The latest buzz of the financial market is Nasdaq, the shortened form of the National Association of Securities Dealers Automated Quotation. The Nasdaq automated stock exchange, which begun its operation in the US in 1971, is now the mecca of the world's most coveted hi-tech stocks like Microsoft, Intel, Amazon and Yahoo!. The market value of the 5,100 companies listed on the Nasdaq was over $5,200 billion in December 1999. Last year, its traded volume in dollars overtook that of the New York Stock Exchange. Only two Indian companies -- Infosys Technologies Limited and Satyam Infoway (a subsidiary of Satyam Computers) -- are listed on the Nasdaq so far.
But some 15 new aspirants are in the queue for listing, including telecommunications firms like Global Telesystem and Bharti Enterprises, software majors like Wipro, NIIT, Aptech, Pentamedia Graphics and Silverline Industries, media and entertainment companies like Zee Telefilms, Rediff, Indiatimes.com and TV 18 and pharmaceutical biggies like Dr Reddy's Laboratories, Nicholas Piramal and Orchid Chemicals. Many of the heads of these companies lined up recently to greet Nasdaq President Alfred R. Berkeley III on a grand tour of Indian cities. The chief minister of Andhra Pradesh, N. Chandrababu Naidu, spent a long time talking to Berkeley in Hyderabad while Maharashtra Chief Minister Vilasrao Deshmukh hosted a dinner in his honour. The Nasdaq chief said, "I was deeply moved by the enthusiasm in India for listing in our liquid, efficient and fair securities market." Venture capital fund manager Deepak Vaidya, who facilitated Berkeley's tour of India, remarked that India "deserved a larger representation" on the Nasdaq. A small country like Israel has 98 companies on the exchange. "The market capitalisation of Israel's 98 companies is $100 billion (Rs 440,000 crore) whereas the two Indian software alone command a $50-billion market cap."
Aspiring to a listing on the Nasdaq has several reasons, foremost being its capacity to attract equity capital from abroad. Infosys offered only 3 per cent of its shares in the form of American Depository Shares (ADS) in March last year. Since then, however, the share, codenamed Infy on the Nasdaq, sold on the US stock exchange at premia up to 45 per cent of the Indian price. Satyam Infoway, codenamed Sify, has also commanded a hefty premium. Riding the crest of the high growth rate of Nasdaq prices -- the market capitalisation of the stock exchange doubled between 1998 and 1999 -- the two Indian companies have found a gilt-edged opportunity to acquire large capital through the Nasdaq route in exchange for a small equity stake.
For software firms, and start-ups in particular, capital acquisition in India is a harrowing task. The rules of the stock market watchdog, the Securities and Exchange Board of India (SEBI), demand that companies seeking listing in India must be appraised by either a public financial institution or a bank.
However, banks and financial institutions go by their standard procedure of weighing security like plant and machinery or real estate, which the software start-ups lack. For them, listing on the Nasdaq is a golden option. It is also an alluring alternative for media and entertainment companies that are strapped of cash for producing television software or Internet website content, but are wary of having to part with too many shares to raise capital from the Indian market. And many pharmaceutical companies are pressing ahead for a Nasdaq listing to access the huge capital they will need for the development of new drug molecules and DNA recombinants and the task of marketing them around the world.
However, listing on the Nasdaq is easier said than done. Mumbai-based InGlobal Financial Trust Chairman R. Sankaran says that he's worried by the current "hype" around the Nasdaq because many of the Indian aspirants may not be able to match up to the US bourse's steep entry barrier, its uncompromising disclosure norms and its high standards of monitoring the stock market. To be listed on the Nasdaq stock exchange, a company must register its securities under Section 12(g) of the US Securities Exchange Act of 1934.
This means that the company must publicly disclose information about its business, results of operations, financial condition, principal shareholders and management. The National Association of Securities Dealers (NASD), which controls trading on the Nasdaq, began a public disclosure programme as far back as 1987 that allows the investor to request every disclosable information about member firms by calling a toll-free number or by routing queries through the NASD website at www.nasdr.com. If the member firm's history carries a stain, it must show up, however faint and ancient the mark may be. If there is an arbitration or civil proceeding involving a securities or commodities transaction, it must be disclosed. The investor has the right to yank the information out. Even the employees of the firm who were terminated following allegations (not necessarily proven charges) of violation of investment-related statutes come under the gaze of the regulator and the investors. Besides, for initial inclusion in Nasdaq, the company must record a net income of $750,000 (Rs 3.22 crore) in the latest financial year.
There are not many Indian Nasdaq wannabes which can pass the acid test. "Some of them have their cupboards brimming with skeletons," says Sankaran. He is hinting at the none-too-bright ethical record of some of the "new-economy" companies that have buried their troubled past and have started over. For example, the promoters of an Internet service provider (ISP) firm which is energetically seeking listing on the Nasdaq have civil and criminal charges chasing them from the past.
Indian companies are still crazy about the Nasdaq because of an interesting new phenomenon on the Indian stock markets. The domestic bourses have since last year been faithfully imitating every up and down in Nasdaq prices, particularly the ripples in the Nasdaq-100 index which is heavy on technology stocks (Microsoft and Intel hold 15 per cent weight of the index). Market analysts say that the evident correspondence between Nasdaq price movement and, say, the movement of the 30-scrip Sensex of the Bombay Stock Exchange (BSE), need not be explained away as plain mimicry. "India is an important software services market," says Alok Vajpeyi of DSP Merrill Lynch, a foreign institutional investor, "but the country is moving up the value chain and so the valuation of its software companies is being driven by that of the buyer country, the US." More than a half of the 100-odd software firms listed on the Indian bourses have export revenues far in excess of their domestic sales.
The Nasdaq quotes, executed when it is night in India, therefore become the driving force when the markets open in the morning. It is obvious that the "technology" stocks reflect the extraneous volatility more than the "economy" stocks. But the Indian market indices, including the Sensex, dance with Nasdaq regardless. Even the Sensex, the home of petroleum, cement and automobile shares, had 35 per cent of its weight given to software and telecom firms till last week. The weight of technology stocks is much more now with the inclusion of Zee Telefilms, Satyam Computers and Dr Reddy's Laboratory but Nasdaq-100 and the Sensex are still not comparable. The correspondence that is visible is more on the long term than the short, or even medium. For example, the downturn on the Nasdaq following the adverse ruling by a US court in the antitrust case against Microsoft was echoed in the Sensex. When the Nasdaq-100 bounced back a week later, so did the Sensex. However, the past week's downswing on the Nasdaq did not affect share prices on the BSE.
The Nasdaq team, however, is bullish on India because, as Vaidya says, "The investor here wants the market to be as liquid and transparent as in the US." Nasdaq disclosure norms may sound outlandishly rigid in the Indian context. But the domestic investor, who has burnt his fingers in an opaque market that often fails to blow the whistle on price-rigging and insider trading, is sure to put his faith only in companies that have passed the Nasdaq test.
It is no wonder therefore that the Nasdaq is planning to enlarge its presence in India by opening an office in the country soon. And, in anticipation, many of the aspirants have switched to the Nasdaq-mandatory, and rigorous, US GAAP method of accounting and are even resorting to textbook corporate governance practices. The fear that keeps lurking is that some of the hasty dotcom entrants, or hawkers of all sorts of software "solutions", may still be tempted to take investors for a ride by flaunting an "Applied For" licence plate on the road to Nasdaq.
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