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India the Better, Newer China for IPOs

Mumbai outperforms Shanghai by a factor of four

Op-Ed Commentary: Chris Devonshire-Ellis

Oct. 22 – The largest coal mining company in the world, Coal India, launched their IPO this week, open both to institutional investors and the public at large. The offering, also India’s largest ever, signals another way in which India differs from China.

Coal India has long been a wholly state-owned enterprise, and now it’s partially public. Although the government still owns about 90 percent of the company, the longer term strategy in India is controlled divestment. Coal India’s success is likely to encourage the government in this regard – it needs to raise serious capital to pay for national infrastructure development in other areas. India’s government is doing something that China’s is not, it’s getting out of business. In terms of success, the offering was over-subscribed by 15 times.

It’s a mind-boggling testimony to the amount of money floating around in Indian markets, the hunger for good stocks, and the sheer euphoria about the India story, which is also reflected in the fact that Mumbai’s Sensex also closed up 388 points on Thursday, the final day of the offering. The success of Coal India also sets an impressive benchmark for Indian prime companies like SAIL, Hindustan Copper, Manganese Ore and Power Grid which are also lined up to tap the capital markets in coming months. To put what has just happened in India with the Coal India IPO into further perspective, the amount of money that flowed into the offering over the past four days is more than last year’s GDP of about 140 countries. Closer to India, it is more than the GDP of Sri Lanka (US$42 billion) and four times that of Nepal (US$12.5 billion).

Of course, China plays have seen this before in the form of massive IPOs for its banks, energy companies and so on. In comparison to some of the China IPOs, even the Coal India offering can appear small. But closer inspection reveals a rather different background between Indian listings and Chinese ones.

India differs from China in the quality of its offerings in several respects. Firstly, the government has instigated an independent watchdog, while China’s is state controlled. When disputes arise, India has an independent judiciary, while China does not. This means suing a company in India, even one fully or partly owned by the government, is a case that will be heard and, if the government is found lacking, will be independently brought to account. Try that in China, and not only will you not have the case heard, but you’re also likely to end up in prison. The appalling cover up of China’s melamine scandal, which was essentially due to corruption at state-owned enterprises in the dairy industry that resulted in the deaths of infants, is a case in point. Not one lawsuit was accepted by China’s judiciary for compensation-seeking parents, on the basis that doing so would cause “social unrest.” Parents that pushed the envelope too far in this matter were detained.

China’s government is also very much involved in its businesses. State-owned enterprises dominate the Shanghai and Shenzhen exchanges, and Hong Kong’s famed “red chip” plays are also nearly all fully or partly owned by the state. About 90 percent of companies listed in China are partially or fully state owned. In India, about 90 percent are totally privately held. India is selling off the “family silver” and is getting out of business. That allows Indian entrepreneurs to do what they do best – manage companies and be entrepreneurial. China’s businesses must abide by state policy.

We can also review the performances of each country’s related stock exchanges, the Shanghai Composite, made up of the best and biggest mainland China players, and the Mumbai Sensex, India’s equivalent.

The above figures are especially telling as Mumbai has far outperformed Shanghai, even while China has boomed over the past decade. Mumbai’s boom time is arguably still to arrive. Successful IPOs and listed companies are that way due to the competence of their management. When one examines the infrastructure differences between the mechanisms in place between China and India’s stock market environment, they could not be more dissimilar. India is already ahead in terms of performance, and as India’s government prepares more state owned corporations for public offerings, the superiority of the Indian model over the Chinese in terms of developing successful corporate businesses for the future will only become more pronounced. Investing in India funds makes a lot of sense right now.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates, establishing the firm’s China practice in 1992 and the India practice in 2007. The firm now has ten offices in China and five in India. For advice over China-India strategy, trade, investment, legal and tax matters please contact the firm at [email protected]. The firm’s brochure may be downloaded here. Chris also contributes to Asia Briefing’s other titles, India Briefing, China Briefing and Vietnam Briefing.

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11 Responses to India the Better, Newer China for IPOs

  1. Inchin Closer says:

    Hi! yes, its true, India’s success story is still unraveling, and the recent coal india IPO was the best Diwali gift the government of India could have given investors. Yet, India has a while to go to match the large IPO’s China has recently seen (Agricultural Bank of China’s IPO stood at US$22.121 billion as against CIL’s IPO of US$3.5 billion. As the Indian government disinvests other public sector companies, no doubt increased money will flow in and deal sizes will inflate.

    However, I also believe that as the Chinese economy stabalizes and reforms and policy measures are put in place for a more sustained growth, – China would be a prudent place for foreign investors to park their funds. This article enumerates the various Chinese industries that are still ripe for investment.

  2. Chris Devonshire-Ellis says:

    @Inchin – we identified the new China industries that will stand out. All will be subsidized in the next five year plan, and there are nine of them: http://www.china-briefing.com/news/2010/10/15/china-to-provide-us600-billion-in-incentives-for-emerging-industries.html.
    In terms of China real estate and related industries –
    (construction etc) I would keep well away. Precisely the opposite to India. Thanks – Chris

  3. Deek says:

    I come from India..and I see no (or little) comparison between the 2 economies (or stock exchanges).

    1. If chinese govt is floating its companies in stock market, does it not mean that it is also seeking private investment in the companies? If yes, then the companies are not partly owned by the govt and the private investors.

    2. A large number of govt owned chinese companies are either already on stock market..or will be going through IPO. So, the country (just like India) is privatizing its industry. I see no difference here.

    3. Corruption: There is a lot of corruption in India..and I believe the same would be true for China also. But hey…same is true for every country. We just heard some big kickbacks in FIFA. LOL

    I see 2 main issues facing the Indian govt:

    1. Physical Infrastructure: The politicians just dont get it. They just dont. Cuz they are incapable of seeing how much GDP the country is losing because of that.

    2. Education: This is the only means by which the poor people in the country can be uplifted. A sound education policy (for kids) is not just a requirement but a necessity.

  4. Chris Devonshire-Ellis says:

    @Deek
    1&2) Yes, that’s true, however China retains ownership in about 90% of all its largest corporations, while India maintains ownership in about 10% of theirs;
    3) FIFA isn’t a country, and in terms of corruption, according to the Transparency Index, China ranks 79th and India in 84th place, so both about as bad as each other. Although my view is that Indian corruption is enedmic, it’s usually small amounts, whereas in China it’s rather larger amounts of money involved.

    Otherwise, concerning infrastructure, the India Gvt. do get it, and are raising money to assist with achieving their target of USD700billion to be spent on it over the next five years, and yes, I agree on the education issue, however the Indian budget for that has been increased to Rs. 49,904 crore (which if you’re Indian you’ll know how much that is). Thanks – Chris

  5. Paritosh says:

    Hi Chris

    Would like to add on ‘Deeks’ comment,

    ‘IF’ India’s Education and Judiciary got updated and worked at least at 50% efficiency then half of India’s trouble’s would disappear.

    A good and efficient Judiciary is a pre-requisite of a successful country. Indian Judiciary (also the constitution) is very good on paper however it’s super creaky speed and efficiency limits its effect on the society.

    A good and efficient education system will prevent the masses of people in getting swayed by caste/religion or other petty politics, also create awareness on controlling the population.

    Current politicians are exploiting the country by using and abusing both the system for their own end. By keeping people illiterate, raising stupid & irrelevant agendas they fuel fire to their petty vote bank politics. Exploiting the outdated/slow judiciary to fill their pockets OR prevent other people from emptying their pockets.

    Unless the country gets a major overhaul in both sectors, it’s economic progress will keep limping.

  6. Paritosh says:

    In the comment above, by educating people I did not mean making India’s masses just Literate but educating to provide a maturity to think rationally.

    Education and Literacy might stem from the same root, but you can be literate and still be uneducated.

  7. Chris Devonshire-Ellis says:

    @Pantoosh: “Current politicians are exploiting the country by using and abusing both the system for their own end. By keeping people illiterate, raising stupid & irrelevant agendas they fuel fire to their petty vote bank politics. Exploiting the outdated/slow judiciary to fill their pockets OR prevent other people from emptying their pockets.”

    You got that right. The problem India has with its democracy is the undemocratic abusing it for selfish greed. It does hobble the nations growth, and education is key to dealing with this. Yet India is throwing up more people such as yourself, and its the new young, and not-so-easily fooled India (in an era of mass communication) that can make that change. Thanks – Chris

  8. Paritosh says:

    Yes things are more open thanks to the hawkish media which rips apart every topic (maybe overdoes it sometimes) and also people are becoming more aware of political drama that happens. But much more needs to be done, there are some signs coming from Mr.Sibal (HR Minister) on the education reforms and proposals on creating four branches of Supreme Courts in four metros to speed up cases.

  9. sandind says:

    Chris – This again shows Indian Govts minimalist approach…why not offload 25%-35% stake in one go instead of offloading 10%..Pranab the FM would have raised 12 Billion in that case and solved the inflation problem without RBI having to do anything…But I do see that GOI can offload equity in 2-3 key companies each year for next 5 years and raise 10-20 billion dollars and fund the road ministry’s public funds requirements?

  10. Chris Devonshire-Ellis says:

    @Sandind – I think the Gvt. got it right, its easy to be critical. It was oversubscribed, and actually a very good deal. They were also testing the waters. Yes, they will offload more equity over the coming years and that, matched with private equity is where the infrastructure cost burden will come from. India in the next decade is the place to be for infrastructure development, and the renewal of cities such as Mumbai and so on – when they can also get the land use issue sorted out – will redefine and remake modern India. Thanks – Chris

  11. sandind says:

    Chris – Yes, Indian infrastructure is the big story but stakeholder alignment(land, capital,poitical) is such a drain on these projects that for each project it takes PMOs intervention to remove roadblocks.

    Well, there are signs that these issues are getting addressed.What will help is for the Govt to show urgency on these matters.

    A larger issue is one of improving public sector units efficiencies and increasing Public investment in place of Public expense.Lastly, the food bill is also a minimalist approach.Its the difference between winning a gold and celebrating and finishing 8th but being the Olympic finals and celebrating ie priority, urgency, vision and intensity.

Comments are closed.



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