Thursday, June 16, 2005


Public limited companies are always under tremendous pressure: they need to keep on growing at a 'healthy' rate every year, or face the wrath of shareholders and stock market analysts. It's not enough to simply maintain the previous year's numbers. Come to think of it, this applies not just to companies, but to the economy as a whole, be it that of a country or that of an entity like the EU.

Why should this be so? The only reason I can think of, and this explains only things at the level of a country, is that every year, a new batch of people enter the work force, fresh out of college. These people will not find jobs unless new jobs are created (unless, of course, they replace an equal number of people leaving the workforce on account of retirement -- which doesn't happen). Ergo, to keep them away from discontentment and to prevent them from becoming a law and order problem, new jobs have to be found for them.

That brings us back to companies. The stated reason is that we need a vibrant stock market in order to attract investors' capital into worthwhile ventures. This is possible only when the returns are attractive, in the form of an assured growth in the stock price. The stock price will continue to move north only if the company's prospects are good.

I take exception to this because we are encouraging speculative behaviour (albeit for a noble cause); an investor interested in a steady income will look for steady profits (achievable even with zero growth), whereas a more aggressive investor doesn't even bother about dividends; he is only interested in capital appreciation.

I initially thought that the speculative element is needed to attract money into IPOs, but even in that case, can't an IPO be fully subscribed with the investments from the first type of investor, i.e. the one looking for steady income? Speculators are always welcome to try their luck with VC firms, aren't they?