The stock market may have crashed, but the effects of the long bull run from 2003-07 continue to be see in the market capitalization to GDP ratio.

The nominal GDP taken for the computation is the sum of four past quarters up to June of each year, rather than the more conventional April-March financial year. Trailing four-quarter GDP to June has been taken because the latest available GDP figures are for the June quarter. The market capitalization figure taken is for the Bombay Stock Exchange, where a much higher number of firms are listed than the National Stock Exchange.

In the last downturn during the technology bust in the early part of this decade, the market cap to GDP ratio fell sharply from 0.44 in 2000 to 0.28 in 2001. The fall this time hasn’t been so dramatic, probably because quite a few large companies were listed during the second half of 2007 and the early months of 2008.

Also See Still healthy (Graphic)

With new issues dropping off sharply now, the ratio is bound to go lower. Besides, when compared with the market cap and GDP ratio of 1.77 times in January, the drop is more substantial.

On 1 October, the ratio has fallen to 0.94. But, this is still rather high relative to the previous years. At the end of 2007, the US market’s market cap to GDP ratio was around 1.05.

The fact that the Indian market’s capitalization is also nearly as much as its GDP shows the effect of the bull run that began in 2003.

Fund-raising options shrink for Indian companies

The Bloomberg league tables for the quarter ended September indicate almost the same trend seen in the first two quarters of the year. The amount of funds raised by Indian companies—both locally and overseas—fell by about 25% compared with a year earlier.

But a look at the instruments used to raise funds shows things have become worse. Last quarter, only 18% of funds raised in the domestic market was through issuing equity. In the first two quarters, nearly 37% of the funds raised came from that route.

Rights issues accounted for as much as 15% of funds raised in India, up from a minuscule 1% a year ago. For the year so far, a sixth of the funds raised within the country has come from rights issues, compared with just 0.8% in the year-ago period.

Things are much worse insofar as overseas markets are concerned. Fund-raising outside of India has dropped by 60% year till date. What’s more, 95.7% of the funds raised overseas was through debt instruments, compared with a smaller proportion—70%—a year ago. In the September quarter, this proportion increased further to 98%, as investors shied away from equity and equity-linked issues. In fact, for the first time in at least four years, there were no issues of foreign currency convertible bonds by Indian companies.

In other words, fund-raising options for Indian firms are shrinking. Worse still, the liquidity pool available for them has also fallen. For instance, debt funds worth $16.4 billion (Rs76,916 crore) have been disbursed from overseas markets so far this year, 45% lower than the $29.9 billion in the year-ago period.

The only two segments through which more funds have been raised are domestic debt and rights issues. The former option is increasingly becoming expensive. At current loan rates, an increasing number of projects are becoming unviable.

The latter has proved to be a double-edged sword for some firms, evident from the experience of Hindalco Industries Ltd and Tata Motors Ltd. Shares of these two firms are trading either lower than or close to the rights issue price. This after they revised their rights issue pricing and size, respectively.

Unless interest rates come off from current levels, fund raising activity is likely to dwindle.

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