Search interesting materials

Friday, January 10, 2020

A gap has opened up between the performance of listed and unlisted companies

by Ajay Shah.

The performance of listed firms has been poor

We start at an index of the net sales (i.e. the top line) of listed companies. This is computed at the quarterly frequency, using the quarterly disclosures which are mandatory for listed companies. As has been our standard procedure when thinking about macroeconomics, we exclude the financial firms and the oil firms. Our methods for constructing indexes (Dua et. al., 2013) are based on obtaining growth estimates from overlapping consecutive-quarter panels.

Figure 1: Index of net sales of listed non-finance non-oil firms (Nominal, seasonally adjusted)

The big fact that is visible here is that the index went up by 4x from 1999 to 2008, and after that it went up by 2x from 2008 till 2019. This doubling in the recent 11 years corresponds to an average nominal growth rate of 6.5%, which is pretty poor.

Figure 2: Index of operating profit of listed non-finance non-oil firms (Nominal, seasonally adjusted)

A similar picture is visible with the index of operating profit, for the same firms. The index went up by about 4x from 1999 to 2006, and has scored a doubling from 2006 to 2019, if we ignore the big decline in the Jul-Aug-Sep 2019 quarter owing to the unusual events for some telecom companies. This recent doubling in 13 years corresponds to an average nominal growth rate of 5.4%, which is also pretty poor.

In this article we wonder: While the listed firms have fared poorly, how different was the performance of unlisted firms?

Do we expect a significant difference between listed and unlisted firms?

Large firms such as Hyundai Motor, IBM India, L G Electronics India, Nokia Solutions & Networks India, Reliance Corporate IT Park, Toyota Kirloskar Motor, etc. are unlisted companies that are observed in the data. At first, we do not expect to see a significant difference between the overall average performance of listed and unlisted companies.

We expect that macroeconomic fluctuations impact upon both listed and unlisted companies, and that the overall growth of both groups should be roughly equal. The growth of all listed companies represents the performance of a diversified portfolio, as does the growth of all unlisted companies.

The traditional concept in India has been that after a firm reaches a certain level of maturity, an IPO takes place. The better and larger firms become listed companies. Listed companies have better access to capital, as the cost of capital goes down. So we have expected that a greater extent of investment may take place in listed companies. By this reasoning, we expect a somewhat higher growth rate for listed companies.

The performance of listed versus unlisted companies

Unlisted companies only have annual frequency disclosures, so we switch from quarterly results to the annual report. The CMIE firm database sees about 50,000 companies for at least one year. We construct indexes of the net sales of all the non-finance non-oil firms, both listed and unlisted. Our methods for constructing indexes are based on obtaining growth estimates from overlapping consecutive-year panels.

Figure 3: The index of net sales (nominal), log scale

The figure above shows the long time-series of the index of net sales. Two curves are shown: Listed companies and unlisted companies. The y axis is in log scale.

The two lines look the same till 2012. Until 2012, the diversification story worked: listed companies were a diversified portfolio, the unlisted companies were a diversified portfolio, but when the portfolio sales growth was calculated, the firm-specific or industry-specific fluctuations tended to cancel out and the overall performance was essentially the same.

But from 2012 on, the two groups have diverged substantially. The listed companies (the red line) have generated weak growth: about 50 per cent (nominal) in about 6 years. The unlisted companies have generated much stronger growth: about a doubling (nominal) in 6 years.

A similar difference is seen with the operating profit also.

Figure 4: The index of operating profit (nominal), log scale

Here also, we see remarkably similar performance between the two groups all the way till 2012. After that, the listed companies have delivered mediocre growth in performance: a total growth of 26% in 6 years. The blue line, for unlisted companies, has delivered total growth of 136% in 6 years.

The investment behaviour of the two groups has also diverged

We measure investment at the firm level using the percentage change, year on year, of the Net Fixed Assets.

Figure 5: Year-on-year growth of net fixed assets (nominal)

We see a striking phenomenon here. Listed companies invested at a bigger rate than unlisted companies in the early years, the red line and the blue lines becoming roughly equal from 1997 to 2009. After that, the blue line has always been above the red line.

There is an investment slump in the listed companies, but this is less the case with unlisted companies.

Is this just an artifact induced by the measurement process?

The CMIE database is now pretty large, it has about 50,000 firms observed for atleast one year. A large number of unlisted companies are observed. This was not the case in earlier years. An alternative hypothesis can, then, be proposed: Perhaps unlisted firms were always more dynamic, but they had a tiny presence in the CMIE database, and what has changed in recent years is not the dynamism of unlisted firms but the coverage of the CMIE database.

In order to examine this, we look at the magnitudes of listed and unlisted firms in the CMIE database.

Figure 6: Share in the count of firms observed by CMIE

Figure 7: Share in the balance sheet size of firms observed by CMIE

The figures above show the share of listed firms in the overall CMIE database. While it is true that the coverage of unlisted firms has improved greatly, it is not as if unlisted firms were absent in earlier years. Well before the recent shift, of greater dynamism by unlisted firms, a good chunk of the firms in the CMIE database were unlisted firms. The estimates for earlier years, for unlisted firms, are based on a strong dataset. This suggests that the phenomenon that we have uncovered is not merely an artifact of changes in measurement by CMIE.

Why might this be happening?

We have discovered that after 2012, fixed investment, revenue growth and operating profit growth are weaker for listed companies when compared with unlisted companies. Why might this be the case? We may conjecture that there are three explanations at work.

The gains in liquidity of shares from listing have declined. There was a time when listing at NSE and BSE gave a quantum leap in the liquidity of the stock, while the shares of unlisted companies were quite illiquid. In the last decade, however, the working of the exchanges has faced many difficulties, and alongside this there are greater opportunities to obtain liquidity through OTC transactions in shares. Through this, the gap between the liquidity of listed vs. unlisted has gone down.

Private equity has become a major source of capital. Private equity investors have become much more important in financing firms, and large ticket investments are now possible while the firm stays entirely private.

The burden of listing has gone up. The compliance burden imposed upon a firm by exchanges and by SEBI has become greater. The penalties meted out for non-compliance have become greater. The unpredictability in the behaviour of enforcement has become greater. For many a firm, staying unlisted is a way of avoiding the hazards of engaging with more state actors.


  1. When we see the remarkably weak operating performance of listed companies, we should be cautious before concluding that the overall performance of the Indian economy is weak. Listed companies are faring unusually poorly, and their performance constitutes an under-estimate of overall performance.
    In this sense, these findings undermine the claim of Dua et. al. 2013, which argued that you could construct a good output proxy for India by utilising the quarterly results of listed firms.
    As a consequence of these findings, in our business cycle measurement work (Pandey, Patnaik, Shah 2019), the only application of the net sales growth of listed companies is in identifying the macroeconomic measures which are leading vs. coincident. The performance of listed companies is not, in itself, utilised in constructing business cycle measures, as it has a downward bias in the post-2012 period.
  2. In response to the frictions imposed by the Indian state upon private persons, there is a desire to exit from business plans that induce interfacing with the Indian state. As an example, from 2007 onwards, a good deal of trading in Nifty and the Rupee -- the two largest financial products -- has left India, in response to weaknesses of financial regulation, capital controls and taxation in India.
    The phenomenon identified in this article may constitute an element of this exit: private persons are responding to the regulatory environment of SEBI and the exchanges by avoiding listing. This reflects the impact of the policy environment upon the gains from listing (what liquidity do we obtain on the exchange?) and the costs of listing (what additional burden of regulation and enforcement do we face as a consequence of being listed?).
  3. For investors, there is merit in looking beyond listed equities in order to obtain the tail wind of high growth of operating profit.


Dua et. al. 2013, A better output proxy for the Indian economy, The Leap Blog, 21 July 2013.

Radhika Pandey, Ila Patnaik and Ajay Shah, 2019, Measuring business cycle conditions in India, NIPFP Working Paper No. 269, May 2019.


I thank Pramod Sinha, who implemented the ideas of this article as R programs.

The author is a researcher at the National Institute for Public Finance and Policy, New Delhi.

1 comment:

  1. nice article - I draw a bit of closeness as I have too worked on the CMIE database (for different purpose of comparing listed and unlisted companies on Debtor Days and hence feasibility of launching Factoring product in Indian market).

    my point being if as per #2 (left India, in response to weaknesses of financial regulation, capital controls and taxation in India) from 2007; then accusation on the FinMin of Modi Govt. coming into force since 2014 seems hastily done and bit unjustified/unsupported by data - which you have rightly brought out! Arun Jaitley criminalized tax evasion but other factors were at work from even before!


Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticism is perfectly okay; uncivilised language is not. We delete any comment which is spam, has personal attacks against anyone, or uses foul language. We delete any comment which does not contribute to the intellectual discussion about the blog article in question.

LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.