Mumbai: Even as governments across the world spent tens of billions of dollars to rescue financial firms in return for hefty equity stakes, the Indian state had a free ride in 2008. Without spending a rupee to acquire extra equity, the government increased its share of the domestic stock market by about a quarter.
This was largely because of the significantly higher loss in market capitalization incurred by private sector firms in a year of global financial turmoil.
According to a Mint analysis, India’s equity market shrank 56.14% to Rs31.45 trillion in 2008.
Also See Shrinking Private Sector Share (Graphic)
The bellwether Bombay Stock Exchange’s (BSE) key index, the Sensex, slumped 52% while the BSE-100 index, consisting of the top 100 firms listed on BSE by market capitalization, lost about 55.28%. The value of 21 government-run firms in BSE-100 dropped on average by about 44.21% in 2008.
The government’s share in the cumulative market capitalization of publicly traded firms on domestic bourses rose by 4.68 percentage points, or about a quarter, to 22.7% at the end of 2008, from a little above 18% at the end of 2007, says a client presentation by Mumbai-based Instanex Capital Consultants Pvt. Ltd, an index service provider and funds adviser.
“The government emerged a larger owner of Indian companies even though it did not increase its stake through fresh capital inflows,” said Gautam Chand, chief executive of Instanex.
Private sector ownership, both by individuals and corporations, in India’s stock market universe dropped more than 6.3 percentage points to 24.8%, as of 31 December, according to Instanex.
Overall stock ownership by promoters dropped marginally in 2008, by 0.2%.
While the ownership by foreign promoters rose 1.54 percentage points to 7.83%, the ownership of Indian promoters dropped 1.76 percentage points to below 50%.
Foreign investors flee
A larger drop was witnessed in the stock ownership of foreign institutional investors (FIIs), the main driver of Indian stock markets, who sold Indian stocks worth a net $13 billion (Rs63,180 crore today) in 2008. FIIs owned shares worth about $79 billion at the end of December, the report said.
Since 1993, when India opened the doors for this class of investors, FIIs had net invested $46.25 billion till date and the maximum flow of foreign money into Indian equities was seen in 2007, when foreign funds pumped in $17 billion, net of selling.
Driven primarily by foreign fund inflows, the Sensex saw a sevenfold rise between 2003 and 2008. The credit crisis in US and a resultant trillion dollar deleveraging in the global economy put the brakes on the bull market rally.
Foreign funds continue to dump Indian stocks this year to raise money to meet investor redemptions amid low risk appetite and gloomy outlook for local equities. Since the beginning of this year, FIIs have sold a net $1.08 billion.
The Sensex has lost 0.66% this year. It gained 283.03 points, or 3.04%, to end at 9,583.89 on Monday. Its lifetime high was recorded on 10 January 2008, when the index touched 21,206.77 points in intra-day trade.
Domestic institutional investors (DIIs), including mutual funds, insurance firms and banks, substantially increased their ownership in listed firms in 2008. DIIs now own nearly 10% of India’s listed universe. Retail investors, too, nibbled on shares dumped by promoters and FIIs. The share of retail investors in the overall market capitalization of Indian companies increased by 43 basis points to 16.5%. One basis point is one-hundredth of a percentage point.
With the market in a firm bear grip, there were few initial public offerings (IPOs) in 2008. In 2007, some 105 IPOs raised Rs39,387.72 crore; in 2008, 28 IPOs raised Rs830.66 crore.
Theoretically, IPOs by private firms can push up promoters’ share of market capitalization as the number of listed private entities increases at a time when the government is not pushing divestment in unlisted state-run companies.
Local promoters’ share in the markets can decline further if some of the shares pledged by private promoters are sold by lenders in the open market.
On 19 January, Mint had reported that nearly $15 billion worth of promoter shares have been pledged as collateral with lenders, according to a dozen senior executives from the broking, banking and non-banking finance communities.
Capital market watchdog Securities and Exchange Board of India has made disclosure of such shares by promoters of listed companies mandatory, starting from the quarter ending March 2009. So far, 90 firms have already made such disclosures.
Along with the change in the ownership of Indian markets, the profiles of highly traded stocks are also set to change this year.
“With liquidity having been sucked out of the financial system, the Indian stock market has decisively entered a new phase, where defensive companies are clearly and strongly outperforming the stars of the liquidity-fuelled years,” said Saurabh Mukherjea, head of India research for the UK-based Noble Group Ltd.
Graphics by Ahmed Raza Khan / Mint