Recently Market suddenly moved up belying the fears of downtrend in economy due to Lock-downs and restricted movement of people for work or pleasure.
While there are several theories doing the round about this surge is liquidity-led or bubble created by new investors etc. etc., One important factor leading to capital market surge is up-move in the Stock of Reliance, which has high weight in Both Sensex and Nifty.
The surge is not without any reason. Sensing the fall of deal with Saudi Aramco for stake sale, it sold the stake in Jio Platforms to several cash-rich investors besides raising capital through Rights Issue. This helped the company to go debt-free and power to go for new deals.
Some more companies specially in the Banking and Finance Sector are planning to raise long-term funds by way of issuance of fresh equity or NCD. This will improve their long-term cash availability and capability to acquire weak but viable businesses.
Still there are some well-managed companies or groups having high debt on their Books. These debts were created for fast expansion as well as large-size acquisitions. These companies can also separate various businesses into separate units and offload the partial stake in those units without losing the majority control. Reduced debt in their books will improve their debt-service ratio and better rating by investors.
Many MSMEs are facing problem about non-interest of next generation in the existing family business. Equity can play a major role in dilution of stake by promoters at fairly good value, if done at right time, i.e. before business starts shrinking. To begin with, Periodic allotment of shares to employees at a discount to fair market value as determined by the valuer should be done to improve belonging-ness and loyalty towards the organisation. Fairly good valuation by merchant banker and stake sale can give the business a more realistic valuation. Gain in valuation of shares during stake sale or IPO can give a handsome bonus to the employees. As promoters grow older, they should dilute their holdings slowly to keep a buffer outside the business, which can take care of them in old age. Further, the professional management should be developed in a way that promoters can free themselves from the active involvement in management of Business. With continuation of business with professionals, the promoters may also enjoy the dividends as pension.
The financiers or the investors should also need to change their outlook. Instead of financing a project at fixed rate of return, they should also look at option of equity financing.
The lenders should not consider the debt as risk-free. This was proved by large NPAs in the Books of Banks. Banks have to write-off huge sums to clean their Books, but not earned anything extra in case of successful project. In case of equity, profit from successful enterprises help in mitigating the loss from failed projects. This is the whole concept behind the angel investing.
However, Banks with access to short-term funds through deposits cannot be involved in investment financing. But to safeguard their interest, the lenders should keep themselves away from long-gestation projects. They must make sure that promoter has brought in at-least 50% of the project cost by equity. Disbursement of loan funds should start only after utilization of at-least 50% of the equity funds and final disbursement to be done only after the promoter has brought in his entire stake. With initial funding done by equity, the gestation period of the project will be less after the lending. This will lead to lower capitalization of interest and ultimately lead to lower project cost. Low debt-service ratio will also help the project to remain viable.
Banks should also be cautious in long-term lending with exposures like Housing Finance. Presently majority of Indians are employed for a continuously long period in the same organisation. This is not likely to continue in future with rapidly changing business scenario and change in requirement of skill-sets. They should keep sufficient margin while financing for housing and personal assets like car.
With reduced scope in lending, more working capital funds will be available to MSMEs and with falling interest rates, personal savings will also tend to move towards equity.
While there are several theories doing the round about this surge is liquidity-led or bubble created by new investors etc. etc., One important factor leading to capital market surge is up-move in the Stock of Reliance, which has high weight in Both Sensex and Nifty.
The surge is not without any reason. Sensing the fall of deal with Saudi Aramco for stake sale, it sold the stake in Jio Platforms to several cash-rich investors besides raising capital through Rights Issue. This helped the company to go debt-free and power to go for new deals.
Some more companies specially in the Banking and Finance Sector are planning to raise long-term funds by way of issuance of fresh equity or NCD. This will improve their long-term cash availability and capability to acquire weak but viable businesses.
Still there are some well-managed companies or groups having high debt on their Books. These debts were created for fast expansion as well as large-size acquisitions. These companies can also separate various businesses into separate units and offload the partial stake in those units without losing the majority control. Reduced debt in their books will improve their debt-service ratio and better rating by investors.
Many MSMEs are facing problem about non-interest of next generation in the existing family business. Equity can play a major role in dilution of stake by promoters at fairly good value, if done at right time, i.e. before business starts shrinking. To begin with, Periodic allotment of shares to employees at a discount to fair market value as determined by the valuer should be done to improve belonging-ness and loyalty towards the organisation. Fairly good valuation by merchant banker and stake sale can give the business a more realistic valuation. Gain in valuation of shares during stake sale or IPO can give a handsome bonus to the employees. As promoters grow older, they should dilute their holdings slowly to keep a buffer outside the business, which can take care of them in old age. Further, the professional management should be developed in a way that promoters can free themselves from the active involvement in management of Business. With continuation of business with professionals, the promoters may also enjoy the dividends as pension.
The financiers or the investors should also need to change their outlook. Instead of financing a project at fixed rate of return, they should also look at option of equity financing.
The lenders should not consider the debt as risk-free. This was proved by large NPAs in the Books of Banks. Banks have to write-off huge sums to clean their Books, but not earned anything extra in case of successful project. In case of equity, profit from successful enterprises help in mitigating the loss from failed projects. This is the whole concept behind the angel investing.
However, Banks with access to short-term funds through deposits cannot be involved in investment financing. But to safeguard their interest, the lenders should keep themselves away from long-gestation projects. They must make sure that promoter has brought in at-least 50% of the project cost by equity. Disbursement of loan funds should start only after utilization of at-least 50% of the equity funds and final disbursement to be done only after the promoter has brought in his entire stake. With initial funding done by equity, the gestation period of the project will be less after the lending. This will lead to lower capitalization of interest and ultimately lead to lower project cost. Low debt-service ratio will also help the project to remain viable.
Banks should also be cautious in long-term lending with exposures like Housing Finance. Presently majority of Indians are employed for a continuously long period in the same organisation. This is not likely to continue in future with rapidly changing business scenario and change in requirement of skill-sets. They should keep sufficient margin while financing for housing and personal assets like car.
With reduced scope in lending, more working capital funds will be available to MSMEs and with falling interest rates, personal savings will also tend to move towards equity.
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