For more private investment & jobs: Shift investment from capital markets to industry

New framework to boost private investment and job creation

I had written an article titled, “Why Indian Industry May Not Be Investing”[1], in PGurus on February 22, 2025. In that article, I had explained how capital market exuberance is starving the industry of long-term, productive investment.

Building on that thought, this article proposes a new framework to increase private investment in industry and employment generation by an order of magnitude.

The core idea is for the government to control the Business-to-Capital Market (BCM) Ratio through policy actions.

This ratio is designed to facilitate the flow of capital from (significantly speculative) financial markets into direct investments in business and industry, with the aim of stabilizing market valuations while fueling real economic growth.

Defining the BCM ratio

BCM Ratio = Direct Investment directly in Industry (Equity + Debt)/ Total Capital Market Investment (in Stocks, Mutual Funds, Bonds, etc.)

Clarifications

Direct Investment in Industry: Includes equity and debt raised by companies for industrial purposes, covering not only new capital infusions but also reinvested profits, private equity, venture capital, and FDI.

Total capital market investment: Captures real-time investor sentiment through market values of investments in equity shares, debt instruments, mutual funds, and derivatives like futures & options. This ratio will vary between bull and bear phases, and that’s fine.

Data constraints: Ideally, comprehensive data would include all equity, including untraded and unlisted shares. However, due to current limitations, we must rely on available proxies like alternative investment funds and private equity reports.

Establishing benchmarks: Learning from market cycles

A balanced investment ecosystem in India may have a BCM Ratio of around 0.5 (initial guesstimate), to be refined based on historical trends and international best practices.

Why 0.5?

Bull Markets: During speculative surges, the BCM Ratio could drop to 0.3 or lower, signaling excessive focus on short-term financial gains rather than productive industrial investment.

Bear Markets: When market sentiment weakens, the BCM Ratio may rise above 0.7, reflecting risk aversion but also decreased confidence in capital markets.

Stabilizing Effects: Maintaining a ratio near 0.5 would ensure that for every Rs.2 invested in capital markets, Rs.1 goes into business and industry. This should help stabilize stock valuations, moderate P/E ratios (ideally around 18–22), and smoothen market volatility.

Does this mean the government will over-regulate investment? Not at all. The government will only fine-tune its policies to facilitate the industry and capital market to operate in the ideal zones.

The key issue: Why can’t people invest directly into industry?

A fundamental challenge in maintaining the BCM Ratio is that individual investors cannot directly invest in industrial equity and debt unless companies offer them through IPOs, further POs, corporate bonds, or private placements.

Thus, the issue lies as much with industry as with investors. While the stock market attracts massive investment, many companies remain private, limiting direct access for investors, and yet adequate investment is not following into the industry.

The government must encourage more businesses to go public while providing alternatives like mutual fund-based industrial investment models for retail and institutional investors.

Encouraging more IPOs and public listings

1. Revisiting MSME listings: Was it just bad timing?

A few years back, the government introduced a framework for MSME listings, but it did not take off. Was it the wrong time? Perhaps. But should the government try again?

Yes, but with significant easing of listing norms, better investor education, and improved risk mitigation. Key steps:

• Reducing compliance costs and complexity for MSMEs going public.
• Allowing gradual public listing (partial IPOs with controlled liquidity windows).
• Stronger government-backed credit enhancements to reassure investors.

2. Specialized IPO markets for high-growth sectors

To make listing attractive for new businesses, the government can create sector-focused public markets for:

• Defence startups
• AI and new-tech/ deep-tech firms
• Green energy companies
• Agri-tech and industrial automation firms

These sectors require high-risk capital but also offer high long-term returns. Dedicated IPO markets would match investors with risk appetite to the right businesses while boosting industrial investment.

The mutual fund solution: Revolutionizing industrial investment

Why mutual funds could be the game-changer

Retail investors may not be equipped to invest directly in MSMEs, defense startups, or AI-driven companies. However, they do trust mutual funds (MFs) with brand value and their fund managers.

Thus, structuring MFs and HNIs to invest in industrial equity and debt could solve the problem.

Investor appetite already exists, but suitable opportunities are scarce

Investors are actively looking for high-risk, high-return sectors, but the market is not providing enough suitable opportunities.

Defense sector mutual funds are in high demand, even though some of their holdings are small-cap stocks and inherently risky.

Small-cap mutual funds in general are seeing strong inflows, showing that retail and institutional investors do have risk appetite.

What’s missing? More new-age industry investment options.

How it could work

1. Creation of Thematic MSME/ startup-focused MFs

• Fund houses can launch mutual funds focusing on high-growth industrial sectors.
• Investors would choose based on their risk appetite and MF brand trust.

2. Pooled investment approach

Since retail investors might hesitate to take on high-risk MSME stocks, MFs could pool funds from institutional investors, HNIs, and sovereign funds.

This reduces individual investor risk while ensuring businesses get steady long-term funding for high risk and MSME sectors.

3. Debt-based MF schemes for MSMEs

Mutual funds can also introduce structured debt instruments where they invest in high-yielding, high-risk, and MSME debt.

This could provide businesses with a viable alternative to risk-averse traditional bank loans.

4. Possible Government Incentives for High Risk and MSME-Focused MFs

• Tax breaks for investments in High Risk and MSME industry MFs.
• Government-backed risk-sharing models (co-investment or credit guarantees) in select sectors of interest to the government.
• Exit pathways via structured buybacks or secondary markets.

Global precedents

•  The US and UK have many VC funds embedded within mutual funds for startup investment.
• Israel successfully used government-backed tech funds to drive capital into innovation.
• India can adopt a similar approach, tailored to its own industrial needs, as it has a dire need.

Potential impact: Will this solve the government’s investment problem?

1. Massive equity & debt flow into industry

• MSMEs and startups would get consistent funding without relying on sporadic IPOs or VC rounds.
• A well-structured MF approach could unlock billions in investment capital.

2. Job creation on a large scale

• A 10–20% increase in direct industrial investment over the next decade could generate 1–2 million new jobs in AI and automation-driven sectors.
• If the same investment is applied to labor-intensive industries, like garment manufacturing, job creation could be 5X.

3. Market stability and FII confidence

• Lower stock market volatility due to less speculation-driven capital flows.
• Foreign Institutional Investors (FIIs) prefer stable, reasonable-P/E markets.

Note:
1. Text in Blue points to additional data on the topic.
2. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.

Reference:

[1] Why Indian industry may not be investing – Feb 22, 2025, PGurus.com

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