One of India’s top bankers and Vice-Chairman of Kotak Mahindra Bank, Uday Kotak, has raised a red flag on the surge in stocks, saying that it raises questions as to whether this poses the risk of a “bubble”. He said a lot of domestic savings were flowing to “a few hundred stocks” of firms whose governance standards fuel concern.
“While we are in the right direction, I always worry about excesses. What’s the excess which worries me? Here we have got a wonderful situation where massive amounts of savings are moving to the financial savings. Within the financial savings space, (money flows) into mutual funds, unit-linked schemes of insurance companies and directly into the equity markets. Money is coming through a broad funnel and it’s going into a narrow pipe… massive amount of Indian savers’ money is now going into a few hundred stocks. And you come back to the question of how good is the governance of these companies. The amount of money that’s going into small and mid-cap stocks is something on which we have to ask tough questions. Is there a risk of a bubble?” Kotak said in an interview.
India’s benchmark Sensex rose by a record 7,430 points, or 27.90 per cent, in 2017 and investors made huge notional profits of Rs 45.50 lakh crore as market capitalisation surged by Rs 151.73 lakh crore in a year marked by the impact of demonetisation and the Goods and Services Tax or GST. The stock markets still appears to be headed north — from January 1 to 12, the Sensex gained another 500 points to close at yet another peak of 34,592.39 on Friday.
Kotak, who headed a Sebi committee which submitted a report last year on changes in corporate governance rules for listed firms, said, “Keep in mind now you have EPFO money, insurance money, pension, investors’ and savers’ money. People think nothing can go wrong. I would increase my level of alert from the policy point of view and dramatically improve the level of governance and transparency.”
Key indices and some stocks have surged. With mutual funds witnessing huge inflows into equity schemes after demonetisation, the Sensex has been hitting new peaks on a daily basis.
“You’re pushing all this (money) into a narrow funnel which inevitably runs the risk of a bubble. Micro is improving but the speed at which stock prices are going up is even faster… The speed at which stock prices are going up is sheer money power,” he said.
Kotak also raised concern over the high level of foreign ownership in top private sector banks and maintained that foreign investors are benefiting from it. Citing the example of HDFC, he said, “More than 80 per cent (of HDFC) is foreign owned. Here’s a company whose core business is money from retail savers – Indian house owners. And of the entire gain made by that company, 80 per cent belongs to foreign investors.”
Comparing Indian ownership with that of the US, he said the biggest growth companies in the US — Amazon, Facebook, Google, Microsoft and Apple — are majority American owned. “The policy framework should encourage outstanding Indian companies over the next 10 or 20 years. And let broad-based Indian savers over time gain out of that,” he said.
“We have encouraged more and more foreign flows to come in because we have a shortfall in the current account. What have we done? We have basically got some of our jewels majority foreign owned,” Kotak said.
Kotak also made out a strong case for encouraging what he terms “Indian champions”, well-governed companies that are not based on any favours by the government, and the need to broadbase owenership.
The Insolvency Law has helped shift the balance from the debtor to the creditor but compared to three years ago, there has been a 180-degree turn on the economy front, he said, pointing to improving micro factors but a tougher macro – with the current account and fiscal deficit widening.