nearly I 0 percentage points. This drop in the share of bank
114
Chapter - III
deposits was supported by an increase in the number of NBFCs in the 1990s. This
dimension of the changing asset structure of the household sector also points to a shift
from safe and low income assets to risky and high income assets.
Table 3.7: Household Liabilities Structure in the Nineties in India: 1989-95 In Rs. crores)
Uabillties 1989 1990 1991 CCI Phase 1992 1993 1994 1995 Post -CCI Nc:t Household liabilities 10135 9267 5997 8499.6 14752 14541 31326 26309 21732 2.1. Bllllk Advmoe 77.1 73.3 52.9 67.8 68.3 60.3 75.4 84.6 71.1 2.2. L. & A by Co-op. 4.8 7.6 13.5 8.6 9.0 21.9 15.6 7.7 13.6 2.3. NBFCs 8.6 9.9 19.9 12.8 17.4 10.7 6.6 5.4 10.0 2.4. Govt. 6.9 6.3 7.5 6.9 2.8 4.6 1.3 1.4 1.5 2. 5. Jnsuranoe Corporatioos 2.6 2.8 6.3 3.9 2.4 2.4 1.1 0.9 1.7
Source : Vanous J.SSUeS of The Report on Currency and Finance, RBI, Bombay.
An examination of the liabilities of the household sector (Table 3. 7) brings out another
related trend. There has been an increase in the bank advances component of liabilities,
but a decrease· in advances and loans from the NBFCs. This could be due to an
implicit strategy, on the part of households, of extracting the relatively cheap loans and
advances from banks for investments in other assets that provide higher returns. One
of the many limitations of a segmented market in a liberalised situation gets highlighted
here. Most investment in durable consumer goods could have been financed through
loans from banks and co-operatives, while maintaining the high return NBFC deposits
intact. This is clearly seen from the yearly trend in the share ofNBFCs' loans to total
liabilities, which decreased from 19.9 to 5. 4 per cent during the period 1992 to 1995,
while loans and advances from banks increased from 52.9 to 84.6 per cent during the
same period ..
Thus, investment patterns of the household sector point to a change in
preferences regarding investment options. The household sector has, on an average,
contributed about 73.3 per cent of total GDS in India, followed by 16.3 per cent from
the public sector and 10.3 per cent from the private sector. As this sector has been the
highest contributor to total GDS since the 1950s (Figure 3. 5. }, such shifts can have
macro-economic implications. Some of these implications are the following : a) a
general increase in the household sector liabilities to commercial banks and an increase
in share of deposits with the NBFCs can affect the viability of new financial
intermediaries like the NBFCs; b) there could be a tendency for risky investment
projects getting higher priority over safe investments; c) there could be a high rate of
growth in luxury consumption also due the activities of NBFCs in the hire purchase
and real estate financing business; and d) there could be a greater reliance on the NIM
115
Chapter- m
on the part of these sectors which do not have any direct impact on production.
Although many of the other implications also require detailed analysis in the Indian
context, the experiences of East Asian countries clearly point to the relevance of such
an enquiry. However, this thesis would concentrate mainly on one of these macro
implications which has a direct relation to industrial production, namely, the structure
of the NIM in terms of industrial composition, which will be taken up in the analysis of
survey data carried out in the later chapters.
To summarise, during the 1990s three components of household financial
assets had a high share in total assets, viz .. , deposits, shares and debentures, and
pension and provident funds. Of these three assets, deposits and share and debentures
were characterised by internal shifts in composition, which contributed to the growth
of the NIM. As was seen, the change in the composition of household sector assets
promoted the growth ofNBFCs' deposits and investments in private corporate sector
shares and debentures. 17
Moving away from a narrow view of the changes in the savings patterns of
households, let us now look at the contribution of public, private and household
sectors to total GDS and their linkages to the prevailing trends in the NIM.
Figure 3.6 : Growth of Gross Domestic Saving and its Composition : 1950-95
90.0- - - - - - - -·- - - 30.0
80.0
70.0 -v _ __....-::- ~ ~ 25.0
60.o v = 9.73sie0213x ~ n II 20·0
50.0 j R' = 0.8678
40.0 J 30.
20.C
10.<1
15.0
10.0
5.0
195o-51 1954-55 1958-59 1962-63 1966-67 197o-71 1974-75 1978-79 1982-83 1986-87 1990-91 1994-95
CJ%toGDP -n- Public ~Private _._ Household - Expon. (% to GOP) I
Note : The bars are represented in right hand side "Y'' axis.
From figure 3.6 it can be seen that on the one hand, the public sector's contribution to
GDS decreased from 23.2 per cent in 1982-83 to a low of 2. 4 per cent in 1990-91. On
17 Also refer Appendix Ill
116
Chapter - Ill
the other hand, the contribution of the private sector increased from 9. 8 to 15. 5 per
cent during the same period. The changing investment behaviour of the household
sector, whose savings grew at an exponential growth rate of 2. 13 per cent over the
period from 1950 to 1995, appears to have had a greater role to play in the rise of
GDS in India. If one were to discount for the period before nationalisation, the growth
in savings has improved during the intermediation phase starting from 1969.
Figure 3. ft below attempts to capture the significance of the growth of GDS for
the NIM, during the early nineties. A comparison of the trends in growth of N1M and
GDS, which points to three distinct phases of growth of NIM has already been
provided in Chapter II.
Figure 3."6: Capital Raised from NIM as a Percentage ofGDS*: 1957-95
14.0
12.0
10.0 f., «<
8.0 = Q,l u
6.0 ""' l 4.0
2.0
0.0 r--on 2:
_._%toGDS
Note : • At Current prices.
y = O.l401x + 0.0232
R2=0.3032
- Linear (o/o to ODS)
Starting from the eighties, the NIM is seen gaining in significance relative to GDS, but
the relationship is stronger during the 1990s.l 8. Its ratio to GDS crossed the I 0 per
cent mark for the first time in the history of India during this phase. The exponential
growth rate, which is based on discounted figures, which takes into account the dull
and stagnant phase between 1969 to 1980, shows a value of 15.68 per cent over the
years. The period after 1980, particularly the nineties, which witnessed tremendous
growth, is clearly a dynamic phase. The only exception to this dynamic growth in the
NIM was in 1994. The drop in the NIM as a percentage of GDS in 1994 was largely
18 The graph also confirms the results of a very meagre contribution by NIM in the intermediation phase especially after the nationalisation of banks in India. lbe period 1969 to 1980 showed the lowest possible dip in the graph of the NIM as a percentage of GDS. This suggests a dip in the resources raised from the NIM or a rise in other financial savings. Both ways, it proves the increasing significance of banks in resource generation in India.
117
Chapter - Ill
due to the slump in secondary market activities, which points to the failure of the
regulatory mechanism to sustain the momentum generated initially.
As seen from the above analysis, the share of the NIM m the total GDS
increased considerably in the 1990s, which coincided with an increase in the
contribution of this market to capital formation. The trend increase in the share of
NIM in capital formation is revealed by the figures presented in Table 3.8.
Table 3.8 : NIM as a Percentage to Investments in the Manufacturing sector
(In Percentage) SECTOR Manufactwing Macro Variables GFCF (@) Variables GFCF GCF GCF(II) GCF GFCF GDP(~) CFC Tocal Const. M.&E. 1950-59* 2.54 2.31 0.50 0.48 0.53 0.07 1.22 0.94 1.63 2.23 1960-69 9.83 6.97 1.84 1.81 2.04 0.29 4.61 3.26 5.85 7.48 197(}.79 3.61 2.50 0.62 0.64 0.76 0.11 1.54 1.34 2.54 2.91 1980-89 13.30 11.31 2.62 2.70 2.99 0.59 6.00 4.32 9.85 7.73 199(}.95 34.71 30.82 7.44 8.58 9.07 1.86 18.48 12.63 35.23 19.73
NINETIES 1989-90 30.81 25.89 5.61 6.63 7.18. 1.4 14.10 10.84 26.88 18.18 1990-91 16.47 13.87 2.91 3.65 4.02 0.8 8.26 6.07 15.19 10.10 1991-92 18.71 19.00 3.99 4.49 4.61 0.9 9.13 6.14 16.58 9.75
CCIPbase 25.18 22.39 4.99 5.84 6.22 1.25 1249 8.92 23.47 14.44 1992-93 53.20 40.93 11.69 12.87 13.84 2.8 27.18 19.42 53.13 30.61 1993-94 44.17 47.35 10.00 11.71 11.74 2.4 23.73 16.43 45.71 25.65 1994-95 50.67 43.52 10.66 12.34 13.26 2.8 27.91 17.85 52.70 27.00 1995-96 25.05 20.28 5.38 6.46 6.95 l.S 14.68 9.88 28.07 15.25
Post-CCI 43.27 38.02 9.43 (10.84 11.45 I 2.36 (23.38 115.90 44.91 24.63 .. Note 1) • =Data represents only three years, 1957-58, 1958-59 and 1959-60; n) # = Fmances of GCF is the
sum total of GDS an~ foreign capital inflow; iii) @ = calculated by excluding the household sector as they are only investors and not users of this channel of fmancing; iv) Also refer Appendix IV and V for details on trends from 1950 to 1995.
Source : Calculafe4 based on current value5 of all the data from various issues of The Report of Currency and Finance, RBI, Bombay.
The table assesses the NIM relative to three sets of variables : capital formation in the
manufacturing sector; a set of macro indicators; and investment in machinery and
equipment in the private corporate and public sectors. The last category excludes
households as they do not use the NIM as a channel for raising resources for
investments. The evidence in the table suggests that the period 1970-1979 was a bad
phase for the NIM, as its ratio to all the variables showed a decreasing trend. The
most effective phase was from 1990 to 1995 during which the NIM's share showed an
increase across all the variables.
If the NIM's share to manufacturing sector GFCF is looked at in detail, it can be
seen that the contribution of the NIM to the total financial requirements of this sector also
showed a high growth. The share ofthe NIM increased from 2.54 per cent in the 1950s to
9.83 per cent in the 1960s. Although during the intermediation phase (1969-1979) it
dropped to 3.61 per cent, during the 1980s it grew to 13.3 per cent, and in the 1990s it
118
Chapter - III
further grew to 34.71. This points to a phenomenal rise in the contribution of the NIM to
fixed assets formation in the manufacturing sector in the 1990s.
Figure 3.7 : The Share of Capital Formation (Machinery and Equipment) of Public and
Private Sectors to GDP
7.00
6.00 'Widening (iap'
'-D 00 0 N .... ~ oc 0 '" .,. 'D 00 0 N ....
'-D '-D ..... ..... ..... ..... 00 00 00 00 oc a-, a-, a-, 8 N ~ \D 00 0 N -t •r1 ·r~ '~"'• ~~ ,, ) \D \D \D 0\ 0\ C\ a-. C\ 0\ CJ'. 0\ ~ :::: :::: a-, ~ :::: :::: "" :::: :::: :::: "' "' :::: ::::
-·-<>·- \I& E.puh 0 o (JD!' -0- \1& F.pri 0 o (iJ)p
Note • GH.'I· Pri Gross hxed Capital Fonnation (private sector), M&F Machinery and J·:quipment of public and private sectors. Source . FPW Research l·oundation reports.
The salient feature discernible from the above discussion is that over the years the
relevance ofthe NIM and its contributions to capital formation increased significantly.
Table 3.8 shows that while the growth in GCF in the public sector was decreasing, that
in the private sector was increasing. Investment by the public sector declined over the
years, falling from 18.57 per cent in 1970-79 to 15.05 per cent in the 1980s, and fell
further to 12.01 per cent in the 1990s. The share ofnew issues raised showed a clear
increase during 1989-90 to 1995-96. However, growth was more remarkable during
the 1992-95 period, compared to the 1989-1991 period. Between 1992-1995, the
contribution of the NIM to GDS almost tripled. The ratio showed a remarkable
increase from 1992 onwards, after the liberalisation of price fixation and the
introduction of SEBI.
Table 3.9 : Investment in Construction and Machinery and Equipment Across sectors in India : 1950-95
(J n percen age Sectors Public Private 1 lousehold mer- (Total) Phases Const. M. &I~. Const. M. &J:. Const. M. &1. Con st. M.&E
50 to 59 76.1 23.9 20.2 79.8 68.9 31 I 66.1 33.9 60 to 69 65.7 34.3 24.0 76 () 62.4 37 () 58.9 41 1 70 to 79 60.6 39.4 16.6 8.i4 60.7 19 ' ')(, 4 .n?; 80 to 89 55.2 44.8 14.8 85.2 60. J 39.9 49.7 50.3 90 to 95 'i 1.7 48.3 13.2 86.8 64.3 35.7 45.9 54. J
Source • Based on data compiled from 7he Report on ( 'urrencv and Finance. RBI. Bombav
119
Chapter-m
In summary, it can be argued that the 1990s were of special importance to the Indian
capital market. One of the many developments of significance was the increase in
market capitalisation which shot up from a meagre 5 per cent of GDP at factor cost in
1980-81, to nearly 52.3 per cent in the 1990s. Another change that took place in the
NIM during the 1990s was the transformation of the structure of the NIM which led to
both a wider choice of instruments and high expectations for the players in the market.
Because of high investor and investee expectation, 'credit risk spread' became more
pronounced. The general tendency in the behaviour of investors to become more
concerned with safety during recessions and less so in periods of prosperity, was
exploited to the maximum during the 1990s.
3.3 Capital Raised by Private Corporate Firms in the 1990s
3.3.1 Value of Public Issues Vs Rights issues
The period between 1989 and 1996 is unparalleled in terms of capital raised through the
NIM by the private corporate sector in India, particularly in the form of rights and public
issues. During this period, most of the issues were in terms oflnitial Public Offers (IPOs),
especially during the last three years (1993 to 1996).
Table 3.10 which gives annual trends in the capital raised from the N1M during
1989 to 1996, shows that the capital raised increased from a total amount ofRs. 2975.12
crores in 1989 toRs. 21595.21 crores in 1995. In real terms, however, the increase was
from Rs. 2975.1 crores (taking 1989 as the base year for calculating real movements after
deflating with WPI19) toRs. 12097.1 crores in 1995. Thus, while the increase in nominal
terms suggests a boom, the analysis shows that in real terms, the increase was not so
significant as to warrant being called a boom. The boom in nominal values was thus largely
due to the effect of high inflation, particularly during the post -CCI period. It can be seen
that during the post-CCI period, the difference between the nominal and real values was Rs.
61562.7 crores (66.7 per cent), when compared with a difference ofRs. 1077.7 Crores
(12.14 per cent) during the pre-CCI period.
It can be seen from figure 3.8 also that, in real terms, the post-CCI period had only
a marginal effect on the capital raised through N1M for private corporate firms in India.
19 WPI (General) as provided by Economic Survey, Government of India, Ministry of Finance, New Delhi.
120
Chapter - Ill
Thus, the value of capital raised, both in nominal and real terms, almost stagnated between
1993-1996, despite intermittent annual fluctuations.
Table 3.10: Amount of capital raised from NIM: 1989-96
Public Issues Rights issues Total YEAR Nwnbers Amounts Nwnbers Amounts Nwnber Amt (nominal)
1989 189 2975.12 N/A. N/A 189 2975.12 1990 142 1072.30 N/A N/A 142 1072.30 1991 168 1539.31 273 3287.67 441 4826.98
<-U Pertocl 499 ~73 273 3287.67 772 8874.4 1992 405 5476.55 468 11311.92 873 16788.47 1993 667 I 1159.98 424 9723.85 1091 20883.83 1994 1130 9192.93 334 6720.42 1464 15913.35 1995 1445 14577.33 320 7017.88 1765 21595.21 1996 1183 12409.72. 201 4657.62 1384 17067.34
Post -CCI Period 4830 40406.79 1747 39431.69 6577 92248.2 Note : For the purpose of standardisation, WPI was used to find the trend m NIM m real terms. Source : Report on Primary market from Prime Database.
Real (WPJ) 2975.1 972.5
3849.0 7796.7
12163.7 13964.7 9599.0
12097.1 8989.4
30685.5
Hence, it can be argued that while during the initial post -CCI year ( 1992-93) a boom was
experienced, the boom did not continue after 1993. This clearly revealed that even though
the NTh1 showed a high growth in investment with liberalisation of domestic markets in
terms of rise in the number of public issues and the amount collected, the real effects of
such an increase was marginal in terms of investments.
Figure 3.9 : The Nominal and Real Effects of NIM Boom in The Nineties
25000 .:rr======,..------------------------~ I ---Nominal f -Real
20000 L-....._,:-----
l.SOOO
10000
5000
1989 1990 1991 1992 \"ear 1993 1994 1995 1996
Source: From the sample data.
Also, the half-yearly secular trends of capital raised through NIM reveal a larger share
of rights issues in total values. That share was rising till the second half of 1992, but
registered a sharp decrease thereafter (Figure 3.9). The trend was due, among other
factors, to the decrease in the number of existing companies participating in total
capital raised after 1992, suggesting a rise in the participation of new firms and further
1ssues.
However, it should be noted that the new firms were not all new, as many were
associated with existing firms in the corporate world. The formation of new firms that
121
Chapter - III
participated in the market can take two forms : existing companies converting
themselves through IPOs from private entities to public limited companies and the
floatation of completely new companies by existing companies. Thus, equity pricing
liberalisation led, in essence, not only to an increase in the number of new companies
participating in NIM during the post-CCI period, but also led to a process of
"graduation" of existing companies from private limited to public limited. This was
because of a number of policy changes related to removal of restrictions on FERA and
MRTP companies20.
Figure J.t: Half-Yearly Trend in Capital Raised from NIM: 1989-95
14000
12000
10000
8000
6000
4000 Half yearly
2000
0
:;:: .., "'
-Totai(Amt) -o- Rig. (Amt)
Note: Hl/H2 refers to Half-year, an year is broken down to half years. Source : Calculated from PRIME database.
-A- Pub (Amt)
Apart from liberalisation, the other factor that led to changes in the trends in NIM in
the 1990s is inflation. The relatively high inflation in the 1990s contributed to the
growth in public issues significantly. From Figure 3.8 it can be seen that the value of
average yearly public issues increased almost 8 times, from Rs. 1890.89 crores in the
1980s to Rs. 14613.35 crores in the post-CCI period (1990/91 to 1996/97).21 The
increase in public issues also coincided with a decrease in the number of rights issues,
as is seen in the figure. Although both rights and public issues showed a close relation
20 This could be the effect of the policies taken in 1986 like, I ) investment limits of small scale and ancillary units were enhanced and 200 items reserved for production in the small scale sector were de-licensed, 2) 23 industries located in centrally-declared backward areas were delicensed for companies under the MRTP Act and FERA, and 3) the threshold asset limit in respect of MRTP companies was raiSt.-d from Rs. 20 crores to Rs. 100 crores. This led to the movement of 112 companies out of the purview of the act. Such liberalisation led to an expansion in the list of private firms which were looking for capital, by 1990 and these companies used the NIM channel once the pricing was liberalised.
21 This calculation is based on RBI data, but, another calculation (yearly average capital raised) based on PRIME Database puts the figure at Rs. 14696.8 Crores. The average here is not divided by the number of issues but is divided by years instead.
122
Chapter- ill
till July 1993 with a higher share of rights issues, from mid-1993 onwards public issues
showed tremendous growth in comparison with rights issues. It can be concluded that
during the 'scam' period (1991 to early 1993) rights issues were very popular (see
Figure 3.9), with existing firms making large gains out of these issues. But,
immediately after the 'scam', the only palpable explanations for the rise in public issues
are : 1) the increase in the number of issues from new companies; and 2) the decrease
in the bank credit to small borrowers which forced small and medium companies also
to tap the NIM for their fund requirements.
3.3.2 Number of Public Issues Vs Rights issues
Looked at in terms of the number of issues, it can be seen that there was in fact a boom
during the post-CCI period. While the total number of issues (both public and rights
issues) increased from 189 to 441 between 1989 to 1991, the increase was remarkably
more during the post-CCI period, with the number of issues jumping from 873 in 1992
to 1384 in 1996. . The boom in issues in the NIM during the post-CCI period was not of a similar
magnitude for both public and rights issues. From Table 3.11 it can be seen that while
the number of public issues increased significantly, that of rights issues increased at a
decreasing rate. These growth trends suggest that immediately after liberalisation, the
NIM experienced a shift in terms of the structure of financial instruments and channels
of marketing by firms. The shift was from rights issues to public issues, reflected in a
decrease in the yearly number of rights issues accompanied by a simultaneous increase
in public issues after 1992.
This shift, as discussed earlier was mainly due to the entry of new firms into
NIM and more specifically, due to a change in the pricing policy of equities. Another
explanation for this phenomenon would be the transformation of private limited
companies to public limited companies during this period. This change in usage of the
public issue channel is well reflected by the monthly trends in the number of issues
made in the NIM, presented in figure 3.10 below. The fact that private corporate firms
in India preferred public issues in the nineties is clearly seen from the trends in terms of
participation of firms in the NIM.
123
Figure J.lO: Month-wise Trends in Number of Issues in New Issue Market
200
180
160
140
~.:--- " - --l :---- Public '--
120 .! 100 ! 80
60
40
20
0
Soun:e :Annual Reports, PRIME Database.
Chapter - Ill
Further, when co~pared to rights issues, public Issues had very small average SIZe,
suggesting that new and existing private companies which resorted to public issues during
the nineties raised very small amounts of capital from the NIM. As can be seen from Table
3.11, the monthly amounts called from each of the channels show that while public issues
recorded amounts in the range ofRs. 10 to 20 crores during 19 months, there were 32
months in which rights issues amounts fell in this range. The table suggests that as the size
subcategory increases, the months with rights issues in each subcategory also increases.
This indicates ~ during the 1990s, rights issues were of large size when compared to
public issues.
]'able 3.11 : Month-wise Trends in Rights and Public Issues : 1989-97
Amotmt PUBIJC RIGHT
Called Months • Percentage Months • Percentage Less than I crore 2 2.02 2 2.35 I to 5 Crores 25 25.25 8 9.4I 5 to 10 Crores 35 35.35 I5 17.65 IO to 20 Crores I9 I9.I9 32 37.65 20 to 30 Crores 8 8.08 I6 18.82 30 to 50 Crores 7 7.07 12 14.11 50 to I 00 Crores 3 3.03 0 0.00 Swn 99 99.99 85 99.99 Rs in Crores Maximwn Issue Size 82.58 (Nov-91) 123.28 (Dec.-96) Minimwn Issue Size 0.59 (Jul.-91) 1.85 (Jul.-90) Average 11.65 20.45 Nwnber of Issues 5402 2170 Total Amotmt (nominal) 62911.51 44375.38 Ske\\-1lcss 2.15 2.26 Note : • = Nwnber of months. Source :Data collected and collated by the researcher.
1')..1
Chapter- III
This difference is also seen in the average size, which was Rs. 11.65 crores in case of public
issues and Rs. 20.45 crores for rights issues. The large size of rights issues points to the
advantage of existing firms over new firms. The same result is conveyed by the values of
maximum issue size which was Rs. 82.58 crores for public issues and Rs. 123.28 crores for
rights issues. (Table 3.11). The opening up in 1992 had a significant effect on rights issues
as their average monthly size showed an increasing trend. 22 Hence, it could be said that
existing firms had an advantage over new firms and firms which came to the market for the
first time. This trend towards larger rights issues also goes to reveal the strategy of existing
firms to avoid dispersion of shares across a large section of shareholders.
The analysis of 5092 (total population23) issues from 1989 to 1995 indicates an
increasing skewness in the distribution of number of issues, across various size
categories, over the years. This skewness index increased from 2. 15 in the CCI period
to 3.07 during the post-CCI period (Table 3.12). Individual years in the liberalised
phase also show a relatively high concentration. It has already been argued that the
growth in the NIM during the liberalised phase was caused by an increase in activity of
the market in terms of an increase in number of issues. However, the skewness in the
distribution of amounts called remained the same at 3.28, during both the phases.
Thus, the actual difference between the CCI and post-CCI periods was found in the
skewness in distribution of the number of issues called, and not in the total amounts
called. This clearly establishes that there were a larger number of firms participating in
some particular size category, while intra-size distribution in amounts remained the
same.
The main reason for the increase in concentration in number of issues called is
that changes were taking place in the market, in terms of size of issues called (Table
3.12). During the post-CCI period, issues that were worth less than I crore became
less important. Their share decreased from 25.2 per cent to 6.6 per cent, between the
22 This could be attributed to the liberalisation of pricing policy with respect to firms who already have a record of three positive years of operational history and also to the issue of convertible debentures.
23 Issues which sometimes come as a single component but have two parts, one as rights and the other as public issue, are broken into tVW> individual issues. This was done to capture the effect of rights and public issues separately.
125
Chapter- Ill
two periods. The size classes 1-5 crores and 5-10 crores showed the highest growth,
increasing their shares from 44.5 per cent and 12.2 per cent in the CCI period, to 53.9
per cent and 18.0 per cent respectively, in the post-CCI period. Thus, more than 70
per cent of the total number of issues came from these classes, suggesting an increase
in the size of public issues during the post-CCI period.
Table 3.12 : Size-wise Distribution of Issues 14: 1989-95
Size in Crores 1989 1990 1991 CCI 1992 Lessthan I 35 76 113 224 83 )to5 71 141 211 423 444 5to 10 14 31 58 103 167 10to20 9 24 47 80 79 20to30 0 s 20 2!5 38 30 to so I 7 8 16 40 More than SO 9 10 17 36 62 Total 139 294 474 907 913
PERCENTAGE SHARES Less than I 25.2 25.9 23.8 24.7 9.1 ltoS 51.1 48.0 44.5 46.6 48.6 5toJO 10.1 10.5 12.2 11.4 18.3 10to20 6.5 8.2 9.9 8.8 8.7 20to 30 0.0 1.7 4.2 2.8 4.2 30 to so 0.7 2.4 1.7 1.8 4.4 More than SO 6.5 3.4 3.6 4.0 6.8 Total 100.0 100.0 100.0 100.0 100.0
DEGREE OF SKEWNESS No. of issues 1.35 1.85 I 2.15 I 2.47 I 2.90 I Amt. of issues I 3.69 I 2.39 I 2.98 I 3.28 I 3.46
Note : The 1ssue here 1s total amount called via pubhc 1ssues only. Source : Extracted from PRIME Database.
1993 61
550 224 140 35 46 74
1130
5.4 48.7 19.8 12.4 3.1 4.1 6.5
100.0
2.79 I 3.40 I
(In munber) 1994 1995 Post -CCI
68 43 255 855 405 2254 281 80 7!52 126 40 385 46 31 150 51 22 1!19 61 33 230
1488 654 4185
4.6 6.6 6.1 57.5 61.9 53.9 18.9 12.2 18.0 8.5 6.1 9.2 3.1 4.7 3.6 3.4 3.4 3.8 4.1 5.0 5.!5
100.0 100.0 100.0
3.17 I 3.41 3.07 2.47 I 3.40 I 3.28
The analysis shows that issues in the &ize class of more than 50 crores collected nearly
58.3 per cent of the amount mobilised from the market. However, this class had only a
5 per cent share in the market in terms of number of issues. The smaller issues with
size less than 5 crores which accounted for 65 per cent of the total number of issues,
raised only 10.9 per cent of total amount called. The data, thus, indicates that the
NIM's growth between 1989 and 1995 was largely benefiting the large companies as
they raised maximum amounts from the market through a small number of issues in
comparison to small firms, which did account for the largest number of issues but,
garnered the least in terms of amount collected.
The above trends therefore suggest that a relatively liberalised capital market
can lead to an increase in the number of issues raised even in the 'lower size-classes'.
But, it also appears that liberalisation can lead to a rush by large firms to obtain
24 Amount of public issues is taken for categorisation, as PRIME database does not provide PUC of firms that come out with public issues.
126
Chapter- III
maximum gains from the market, without necessarily going in for a large number of
issues.
3.4 Preference for Various Financial Instruments in the 1990s
3.4.1 Instruments of Financing: Equity Vs Debenture
The shift in the financing preferences of firms as a result of changes in equity pricing
norms is shown in Table 3.13, which analyses the distribution ofNIM financing across
the two significant instruments, equities and debentures. In real terms, equity issues
showed an increase from Rs. 245.16 crores in 1989 toRs 6562.8 crores in 1994 and
debentures increased from Rs. 2315.4 5 crores to Rs. 3 3 02.7 crores during the same
period. This clearly points to an increase in the relative role of equity finance in the
private corporate sector. The coefficient of variation of size of issues indicates that in
the post-CCI period, size variation was larger when compared with the CCI period.
Table 3.13: Equity and Debenture Issues and their Structure: 1989-95
Year& Number of Issue Amotmts real terms)
Phases Equity Debenture Equity Debenture 1989 107 32 24S.2 231S.S 1990 213 81 S22.4 1S14.S 1991 336 138 1019.7 2867.7 CCIPerlocl 656 251 1787.3 6697.6 1992 714 199 4937.3 72Sl.7 1993 9S8 172 6747.S 0 7190.9 1994 13S3 13S 6S62.8 3302.7 199S* S99 ss 2897.0 2SS1.9 Post-CCI 3624 561 21144.5 l0303.3 Note : 1) The 1995 data accounts for only J8Dll8l)' to March lSSlleS.
Souree: PRIME Database.
3.4.2 Financial Instruments Used by Firms
(In Rs. aom;)
Coefficient of Variation Equity Debenture 111.7 197.2 1S3.7 16l.S 26S.7 22S.O 177.0 194.6 373.4 217.6 44S.1 28S.3 328.7 179.6 293.8 268.8 360.4 237.8
The various types of instruments which were used by Indian corporate firms for raising
investment capital are presented in Table 3.14. It shows that debt and debt-hybrid
issues were made mostly through the rights channel, suggesting that existing firms
were more dependent on debt instruments. On the other hand, nearly 75 percent of
equity issues were raised through the public issue channel, corroborating the earlier
conclusion that new firms were more dependent on equity issues than older firms.
Premium issues25 were distributed nearly equally across these two channels, with nearly
55 per cent through public issues and 44.9 per cent via rights issues. The high share of
25 Premium issues are equity issues with premium charged on the par value.
127
Chapter - Ill
new companies (nearly 40 per cent of the public issues26) in total public issues during
the 1990s, and the usage of premium issues in the market indicates the robustness of
the NIM during the 1990s.
Out of a total of 4977 issues called during the period March 1989 to March
1995, nearly 86 percent (4279 issues) were broad-equity instruments~7 • In terms ofthe
amount collected from the market, premium issues garnered the highest amount (Rs.
23357.66 crores). The share of premium issues was more than 37 per cent of the total
funds raised from this market. Premium issues were followed by Fully Convertible
Debentures (FCDs) with Rs. 13011 crores (20.7 per cent), equity with Rs. 11689.81
crores (18.6 per cent) and Partially Convertible Debentures (PCDs) with Rs. 10324.38
crores (16.5 per cent). These four instruments which have strong equity characteristics
accounted for 93.04 per cent of the total capital raised with traditional instruments. A
possible reason for this could be the popularity of equity issues during the period of the
boom, which was directly associated with the systematic risk of production. The
systematic risk of production is the main factor that compels firms to avoid instruments
which require periodic returns in the form of interest payments.
Table 3.14: Traditional Instrument-wise Details on Capital Raised From NIM: 1989-95 _iln Rs. aores)
Instnunent No. Average Maximmn Minimmn Total cov. Public Right Issues Issue Size Issue Size Issues Size Amount Issues Issues
Equity 2876 4.06 1.80 0.05 11698.81 197.9 2155 722 Premium 1403 16.64 1240.00 0.25 23357.66 323.5 773 630 FCD 387 33.62 978.24 0.57 13011.29 240.7 150 237 PCD 236 43.74 679.56 0.72 10324.38 196.4 98 138 NCD 44 34.74 265.50 0.25 1528.79 143.0 17 27 CCP 17 10.72 54.36 0.10 182.26 130.4 II 6 Bonds II 21.09 500.00 50.00 2320.00 56.8 II 0 OCD 3 99.00 255.38 14.90 297.00 112.8 I 2
TOTAL 4977 32.95 3974.84 66.84 62720.19 - 3216 1762
Source: Extracted from Prime Database.
The average size of issues also reveals that most of the equity issues were from 'small
firms', amounting to a meagre Rs. 4.06 crores compared with more than Rs. 30 crores
for most debt instruments. While differences between the average size of issue of
equity and debt instruments did show a decreasing trend during the 1980s, debt still
maintained its dominance in terms of average size. Overall, based on these findings we
26 Refer to PRIME Annual Report on Response, 1989-95. 27 Broad-equity instrmnents here include fully Convertible debentures (FCDs) and partially convertible
debentures (PCDs), which in principal are debt instruments during the time of issue, could be technically treated as equity, because in the course of time they get converted depending upon the contract between the lender and investor.
128
Chapter - III
can conclude that there was a clear demarcation m the preferences for issues of
existing and new firms, with existing companies preferring debt, and new firms
preferring equity.
Another finding that can be inferred from the data is that due to the role that
existing companies played in the promotion of hybrid instruments, the number and
amount raised through these instruments increased after the liberalisation of capital
markets in 1991 28. Hybrid instruments, whose origins can be traced to interest rate
volatility and frequent tax and regulatory changes in the developed economies, have
not been important in most developing countries. A crucial influence on innovation in
financial instruments is the extent of deregulation of the financial service industry and
increased competition within the investment banking industry. Also, lack of experience
in handling these instruments and information asymmetries with respect to their
technical aspects usually makes it difficult for them to gain greater popularity in
developing countries. However, their role became significant in India in the 1990s.
The introduction of hybrid instruments in the Indian market was something which
could not be avoided as there was a drastic change in the mode of fixation of interest
rates, substantial uncertainty with respect to taxation, and rapid changes in
expectations and fears, in the wake of liberalisation.
Table 3.15 : Hybrid F"manciallastrument-ne Details on Capital Raised from NIM : 1989-95 :In Ra. a-ores)
Jnstnunent No. Average Maximwn Minimwn Total cov Public Right Issues Issue Size Issue Size Issues Sizt Amount Issues Issues
NCD-EW 55 67.44 560.00 0.13 3709.29 152.3 6 49 EODW 17 40.13 460.53 2.94 682.23 263.4 7 10 Equi-Warrant(EW) 14 26.82 l36.SO 3.99 375.41 126.0 0 14 FCD-EW 7 72.11 240.00 2.38 504.77 109.5 4 3 :Jptianal FCD s 456.00 1473.00 92.00 2280.00 113.2 4 I FC-BOND 4 52.41 169.96 ll.S2 209.64 129.5 I 3 PC D-EW 3 22.98 47.85 7.76 68.95 77.1 2 I Fully Redeemable Can.-EW I 49.72 49.72 49.72 49.72 0.0 I 0 Double Disoount Bonds-EW I 14.33 14.33 14.33 14.33 0.0 0 I Partially Optional Con. Deb. I 24.50 24.50 24.50 24.50 0.0 I 0 Muhiple Optional Con. Deb. I 84.26 84.26 84.26 84.26 0.0 I 0 BOND-EW 1 50.00 50.00 50.00 SO.OO 0.0 I 0 Double Disoount Bonds. I 150.00 150.00 150.00 150.00 0.0 I 0 Reed Con. Prefer. Shares I 0.51 .51 0.51 0.51 0.0 0 I Secured Premium Nw:s I 346.50 346.50 346.50 346.50 0.0 0 I TODC I 2172.00 2172.00 2172.00 2172.00 0.0 I 0 TOTAL 114 226.86 2172.00 0.13 10722.11 30 84
Source : Extracted from the sample data:
Table 3.15 provides a summary of the types of hybrid instruments which were
introduced in the capital market in India since 1989. A total of Rs. 10722.11 crores
28 Also refer to Table 2.22 for more details.
129
Chapter- Ill
was collected through these instruments between 1989 and 1995. Compared to the
average issue size oftraditional instruments of Rs. 32.95 crores, that for hybrid issues
was Rs. 226.86 crores. Most of the hybrid issues were from large firms, unlike issues
of traditional instruments which came from small firms. Some of the public issues
which used hybrid instruments were those by Essar Oil Ltd. (optional fully convertible
debentures) and Western India Shipyard Ltd. (secured redeemable partially convertible
debentures), both in 1995. Debt instruments with equity warrants were the most
popular instrument during this phase in Indian capital markets, particularly in terms of
the number of issues. Many other hybrid instruments were used in just a single issue
over the whole period. They were issued by existing companies which used the rights
channel. Of the total 114 issues, 84 issues or 73.7 per cent were through the rights
issues channel. Thus, it was old firms which experimented with hybrid instruments in
India in the 1990s.
3.5 Growth of Premium Issues (Zero Cost Funds) in the 1990s
With an increase in premium issues, premium account (zero cost) funds recorded high
growth for the private corporate firms during the 1990s, when compared with the
1980s. This was mainly because of the de-control of premium fixation in 1992. The
freedom to fix premium on both public and rights issues encouraged a large number of
companies to announce public issues with high premiums in the 1990s.
Table 3.16 shows that the role that was being played by premium issues in total
amount of capital raised from NIM increased during the period 1989-95. During this
period, premium issues became an important form of financing for firms with high
goodwill, as premiums are usually charged by existing companies whose issues have a
high market value. The purpose of demanding a premium is to protect existing
shareholders from capital losses. If an existing listed company does not charge a
premium, then existing shareholders will suffer losses, as the market value of their
share would drop after the issue, leading to capital losses. The loss will be equivalent
to the price reduction due to excess supply of stocks. Also, investees gain from
premium issues as the amount would lead to an increase in reserves and surplus of the
company. For these reasons most firms with good 'reputation' exploit this channel to
their benefit.
130
Chapter - Ill
Year-wise trends in premium issues provided in Table 3.16 reveals an increase
in the number of such issues since 1992. While the yearly average number of issues
during the CCI period was 27, it jumped sharply in the post-CCI period to 331 issues
per year. This indicates how firms used the liberalisation of pricing norms and the
euphoria of the post-CCI period to gamer additional savings. The amount raised
through this channel from the market also reveals a similar trend, as it grew from Rs.
144.76 crores in the CCI period to Rs. 5730.91 crores per year during the post-CCI
period.
Further, the relative shares of premium issues in the number and value of total
issues also showed an increase. But, the increase in share was higher for amounts
called than for number of issues. The share increased to 6.82 per cent in terms of the
amount called and 5.54 per cent in terms of the number of issues from 0.17 per cent
and 0.45 per cent during the post- and pre-CCI periods respectively. The years 1993
and 1994 showed remarkably high shares when compared to the earlier years, but, on
the whole there was an increasing trend, confirming the earlier findings of an increase
in premium issues in total private corporate financing. This points to the increasing use
of the premium option by finns which did not have that option under the CCI
regulatory regime. The average size of premium issues corroborates this, having
grown from Rs 4. 72 crores in the CCI-period to Rs. 18.20 crores subsequently.
Table 3.16: Year-wise29 Trends in Premium Issues in india: 1989-95 (In Rs. crores)
Years Premium Issues % of yearly premium issues to Grant total issues #
Numbers Amount AVCOJ?JC No. Arm 1989 13 38.07 2.93 0.22 o.os 1990 28 126.23 4.S1 0.47 0.1S 1991 40 269.72 6.74 0.67 0.32 CCI 81 434.02 4.72 0.45 0.17 1992 174 387458 22.26 2.92 4.61 1993 371 7462.SS 20.11 6.22 8.88 1994 S2S 7S29.40 14.34 8.80 8.96 199S(*) 2S2 40S7.11 16.09 4.22 4.83 Post-CCI 1322 2292l.60 18.20 5.54 6.82
Note: • = Data on prenuum 1ssues IS tlll march 1995 (total population); and # = 1s sum of 1ssues and amoWlt collected for 1989-95, which is the denominator. Source : Extracted from Prime Database.
A significant feature of the trend in premium issues during the second phase, was the
sharp increase in the number of such issues made through the public issue channel.
Table 3. 17 shows that the percentage of premium issues in the rights category declined
from 62.58 per cent of the total during the CCI period to 4 7. 75 per cent during the
post-CCI period, while the share of premium issues associated with public issues rose
29 The year here is January to December and not FY.
131
Chapter - Ill
from 37.42 per cent to 52.25 per cent. Thus, during the liberalisation period, firms
tried to expand their equity base further and beyond the existing shareholders, while
protecting their financial interests.
Table 3.17 : Distribution of Premium Issues across Right and Public Issues
Years Right Public Total Prerni wn to Total issues No. CJI'oage No. o/oage No. No.~cen!l Amt (per cent)
1989 N/A - 13 -1990 15 55.17 13 44.83
1991 28 70.00 12 30.00
CCI ll 62.58 13 37.42 1992 129 74.14 45 25.86 1993 205 55.26 166 44.74 1994 188 35.81 337 64.19 1995* 65 25.79 187 74.21
Post-CCI 147 47.75 184 5l.l5
Note: • =Data 1s avatlable only till March (1.e., three months). Source : Various reports of PRIME database.
13 6.95 1.36
29 8.28 3.19
40 7.81 4.85
35 7.68 3.13 174 17.13 20.73 371 32.15 34.15 525 31.00 23.09 252 14.66 22.12
331 23.74 25.02
The year-wise analysis also shows that the share of premium issues in total capital
issues increased from 7.68 per cent in the CCI period to 23.74 per cent in the post-CCI
period. A similar trend was also observed the case of amount called, with an increase
in the share of premium issues from 3. 13 per cent to 25.02 per cent The difference
between the figures relating to number of issues and amounts collected points to an
increase in the average size of premium issues during the post-CCI period. All these
results point to a situation where, in the liberalised phase even firms which were
unknown to the market could garner high premium through public issues.
Table 3.18 : Size-wise Distribution of Premium Issues : 1989-95
Category Premiwn Issues %to Total(*) Percentage Share No. Am No. Amt. No. Amt.
Lessthan I 94 208.9 1.58 0.25 6.7 0.9 ltoS 507 1522.3 8.50 1.81 36.1 6.5
Sto 10 374 2639.9 6.27 3.14 26.7 11.3 10to 20 187 2640.3 3.13 3.14 13.3 11.3 20to30 79 1899.9 1.32 2.26 5.6 8.1 30to 50 80 3046.0 1.34 3.62 5.7 13.0 above 50 82 11400.4 1.37 13.56 5.8 48.8 SUM 1403 23357.7 23.52 27.79 100.0 100.0
Note : • = 1 otal1s the swn of 1ssues and amount collected for I 989-95 ( 5965 1ssues ), which 1s the denominator and in terms of amount Rs. 84055.29 crores. This accounts for details on issues till December I 995. Source : PRIME database.
The evidence on the size-Wise distribution of the total amount of premium issues
called30, shows that size classes Rs. 1 to 5 crores, 5 to 10 crores and 10 to 20 crores
30 This classification is different from the nonnal approach of using either paid up capital or fixed assets. It was adopted because data on paid-up-capital and total assets are not available for all the issues. The issue size is a better means of classification in such a situation as a small fum cannot be expected to go for a public issue beyond its authorised capital.
132
Chapter - Ill
dominated in terms of number of issues, accounting for 1 068 issues of the total of
1403 premium issues. In terms of the amount collected, however, the size class Rs. 20
to 30 crores, 30 to 40 crores and above 50 crores classes dominated, accounting for
Rs. 16346.3 crores ofthe total ofRs. 23357.7 crores. The table thus reveals that 75.7
percent (in numbers) of firms collected only 29.1 percent of the premium amount,
while 17.1 percent of firms (in numbers) collected 70 per cent of the amounts of
premium. This concentration of amounts called suggests that even though there were
a large number of premium issues in the small size group, the values involved in the
larger size groups gave them a significant edge in terms of amounts collected.
Table 3.19: Yearly Analysis of Premium Issues: 1989-95
1919 1990 1991 CCI 1992
Category No. An No. An No. An No. An No. An
Lcadwa I 7.7 2.4 14.3 1.5 1.5 0.7 9.1 1.5 35.6 4.9
lto5 14.6 64.9 67.9 31.1 60.0 21.9 70.1 41.6 3.4 0.1
5to 10 0.0 0.0 3.6 H 20.0 19.5 7.9 1.2 27.0 u 10 to 20 7.7 32.1 10.7 34.0 1.5 14.5 1.6 27.1 13.2 8.1
20to 30 0.0 0.0 3.6 21.3 0.0 0.0 1.2 7.1 5.2 5.6
30to50 0.0 0.0 0.0 0.0 2.5 12.9 0.1 4.3 6.9 12.2
above 50 0.0 0.0 0.0 0.0 2.5 30.4 0.8 10.1 8.6 59.6
SUM 100 100 too 100 100 100 100 100 100 100
%toluuos 6.8 1.3 19.7 11.7 9.1 5.6 11.9 6.2 19.9 23.1
Note : • =data ts available only till March (1.e., three months). Source : Extracted from Prime Database.
1993
No. Aml.
1.9 0.1
33.4 5.3
30.5 10.9
16.7 1U
5.7 6.9
5.1 9.4
6.7 55.1
too 100
34.0 35.7
(In e) 1994 1995 Pact-CCI
No. Aml. No. A.m. No. Amt.
2.7 0.1 1.2 0.1 10.3 1.3
39.0 1.4 46.1 1.9 30.7 5.1
21.4 13.7 22.2 9.6 27.0 10.1
13.3 12.6 9.9 9.3 13.3 10.6
5.0 8.3 1.7 12.6 6.1 1.4
6.9 11.5 4.1 11.0 5.9 12.1
4.1 31.3 6.3 41.5 6.6 50.5
too 100 100 100 100 100
35.7 47.3 14.3 11.1 26.0 31.2
There were significant differences in the role of large and small premium issues across
time as well. The data shows that the Rs. 1 to 5 crores size class accounted for nearly
71 per cent of the total number of premium issues and collected 41.6 per cent of the
total value garnered through premium issues during the CCI period. But in the post
CCI period, firms with issue size above Rs. 50 crores collected about 50.5. per cent of
the total value garnered through premium issues, though their share in the number of
issues was a meagre 6. 6 per cent of the total. Thus, a small section of firms collected a
large share of the total value of premium in the liberalised phase. Firms with issue size
less than Rs. 10 crores which had accounted for 68 per cent of issues during the post
CCI period, collected only 17.8 per cent of the amount mobilised through premium
tssues.
The last row of Table 3. 19 shows the relative importance of premium issues in
total amounts collected and issues made in different years. This reveals that the trend
in the NIM in terms of number of issues and amounts called through premium issues,
133
Chapter - Ill
changed after liberalisation in 1992, with the share in the total number of premium
issues turning out to be less than the percentage amounts which these issues collected.
Clearly, higher premiums were fixed for issues during the post -CCI as compared with
the CCI period. This is because during the CCI period, the premium on issues was
being fixed by the CCI and the company had no control. But, with liberalisation and
relaxation of price fixation, this channel became an easy means to increase the reserves
and surpluses of companies.
The analysis also shows that there was a decreasing trend in the average age of
firms which issued premium equities in the market. The number of young firms I new
firms increased due to the euphoria in the market. The variance across firms further
points to the fact that there was greater proximity in the age of firms in the
liberalisation period compared to the CCI period. The question of premium issues
shall be discussed further in the subsection on post-issue analysis, to look at the actual
use of such funds by the c<>rporate firms.
3.6 Demand and Supply Conditions in the Market
The response to a public issue depends on many factors. General economic conditions,
finn fundamentals, available market choices, and expectations about future income, all
pay a role. The response to an issue is the outcome of a combination of these factors,
with certain individual factors having an overwhelming effect in particular periods.
Table 3.20 : Market and its Response : An Analysis of the Subscription of Issues (In numbers)
Times · 1989-90 1990-91 1991-92 CCI 1992-93 1993-94 1994-95 Post -CCI Subscribed Below 1 18 7 1 26 18 133 113 264 I to 1.5 14 17 8 39 109 288 198 595 1.5 to 3 21 27 13 61 89 126 206 421 3to5 20 21 9 50 72 61 166 299 5 to 10 30 29 51 110 82 59 230 371 10to25 44 30 81 155 62 61 271 394 25 to 50 15 11 32 58 23 24 111 158 50 to 75 2 6 9 17 2 4 31 37 Above75 3 4 3 10 2 I 14 17
Total 167 152 207 526 459 757 1340 2556 COV. 69.6 61.2 117.4 80.1 79.1 106.6 59.3 66.3 Source : Compiled from vanous Annual reports of"Primc database" from 1992-93 to 1994-95.
The analysis of the coefficient of variation of distribution of response to public issues
across the various subscription classes reveals a high degree of concentration during
1991-92 and 1993-94. The concentration in 1991-92 was towards higher subscription
levels of 5 to 25 times, as compared to 1993-94 when the subscription levels were
134
Chapter-m
lower (less than 3 times). The data indicate that 1989-90 and 1990-91 were years with
moderate response from the investors and issues got distributed fairly well across the
various subscription levels.
Figure 3.lt : Comparison of Year-wise Performance of Public Issues across Subscription Categories'
(In percentage)
40
35 &
l ,!I ..
30 .. t ..
!>..
25
1 20 -1:: l;ll
I 15 -
i r = £
10- ~ J ~ 5 -
Th:aos 1altcrlped i t1 0 -Balow1 1 to1.5 1-5 .. 3 31D5 6 .. 10 10 .. 25 251D50 50to76 -75
() 1989-90 Cl 1990-91 ~ 1991-92 )t 1992-93 1993-94 0 1994-95
Source : Extracted from Prime Annual Reports_
During the CCI period, subscription categories 5-l 0 times and 10-25 times accounted
for 50.4 percent of total issues, indicating a high response rate, while the same
categories accounted for only 29.9 percent of issues in the post-CCI period. This
could be attributed to a massive increase in numbers and amounts called during this
period. The trends in the lowest category of subscription level of less than one time,
showed an increasing trend from 4.9 per cent of issues to 10.3 per cent. Thus, in the
post-CCI period there was a shift to the subscription levels of 1 to 1.5, 1.5 to 3 and 3
to 5 times, as these categories together accounted for a majority of 51.5 percent of
issues. There was also an increase in the number of issues which got either devolved31
or refunded during this phase (Table 3.21).
The decreased performance in terms of subscription levels in the post-CCI
period should however be placed in context. This period was characterised by large
increases in the amounts collected via premium issues, pointing to the dominance of
mega premium issues in the NIM. When the quantum of issues and amounts called in
this period are compared, there are no significant differences, indicating the positive
role played by the CCI in checking the quality of issues in the regulated phase. It
31 Devolved issues are those issues which do not get fully subscribed by the public and hence devolves on underwriters.
135
Chapter - III
should, however, be noted that drawing such a conclusion would require an analysis of
the post-issue performance of firms.
Table 3.21 :Refund and Devolved Public Issues: 1989-95
YF..AR Rc:fimd of Issues
(I) (2) 1989-90 0 1990-91 0 1991-92 0 1992-93 3 (I) 1993-94 0 (0) 1994-95 na 1995-96 na
Note: Ftgures m the bracket are NRl Issues. Source : Arutual Reports of PRIME database.
3. 7 Conclusion
(In nwnbers Devolved
Issues (3) 0 0 0
38 (10) 18 (00)
na na
The discussion and analysis in this chapter have shown that the 1990s was a phase of
general rise in expectations created by liberalisation and globalisation. This resulted-1n a
rapid growth of the NIM, particularly its equity component, after the abolition of the CCI.
The evidence shows that in this period, while public sector investment decreased, that from
the private sector increased. This was supported by the growth of support institutions and
a 'scam' -related rise in the market prices of stocks. As is seen, during this phase_, secondary
market prices rose during 1989 to 1991, to be followed by a rise in equity investment in the '•
primary market in the liberalised phase (1992-1995). This shift to stock market funds on
the part of private corporate finns was also due to a decrease in credit availability caused by
an increase in investments in government securities by banks.
Another important conclusion relates to the increase in the importance of NBFC
deposits and investments in shares and debentures in the composition of household savings.
With household savings having a high share in total savings, this boosted the growth of the
NIM in the 1990s. Thus, opening up of the capital market in the 1990s brought a large
section of investors into the NIM and resulted in an equity boom.
This chapter also provides an analysis of changes in the structure of the NIM during
1989-95. The main trend found during this period is the large increase in public issues of
traditional instruments like equities and debentures, besides an increasing but marginal role
for hybrid instruments. The results are based on the complete information available on the
different aspects discussed, and so is a holistic picture of trends in the NIM. It points to a
large growth in public issues and a good performance in terms of response to these public
issues. Evidence indicates that all firms which turned to the NlM were relatively successful
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Chapter - Ill
in raising capital to meet their requirements. This suggests a greater disintermediation
taking place in the economy, as also concluded by Dennis (1996) in his study done on the
macro trends in corporate financing based on CMIE reports. 32
Since a majority of the issues were in the form of public issues and the relevance of
this channel was growing in the post-CCI period, a closer study of public issues would
improve our understanding of the structure of the NIM during the 1990s. Especially after
1993, there was a growing popularity of public issues compared to rights issues. Although
public issues grew at a very high rate with a corresponding growth in equity issues, the
. small average .size of issues reveals that a large part of this could be due to the small firms33.
But, such a conclusion would require further confirmation. While the instruments used
(equity and premium issues) suggest the direct role played by liberalisation in the capital
markets since July 1992, it also points to the graduation of existing companies rather than
an increase in new firms. As both public issues and ~crease in premium issues point
towards this conclusion, this suggests a growing concentration of investments.
This calls for a need to focus on the end use of funds mobilised directly from the
savers, especially when the volume mobilised are substantial. Subsequent chapters (IV to
Vlli) would thus focus on the public issues made during the 1990s. The analysis is carried
out based on data collected from the Delhi Stock Exchange for a sample of 3127 firms34•
Henceforth, this database would be known as the sample data. The analysis would focus
on various c~eristics of firms like location, industry, size, age, objective of public
issues, and financial instruments used by the firms population in the NIM. This structural
analysis would provide a detailed understanding of the behaviour of the NIM in a liberalised
market situation and the effects of an equity boom on a developing country like India.
Such an analysis would also highlight the relative-importance of the NIM across the various
categories taken up for analysis.
Further, since NIM as a channel of financing is vital to real investment creation in a
market economy, the function it performs would also depend upon the extent of
participation of the productive sector in general and manufacturing sector in particular in
the NIM. Chapters IV to VIII will provide a detailed analysis of these aspects of the NIM,
since the scope of this thesis includes an attempt to identify the structure of investments
through the NIM.
32 Dennis Raja Kumar J., 19%, "Financial Intermediation and Corporate Finance in India: Some Recent Experiences", The Journal ofEnterpreneurship. vol. 5, no. 2, p.204.
33 Refer Table 3.1. As seen, the small issues show a high concentration. 34 The complete set of information on public issues was available at the Delhi Stock Exchange Library, New
Delhi for the period of 1989-95, and was collected and collated by their researcher.
137