The Securities and Exchange Board of India (Sebi) has increasingly been pursuing better efficiency in the primary capital markets, after a large part of it got exported to overseas markets in the past few years through foreign currency convertible bond (FCCB) and depository receipt (DR) issuances. The latest addition is that of fast-track issuances by companies that are already listed. Firms meeting certain criteria would now spend much less time and resources raising funds through follow-on public offerings and rights issues.

One criterion is that the firm should have an average free-float market capitalization of at least Rs10,000 crore during the past one year. Based on current stock price levels, this means only about 30 companies would qualify. But as long as the limits are progressively altered, the current limits are a good place to start with.

Large companies such as ICICI Bank Ltd and Tata Steel Ltd have, in the recent past, hit the markets with follow-on and rights issues, taking the usual long-winded route earlier prescribed by Sebi.

These companies would have qualified for the fast- track issuance route and benefited considerably. State Bank of India is expected to hit markets with a rights issue, and it would benefit from new rules. But within a set of about 30 firms, many of which have no plans to raise further equity, the use of the new route could be limited. Some of them could continue using the FCCB or global depository receipt (GDR) or qualified institutional placement (QIP) route to raise equity, depending on their specific requirement.

Companies that wish to establish a presence in overseas markets, probably through acquisitions, would prefer FCCB or GDR issues. Curbs put in place by the Reserve Bank of India (RBI) on foreign borrowing (FCCBs come under this) have recently led to a spurt in domestic QIP issuances. This same factor could help the new fast-track route for follow-on and rights issues.

But the success of the product will be visible only when the criteria are relaxed and the universe of companies that can use the route is expanded. Until then, its use will be limited.

Two-speed economy

The Indian economy continues to operate at two speeds—5.6% for private consumption and 15.5% for gross fixed capital formation. The gross domestic product numbers for the first half of fiscal 2008 show a continuing slowdown in private consumption, while gross fixed capital formation accelerates.

The market believes this trend will continue, which is why it assigns a price earnings multiple of around 50 to the Bombay Stock Exchange (BSE) Capital Goods Index, compared with a price earnings (PE) of about 25 for the Sensex. Of the three main engines of growth—consumption, capital expenditure and exports, the economy is trundling along solely on the strength of the second engine; the other two showing significant deceleration compared with the first half of last year.

Taking the two quarters separately, private consumption growth has been 5.6% in both Q1 and Q2, which might indicate that growth is bottoming out at this level. Private consumption growth was 6.7% in fiscal 2006 and 6.2% in fiscal 2007.

Growth in capital formation slowed from 15.9% in Q1, to 15.2% in Q2. But capital expenditure shouldn’t be tracked on a quarterly basis, because one large project can skew the growth percentages.

The 15.5% growth in the first half is better than the 14.6% growth in this segment last fiscal and has offset the slowdown in consumption and exports.

What about the future? With interest rates bottoming out and a slight softening bias (because bank deposit growth is higher than credit offtake), consumption growth could start picking up. Gaurav Kapur, senior economist at ABN Amro Bank NV, says the Purchasing Managers’ Index, which shows high growth in manufacturing for October and November, serves as a leading indicator.

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