Opinion | Our stock markets need a fresh supply of shares

Indian stock markets scaled another post-covid high on Tuesday, buoyed by a global rally and reports of a calming of border tensions between India and China. The 30-share BSE Sensex, an index of India’s largest and most actively traded stocks, has soared by some 40% above its lockdown-shock low of about 25,638 in late March. This rally has been fuelled not just by retail money via mutual funds, but also by a glut of liquidity sloshing around global financial markets in search of returns. The covid crisis had prompted the world’s big central banks to ease money supply in vast quantities, and ultra-cheap funds going into equities and bonds have raised concerns of asset price inflation. Indian shares have gained, too, as foreign portfolio investors poured ₹218.3 billion into domestic equities in June, the highest this year. Market momentum has been aided by upbeat data coming out of the US and China, lately, and some analysts have cited local factors to justify Dalal Street’s optimism. Yet, our bourses seem to have run ahead of financial fundamentals, given that the full impact of the economic blow delivered by covid-19 is still to show up in corporate earnings. As bad news on performance filters in, more and more stocks will probably look overvalued. In all, India has had no let-up in coronaviral infections, uncertainty abounds on various fronts, and it could take very little for the fragility of the current rally to reveal itself.

With loose monetary policies unlikely to be reversed anytime soon, too much money could chase too few stocks for quite a while, inflating prices in the bargain. If dollar inflows keep the rupee’s external value on an incline, then savvy global investors could count on carry-trade profits by borrowing cheaply in advanced economies and deploying the money in high-yielding risk assets in India. In such circumstances, it would help if the supply of equities were to rise, too. The government can play a major role in seeing this happen. It just has to offload chunks of its equity holdings in state-held companies. Its disinvestment target for the year, at ₹2.1 trillion, could perhaps even be met if it shuffles its offer list to put shares on sale that are likely to attract regular buyers, rather than strategic investors. Instead of Air India, thus, it could go ahead with an initial public offering (IPO) of a slice of Life Insurance Corporation, as envisaged, though the insurer’s policy-holders would have to be assured that they won’t be deprived of profit bonuses. Shares in other public sector enterprises could be hawked as well.

Old businesses, however, may not elicit quite as much interest as new ones. Every crisis that shakes up an economy tends to create a new set of winners, raring-to-go companies that either pivot quickly to new realities or seize opportunities presented by change. While almost all businesses have been hit by the covid crisis, some startups may be onto something that requires expansion money. Angel funds and venture capital have tended to these needs, largely, but it may be time for some of these to go public. Few may have the profit record needed for an IPO, under our current rules, but perhaps such preconditions could be eased a bit in favour of a primary market revival. Discerning investors might be keen to put prospectuses under their lens and acquire a bunch of new stocks for the post-covid era.