Preparing for the dinner party of generous uncle

One of my distinct childhood memories is of an uncle who used to travel abroad for work almost every year. After every foreign trip, he would invariably host a family dinner. At these gatherings, he would passionately explain the difference between heaven (Europe and the USA) and hell (India). He would make every adult regret being born in India and inspire every child to dream of settling abroad.

My brother and I were least interested in what the uncle had to say. Our attention was firmly fixed on the final act—the opening of the goodies bag after dinner. He would generously distribute “gifts” brought from “foreign.” These invariably included bathroom slippers, shaving and dental kits, cosmetics, and writing instruments picked up from hotel rooms and flights; bottles of perfume; some clothes; small toys; and souvenirs—mostly bought from dollar stores (a fact I discovered only in hindsight after travelling myself).

Three essential items were bottles of liquor from the duty-free shop, a wristwatch, and some electronic gadget (a camera, oven, juicer, or VCR). These, however, were offered for sale. In hindsight, I realize that he probably recovered the cost of his entire trip by selling these items.

The Union Budget feels uncomfortably similar.

Each year brings an elaborate build-up, breathless commentary, and a speech promising balance, growth, and inclusion. By evening, optimism peaks. By the next morning, reality intrudes—through fine print, revised calculations, and newly discovered burdens. The middle class feels poorer, markets recalibrate, and expectations quietly reset.

For nearly 30 years, this cycle has remained remarkably consistent. Budgets do not fail because governments lack intent; they fail because they are asked to be miracles. Growth engine, redistribution tool, political manifesto, and fiscal discipline document—all rolled into one.

The Union Budget 2026 arrives with an especially inconvenient truth: the government has more commitments than cash. Capital expenditure must rise, social obligations cannot shrink, and global conditions are unforgiving. Additional resources must be raised—and no amount of pre-budget consultation can change that arithmetic.

For those expecting the finance minister to pull a bazooka out of her tablet, I have said this before and reiterate it here: the Union Budget in India broadly serves five objectives…

The Union Budget in India usually has five objectives:

(i)    Presenting the annual accounts of the previous year's Union Government for consideration and approval of the Parliament.

(ii)   Presenting the policy roadmap for the future. This usually is a political statement.

(iii)  Presenting the budget of the Union government for the following year. This includes the budget for various revenue and capital expenditure of the union government, allocation of resources to states and union territories, and sources of revenue to meet the budgeted expenditure and allocations.

The key monitorable in this exercise usually is the difference between the revenue and expenditure. The excess of budgeted expenditure over budgeted revenue is termed as fiscal deficit.

This deficit is met by the union government through borrowings from various sources. Changes in provisions of various tax laws are also monitored closely as it impacts the tax liability and compliance requirement for the taxpayers.

(iv)  Presenting an action taken report for the previous budget proposals.

(v)   Presenting a medium-term fiscal road map in terms of the Fiscal Responsibility and Budget Management Act 2003 (FRBM Act).

The interest of most capital market participants is usually limited to the third objective listed above. The rich eagerly wait for the budget to get fiscal incentives to make investments and find loopholes for evading taxes. The middle classes wait for some tax concessions. The poor anticipate more subsidies and welfare schemes.

This year, in particular, the budget anticipations are mostly focused on the following two points:

1)    How the finance minister will manage resources to meet the requirements for higher capital expenditure to stimulate the investment demand and pay commission payout. Raising tax rates or imposing additional levies may not be preferred options. Therefore, abandoning fiscal consolidation by retaining current fiscal deficit (4.4% of GDP) target; raising non tax revenue (aggressive disinvestment); higher tax revenue through stricter compliance; and additional duties on precious metals may be some of the preferred sources of additional revenue.

However, market conditions and higher yields could make disinvestment and aggressive borrowing challenging.

2)    Does the finance minister announce any measures to support the capital markets, especially to stem the incessant outflows of capital that is adversely affecting the INR, Bonds, and the sentiments of domestic investors.

As far as I am concerned, I will listen to the finance minister mainly for objectives (ii) and (iv). More importantly, I would like reassurance that the government is fully conscious of global challenges, has a credible strategy to deal with them, and is firmly in control of the balance of payments situation.

I carry no expectations of tax concessions. I am convinced that my effective tax rate has already bottomed out. Any concession—if granted—would likely be ad hoc and possibly misleading, much like the shiny gifts at my uncle’s dinner: attractive at first glance, but rarely of lasting value.

Understanding the IPO debate beyond headlines

The recent discussion triggered by a viral video featuring Sanjeev Prasad, Co-Head – Institutional Equities at Kotak Institutional Equities, has reignited scrutiny of India’s IPO markets. Prasad highlighted that over the past five years, roughly 40% of IPO proceeds have gone to promoters and early investors, while only around 15% has been deployed toward capital expenditure—suggesting limited contribution to real economic asset creation. His statement resonated widely, reflecting growing investor unease over whether public equity markets are increasingly serving as exit avenues rather than engines of new growth.

While the concern is valid and deserves examination, the broader picture is more nuanced than a headline statistic reveals.

The Concern: Is the IPO market becoming exit driven?

The disproportionate share of Offer for Sale (OFS) raises legitimate questions:

·         Are IPOs being priced and marketed primarily to facilitate stakeholder exits?

·         Are retail and long-term investors bearing valuation risks while insiders cash out?

·         Does the low share of capex funding indicate weak real investment demand or excessive optimism?

Examples of post-listing corrections in some high-profile IPOs reinforce the perception that public markets may at times be absorbing expensive liquidity events, not necessarily funding productive expansion.

These are structural questions worth debate—not merely sensationalism.

Understanding Primary Market Activity

Why IPO Activity Matters

The number and size of IPOs indicate important structural shifts and themes, including:

·         Formalization of the economy

·         Promoters opting for greater transparency, accountability, and governance discipline in exchange for growth capital

·         Expansion of the ecosystem of capital markets—bankers, brokers, exchanges, depositories, and intermediaries

IPO vs OFS – A historical perspective

The dominance of Offer for Sale (OFS) is not new. Over the past two decades, OFS has consistently exceeded IPO-based fresh issuance—comprising 75–85% of capital raised between 2017–2020.

Several economic and regulatory drivers explain this trend:

·         Government disinvestment in PSEs for fiscal correction and accountability (e.g., LIC’s ₹20,557 crore OFS—second-largest in recent years)

·         Mandatory minimum public shareholding requirements

·         Corporate deleveraging during the NPA cycle and post-Covid environment

·         Private equity and venture capital exits in high-growth sectors—ecommerce, healthcare, fintech, hospitality (e.g., PayTM, Zomato, Lenskart, Swiggy, Star Health, Nykaa)

·         Foreign multinationals monetizing mature India operations, enabling capital repatriation (Hyundai, LG, etc.)

·         Global consolidation moves post-GFC leading to India portfolio exits via OFS or M&A

​

Purpose of fund raising – More nuanced than headline numbers

The observation that only 15% of capital raised went into capex is incomplete without considering industry composition and balance sheet conditions.

Key realities:

·         Persistent high real interest rates and banks’ post-NPA caution made equity cheaper than debt

·         20 of the 25 largest IPOs in the last five years came from asset-light services and technology businesses, where investment is largely in:

Ø  Customer acquisition

Ø  Intellectual property and software

Ø  Talent and brand development

Ø  Scaling up the operations

Hence, expecting deployment into plant and machinery is outdated thinking.

A shift in ownership mindset

Indian entrepreneurship has evolved. Unlike earlier business families who believed in perpetual ownership, today’s founders are open to value-based exits. Many businesses operate in:

·         Low-entry-barrier markets without regulatory protection

·         Rapidly evolving technology spaces with high disruption risk

In such sectors, early dilution or exit is rational risk management, not opportunism.

​

​Conclusion

It would be wrong to say that OFS-linked liquidity is inherently harmful. To the contrary, it signals maturation of risk capital markets and improves:

·         Ownership broad-basing

·         Market transparency

·         Capital recycling for new innovation cycles

The shift in entrepreneurial mindset—from legacy ownership to agile value monetization—is consistent with global Silicon Valley-style models, not a structural flaw.

The concern about market froth and investor protection is legitimate. An IPO boom that disproportionately benefits exiting shareholders risks eroding confidence.

The context that capital formation today looks different from earlier manufacturing-centric cycles is equally valid.

The critical question for investors is not whether OFS is good or bad, but Does each IPO create enduring shareholder value, regardless of where the proceeds flow?

Sustained market health will depend on (i) Transparent pricing and governance; (ii) Improved disclosure on use of proceeds and return outcomes; (iii) Balanced participation of institutional and retail investors and (iv) Regulatory safeguards against excesses.

The real takeaway

The IPO market is neither a reckless exit carnival nor a flawless growth engine. It is evolving. The responsibility lies with investors to look beyond noise, viral clips, and simplistic narratives—and assess businesses on fundamentals, sustainability, and alignment of interest between promoters and new shareholders.

Informed analysis, not amplified soundbites, should drive investment decisions.

Anticipating a bouncer

The central government presently derives 63% of its resources from taxes (Direct Taxes 36% and Indirect Taxes 27%). 27% comes from borrowing and 10% from other sources.

The present socio-political milieu is such that (i) the central government is becoming increasingly dependent on the regional parties, hence it is imperative that it would need to allocate more resources to the states ruled by the supporting regional parties; (ii) a larger proportion of the population is becoming increasingly dependent on the government for the basic necessities like food, shelter, education and healthcare, requiring the basic social sector spending to rise without any major improvement in the quality of life; (iii) supply side pressures are not abetting, keeping the inflation (including imported inflation) elevated, pressurizing USDINR and yields; and (iv) economic growth continues to be disproportionately dependent on government spending (both revenue and capex).

Under these circumstances, the government shall continuously be under pressure to augment its revenue. The challenges it faces are — (i) personal tax rates are already stretched; (ii) actual number of income tax payers is consistently declining despite decent rise in the IT return filers; (iii) corporate tax hikes at this stage will send wrong signals to the global investors; (iv) GST rates are widely anticipated to be moderated; (v) disinvestment process has totally derailed and not expected to come on track anytime soon due to the political rhetoric; (vi) dividend from CPSEs is close to peaking; and (vii) FRBM targets require deficit cuts putting a cap on additional resource mobilization through borrowings.

The investors need to contemplate from where the government will attempt to raise the additional resources in the coming years to sustain public spending. The answers may have material implications for the investment strategy and market direction post Budget in February 2025.

Hope, this time it is different!

In a significant move for the banking industry, the central government has proposed to lift the embargo on grant of government business to private banks. Whereas, de facto the government has always favored public sector banks for grant of government business, the de jure embargo was imposed in 2012 post global financial crisis to protect the small savers and public entities from a potential collapse. Initially the embargo was imposed for a period of 3years; but it was extended further in 2015; through some private sector banks with public sector legacy (ICICI, Axis etc) were continued to be permitted to conduct some part of the government agency business. As per the latest announcement, the embargo is proposed to be lifted completely.

This announcement has come at a time when the government would be starting the process privatize couple of public sector banks (PSBs), and diluting its shareholding in other PSBs. In past couple of decades, many public sector undertakings have faced serious consequences due to dilution of government patronage to their business and/or introduction of private sector competition in their field of operations, e.g., Air India, BHEL, BEML, STC, MMTC etc. Obviously, lifting of this embargo will seriously impact the profitability of many smaller PSBs. Even larger PSBs will be impacted to some extent. The already subdued valuations of PSBs will naturally get further discounted. Banks like Jammu and Kashmir Bank, which substantially rely on government business, could face serious issues of sustainability.

The moot point therefore is whether liberalization in grant of government and public sector business must inevitably result in destruction of public sector wealth, or the liberalization could be better managed.

On a different note, RBI appears to be quite concerned about the financial markets and economic growth. RBI governor has been categorical in cautioning about crypto currencies. He has also raised the issue of divergence between performances of economic performance and stock market repeatedly. He has also raised concern over second round effect of fuel prices on economic growth.

Whereas, the financial markets and bond markets are fast pricing in an economy “overheating” scenario with sustainable rise in inflation, RBI has reiterated its commitment to continue with “accommodative” policy stance. In recent past, multiple bond auctions by RBI have devolved due to lack of demand at RBI cut off yields.

Obviously there is a divergence in RBI and market’s outlook about the price and yield scenarios. This implies either of the following two scenarios:

(i)    RBI is running behind the curve. If this is the case, the market shall be ready for a rate shock, whenever RBI does the catch up Act. Last time I remember this happened was during Subba Rao tenure, when multiple hikes were implemented in short span of time.

(ii)   RBI assessment of economic and earnings growth is closer to reality. In this case, also markets may be surprised negatively as it is pricing in a sharp recovery in earnings over FY22-23.

Historically, the disagreements\ between market consensus and RBI have not ended well for markets. I hope, this time it is different.

Missing pieces in the Jigsaw Puzzle

Last week the media (both social and mainstream) was buzzing with the "source based news" that the government may be considering yielding a controlling stake in public sector oil company Bharat Petroleum Corporation Limited (BPCL) to some large foreign petroleum company. There was however no hint of confirmation from the "official sources".

On Friday, The stock price of BPCL jumped sharply on the basis of this news. However, most of the gains were given up within 5 minutes of the market opening on Monday. The fall was apparently outcome of the rise in global crude prices due to attack on a large oil facility in Saudi Arab.

The enquiry with some large brokerages and traders indicated that the traders, who bought on Friday, were mostly in panic throughout the weekend and capitulated into selling their positions as soon as the opening bell sounded on Monday morning. This stock price movement, though it confirmed the "herd mentality" theory of stock market price discovery, is still befuddling. When I tried to put all the pieces together in the Jigsaw Puzzle, I could not find place for the following pieces:

(a)   In 2003, the then Atal Bihari Vajpayee led NDA had attempted to privatize HPCL and BPCL and split Indian Oil Corporation (IOCL) into two separate companies to separate the marketing and refining & petrochemical businesses. The attempt was thwarted by the Supreme Court which ordered that privatization of HPCL and BPCL requires approval of the Parliament.

It is true that the present regime enjoys a brute majority in the Lok Sabha and as such getting approval of the Parliament for selling controlling stake in BPCL may not be a tough task, unlike 2003 when NDA enjoyed thin majority and many within the government (including the Petroleum Minister Ram Naik) were averse to such a move.

Nonetheless, any such move would still require a parliamentary approval. In my view, this proposal cannot be pushed as a money bill, not requiring Rajya Sabha approval.

(b)   Any reasonably prudent buyer for BPCL would insist that the policy regarding subsidy on transportation fuel must be cast in stone before any bid is made for the oil marketing and refining company. If I have to take a majority stake in BPCL today, I would insist on a law that either totally and irrevocably prohibits subsidy on transport fuel by the government through public sector retailers, or makes sure that all such subsidies in future are through DBT method only and "at pump prices" are not impacted due to the subsidy on transportation fuel.

(c)    The collective wisdom of the market as of today at least does not believe in the government's ability and/or intention to stay firm on its decision to deregulate the prices of transportation fuel. The common belief seems to be that if the crude prices jump sharply higher, the government may still force public sector oil & gas companies to bear some part of higher fuel cost.

Otherwise, how would one explain that a company which deals with an essential commodity having low price elasticity, and earns its margins ad valorem to its raw material, could be a loser on a sudden and temporary rise in raw material price.

Moreover, since the company usually owns significant inventory of the raw material (crude oil), and is also allowed to take forward position in the raw material also, the quarter end results, just two weeks away, shall reflect decent inventory gains and MTM gains on forward positions.

(d)   The government may also have to confirm whether it still plans to move completely to EVs by 2030 as announced earlier.

 

Use PSE for public good

Some food for thought

"I may neither choose who I would, nor refuse who I dislike; so is the will of a living daughter curbed by the will of a dead father."

—William Shakespeare (English writer 1564-1616)

Word for the day

Ideogram (n)

A written symbol that represents an idea or object directly rather than a particular word or speech sound, as a Chinese character.

 

First thought this morning

I chanced upon a twitter handle @theworldindex. It has some very interesting data about various countries in the world. Though there is no way to authenticate the data, but intuitively I can say it does not sound too off the mark in many cases. The following is some data I found interesting to note and actionable for the government.

Chart of the day

Use PSE for public good

There are hundreds of not for profit organizations that have been set by government in post independence period. These organizations are funded and managed by the state. Most of these organizations have done commendable work in the area of poverty alleviation, equality, inclusion, social justice, research & development, health, education, science & technology, business development, regional development etc.

Similarly, there are hundreds of commercial public sector undertakings owned and managed by the central or state governments. The primary objective of establishing these commercial undertakings in public sectors was to kick start the industrialization in the independent Indian state, since the British left behind an abysmal industrial infrastructure, poor private enterprise and dearth of capital. Government started with investing majorly in infrastructure and core industries like steel, power, oil & gas, cement, heavy engineering, railways, road transport, shipping, civil aviation, telecom, insurance, banking etc. Substantial investment was also made in strategically important defence equipment manufacturing and allied services. Later coal and many private banks were also nationalized. In due course the government made material investment in food supply chain (fertlizers, sugar, food distribution), consumer products, retail & wholesale trade, to achieve price stability, better availability, equitable distribution etc.

As the objectives were gradually met, in early 1990s an in-principle decision was taken to divest the stake in non-strategic undertakings in public sector. The process was begun with disinvestment in some loss making non-strategic undertakings. VSNL, CMC, Maruti, BALCO, IPCL, Hindustan Zinc, etc were sold to private sector. Stake in many profitable undertakings were diluted through public offerings and strategic sales, e.g., banks, insurance companies, MTNL, energy companies, etc.

Besides, the monopolies of the government in sectors like roads, power, telecom, oil & gas, civil aviation, ports, defence manufacturing etc. have been diluted to allow larger private participation (both domestic and international). The private sector has built adequate capacities in sectors like civil aviation, telecom, roads, power etc. to leave the role of government redundant. Most government enterprise in sectors, where free private competition is allowed, struggle to stay profitable because of their inefficient organizational structure and tedious decision making processes. There is no point letting these enterprises continue in operation, especially when the very objective of their existence has already been achieved. MTNL, BSNL, Air India, NALCO, STC, MMTC, SAIL, NBCC, NCL, RINL, Pawan Hans, SJVN, TCIL, Hindustan Paper, Hindustan Copper, Bharat Pumps, BHEL etc. are some of the examples.

In my view, it is high time that the government must constitute a High Power Council (on the lines of GST Council) comprising of representatives from all stakeholders (Political parties, state governments, employees unions etc.) to study and recommend a total overhaul of public sector enterprises in central, state and joint sectors. The Council may recommend sale, dilution, closure, asset sale, and/or change in objectives of these enterprises.

I would like to offer following suggestions in this regard:

(1)   The farm sector in India needs massive investment in technology, R&D, land reforms, training and reorganization. In that sense the situation of farm sector is very much similar to what the situation of industrialization was at the time of independence. Private capital is available but not willing to flow in farm sector due to a variety of regulatory and practical constraints. The government should kick the process of investment in farm sector. The government should acquire all farm holdings below the viable size and consolidate these into large sized farms. The respective land owners and/or and landless farmers tilling the acquired land should be employed at minimum wages plus a share in profit. The money for this venture may be raised by selling most of the industrial undertakings in the public sector, as their purpose of being in public sector has already been served.

For the larger farm holdings, the government should encourage the farmers to partner with the food processing industry on cooperative model. The factories must be taken to farms.

(2)   Companies like MTNL, BSNL, Air India, STC, MMTC etc should be converted into social organizations.

(i)    MTNL and BSNL may be merged. The work force may be rationalized or adopted in other government departments where vacancies are lying for years.

The merged entity may be mandated to provide cheap 5G data to MSME, Educational institute, tech startups in metros; and connect all villages to national digital highway. All educational institutions (primary schools to IITs/IIMs) may be connected digitally and Right to Uniform Education may be implemented through this digital platform.

(ii)   Air India may exclusively be used as feeder to the private airlines. It may bring people from smaller and far away destinations to the major hubs for onward journeys. It may be used as air ambulance service for ferrying critical patients to the major cities. It may also be used as a cheaper cargo service dedicated for Indian ecommerce ventures. A small cess of Rs50 per domestic air passenger can contribute Rs85-100billion for Air India's social programs.

(iii)  STC and MMTC have tremendous experience of operating in foreign countries. Their expertise could be used for a variety of purposes. For example, they can be sourcing and C&F agents for Indian trading startups. They can also work as foreign placement agencies for Indian workers. They can operate foreign tours for Indian travelling overseas, to save them from being cheated by unscrupulous travel agents.

(3)   The government must consider limiting the number of public sector banks to just 5, one for each region. All other banks may sold and proceeds may be used to build two large development financial institutions, one for funding large infrastructure projects and the other for funding technology innovations.