EDITORIAL : THE HINDU, INDIA

 

Starting early for 2012

A standoff with the legislative branch over the budget would seem hardly the best time for President Barack Obama to declare the start of his re-election campaign. The tussle with the Republican-dominated U.S. Congress over cuts in spending brought the federal government to the brink of a shutdown. But the announcement of his 2012 candidacy in the middle of this was less about finding the right political moment than about garnering finances for re-election — the second quarter of the year marks the beginning of a new fund-raising period under U.S election laws. All the same, it has turned the spotlight on Mr. Obama's leadership even as the White House struggled to bring about a last-minute compromise between the Republicans and Democrats on the budget. This battle may eventually work to President Obama's political advantage if enough Americans see the Republicans as confrontational to the point of stopping the work of government. The harder part for the Democrats is to answer a more fundamental question: where is the change Mr. Obama promised during his inspirational 2008 presidential campaign? Americans are clearly disillusioned because the dynamism and hope Obama, the candidate, represented has been replaced by diffidence and over-caution in Obama, the President. The mood was evident when voters gave Republicans a majority in the House of Representatives and drastically cut back the Democratic majority in the Senate in November 2010.

Mr. Obama's approval rating of 62 per cent when he entered the White House has dropped to 46 per cent. The Libyan misadventure may push this down further. The latest let-down for his supporters is the decision to put Khalid Shaikh Mohammed, the self-confessed mastermind of the 9/11 attacks, on trial by a military tribunal at the Guantanamo prison, instead of in a federal court. Coming just a day after he was declared the first official candidate for the 2012 election, it showed President Obama in poor light: he had promised during the last campaign to close down the camp within a year of taking office. The presidential election is still 20 months away. No credible Republican contenders are in sight. Surprising though this may sound, of the many moving parts at work, the one to the incumbent's advantage is the economy. President Obama inherited an economy in deep crisis, but managed to keep it from sinking. Last month, the claim that the economic recovery was well on its way was buttressed by a fall in the unemployment rate to its lowest in two years. Elections in the U.S. are often about the state of the economy. Mr. Obama's political stock has been visibly degraded but all things considered, he remains the favourite for November 2012. 

Primary market messages

There are some important messages from the recently released data on primary markets. Last year (2010-11) a sum of Rs.46,267 crore was raised through public equity issues. The mobilisation was roughly the same as that of the previous year. According to Prime Database, one of India's oldest and most reliable purveyors of capital market data, the mobilisation last year — incidentally the third highest ever — could have been even more but for the fact that some public sector undertakings (PSUs) deferred their planned large public offerings. One of the reasons for the postponement was the volatility in the secondary markets that had set in during the last quarter of 2010-11. Indeed, continuing volatility poses daunting challenges to primary market issuers, especially in timing the issue and price discovery. When iconic PSUs are involved, the issue price can never remain outside the pale of controversy, no matter what method is used to discover the price.

In 2010-11, a total of 57 public issues entered the market, compared to 44 the previous year. Of these, 52 were initial offerings and the remaining five follow-on offers. The average deal size was Rs.811 crore. Ten issues were for Rs.1,000 crore and above. At the other end, there were six issues of less than Rs.50 crore and none below Rs.10 crore. The important message here is that India's primary market remains tilted towards large companies. The ongoing efforts of the government and the regulator, SEBI, to encourage small and medium enterprises to seek funds from the capital market instead of depending solely on bank finance have not been successful. Dedicated exchanges for small share offerings have not taken off. The OTC exchange, which goes back to the early 1990s, was well conceptualised but it found few takers. Public issue of shares continues to be an expensive affair. The system, derived from regulatory rules as well as deeply ingrained market practices, favours the larger issuers over the small. Irrespective of the issue size, there are certain fixed costs such as advertising and publicity that the issuer has to incur. That, in many cases, raises the bar for the smaller issues. While there is absolutely no doubt that a public listing of shares confers many advantages to a corporate, the small and medium enterprises (SMEs) will have to weigh the costs involved against the advantages. Many SMEs therefore depend on outside equity support from venture capital, private equity and many categories of institutional investors.