Opinion
Here’s how authorities ought to deal with India’s market froth
Summary
- Among other factors, scarce investment avenues other than equity shares and dubious practices amid a stock market boom have raised the risk of a bust that could have a political fallout. It calls for an administrative response that doesn’t lead to further distortions.
Market apocrypha describes many triggers that indicate when investor frenzy has reached its peak and a bubble is about to burst. One proxy indicator is hyperactive equity interest among wage earners who typically do not have reliable disposable incomes every month.
Such investors tend to enter the market at its top and invariably end up losing their capital. The second sign is dubious companies making initial public offerings (IPOs) to cash in on feverish activity and raising substantial sums of money.
Given the current state of the Indian stock market, it would seem both these pre-conditions have been more than fully met. All kinds of retail investors are rushing in to invest their meagre savings—not only in IPOs, but also in all sorts of penny stocks, often persuaded by online influencers and tricksters.
The recent jolt of ₹4,800 crore gushing into an IPO by a small two-wheeler dealer looking to raise ₹12 crore does not appear to have changed anything. Indian equity markets in 2023-24 saw IPO numbers jump to 205 from 125 the previous year.
Also read: Mint Quick Edit | Resourceful IPO: Irrational exuberance?
The first half of 2024-25 saw IPO subscriptions in India double, while funds raised globally dropped 16%. This market froth has the Securities and Exchange Board of India (Sebi) worried; the regulator has hinted at manipulation by issuers of paper and threatened to tighten rules.
Any market meltdown would spell multiple risks for the economy, but if millions of retail investors were to see their savings evaporate, it would pose a political risk for the government.
But, before jumping to any normative solutions, it might be instructive to get into the weeds first. There are many reasons for today’s stampede-like conditions in the primary issuance market. A significant factor is the absence of alternative asset classes that can compete with company shares to offer reasonable real returns, post inflation and taxes.
This distortion is playing out in different ways. One manifestation is deposit growth lagging credit growth in the banking industry, forcing banks to rely on relatively expensive liabilities (like certificates of deposit), which raises borrowing costs, even though policy rates seem primed for descent.
Another symptom is the enormous retail predilection for mutual funds (MFs), which, compelled by the same lack of asset options and a shallow secondary market for shares, re-routes these investments into IPOs, thereby reinforcing an artificial valuation bump.
Also read: Why India’s IPO mania is similar to the dotcom bubble
Reports also suggest that some institutional investors (including MFs) have been in collusion with shady issuers to pump up valuations and help promoters make unjustified gains by selling out to clueless investors.
It might be tempting to demand that the government or Sebi clamp down through direct administrative controls and orders. However, as history shows us, this is likely to create more distortions and aberrations.
One immediate task for government officials and regulators is to stop glorifying market valuations, or singing paeans to how India’s market cap ranks high among its global peers. This is a time for statements to be laced with caution and accompanied by warnings on the fragility of savings.
Their role does not end there. The authorities should increase the severity of punitive measures to make any breach of rules prohibitively costly. They could start by making an example of transgressors—which may not be difficult to locate in the current hysteria.
