Recent trends in the primary market – Explained!
by Saritha Pujari Business
Average annual capital mobilisation from the primary market, which used to be about Rs. 70 crore in the 1960s and about Rs. 90 crore in the 1970s, increased manifold during the 1980s, with the amount raised in 1990-91 being Rs. 4,312 crore. It received a further boost during the 1990s with the capital raised by non-government public companies. There is a preference for raising resources in the primary market through private placement of debt instruments. Private placements accounted for about 91% of total resources mobilised through domestic issues by the corporate sector during 2000-01. Rapid dismantling of shackles on institutional investments and deregulation of the economy are driving growth of this segment. There are several inherent advantages of relying on private placement route for raising resources. While it is cost and time effective method of raising funds and can be structured to meet the needs of the entrepreneurs, it does not require detailed compliance with formalities as required in public or rights issues. It is believed in some circles that private placement has crowded out public issues. However, to prevent public Issues from being passed on as private placement, the Companies (Amendment) Act, 2001 made offer of securities to more than 50 persons a public issue. The reforms in the capital markets during the 1990s in terms of market microstructure and transactions have ensured that the Indian capital market in particular is now comparable to the capital markets in most developed markets. The early 1990s saw a greater willingness of the saver to place funds in capital market instruments, on the supply side as well as an enthusiasm of corporate entities to take recourse to capital market instruments on the demand side. The size of the capital market is now comparable to other developing countries but there is still a long way to go. It is important to note that developed economies with bank-based systems, such as Germany and Japan, also have capital markets with substantial market capitalisation in relation to GDP. While there was a sharp increase in market capitalisation as a percentage of GDP during the 1990s, the share of capital issues to GDP, a measure of resource mobilisation by the capital markets, followed an inverted curve during the 1990s. The spurt in capital issues beyond 1.0 per cent of GDP during 1993-96 could not be sustained with the onset of the economic slowdown in the latter half of the 1990s. As a result, capital issues, especially equity issues, dwindled to the 1970s’ levels (as a proportion of GDP) in the latter half of the 1990s. In fact, public capital issues by non-Government public limited companies declined to 0.2 per cent of GDP during 1998-2002 from 1.9 per cent during 1992-97 and 0.6 per cent during the 1980s. Besides, public equity issues by non-Government public limited companies declined to 0.1 per cent of GDP during 1998-2002 from 1.1 per cent during 1992-97 and 0.7 per cent during the 1980s. The market for corporate debt is still in the process of development in the Indian economy, as is the case with most developing economies. The private placement market has emerged as an important source of resource mobilisation in the Indian debt market. The first steps in development of the debt market have been taken through development of the government securities market. The issue of government bonds through auction and their active trading by banks has led to the emergence of a sovereign yield curve. Steps have also been taken, though still in their infancy, to enable active trading of government securities in the stock exchanges. As this market grows and as steps are taken to regulate the private placement market, the corporate bond market will also develop. Creditworthy corporate borrowers will then be able to raise longer term funds for financing their growth. After the exuberance of the stock...
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