Bustle on the stock exchanges alters financing of businesses

The idea of making capitalists out of farmers in India was once thought as impossible as sending a Rockefeller to the poorhouse. But last year, more than 120,000 farmers each plunked down an average of $14 in the country's largest stock sale in corporate history.

The farmers didn't open their first investment portfolio, however, by calling a broker. In fact, with few telephones anywhere in rural India, the stocks had to be sold with a dog-and-pony type of show traveling through some 9,000 villages over five months last year.

In open-air theaters at night, each village was shown a 20-minute film on why to invest in the formation of the Gujarat Narmada Valley Fertilizers Company Ltd., which was raising nearly $5 million.

Not only did the sale symbolize the surplus wealth of farmers in many parts of India, but it reflected a new capitalist drive in the nation, and nowhere is that better seen than on the Bombay Stock Exchange.

The exchange swelters with white-clad Indians milling about in mobs, arms raised in bids, and fingers signaling offers. Its roots lie in the days under British rule when cotton merchants would play satta, an illegal gambling sport of trying to guess the opening and closing prices on the New York cotton market.

In the past year, India has witnessed a boom in its capital markets that would surely gladden the hearts of Wall Street. From $86 million raised in 1979, the five stock exchanges of India shifted gears to help raise more than $550 million last year.

That much money flowing into company coffers radically alters the traditional methods of finance in India. Instead of relying on term loans from banks, most of them government controlled, industry must now answer to stockholders, who may not be as lenient as government when management falls down on the job of achieving maximum return.

Perhaps because India's trading tradition goes back to the ancient silk routes from Persia to China, the new ownership of shares has been quite widespread. Companies that once counted a few thousand stockholders now have hundreds of thousands. Average shareholdings are about $120 per person.

''Indians have become investment conscious,'' says Pradip Harkisondass, a Bombay broker with H. L. Financial Consultants & Management Services Ltd. This is ''partly as a hedge against inflation, partly for confidence in the economy, and partly because the stock markets haven't crashed yet.''

The original reasons for the capital revolution are still strong enough to prevent a crash. The government's Foreign Exchange Regulations Act, which has been used to force foreign companies to dilute their equity holdings to 40 percent as a general rule, opened a scramble for shares in blue-chip companies.

But the real carrot was raising the interest rates to 13.5 percent on convertible debentures, a device that allows the skittish investor to get a guaranteed return for several years and then equity in the company.

Almost half the capital raised last year was in convertible debentures, and now a secondary market is opening up.

The government provided incentives for investment, including tax concessions, as a way to ease the increasing burden on its financial institutions. And now it is opening the field for nonresident Indians to invest, partly in hopes of drawing the wealth of Indian workers in Arab oil nations.

But with 5,000 companies with public shares, the trading is in a narrow market and in low volumes, by Western standards. At present, electronics and chemical companies are the hot stocks, while textiles are stagnant. And the market has ''slumped'' about 15 percent in the last few months, partly because of concern over a budding recession and a bad monsoon.

One reason for the ''equity cult'' may be the size of India's black, or parallel, economy. To try to curb the growth of this nontaxed money, the government last year floated a bearer bond, which only reached about 60 percent of its $1.3 billion target. Buyers were guaranteed anonymity.

The narrow market makes it vulnerable to manipulation by insiders or conspiracies of bears or bulls. In one instance in May, the Bombay exchange closed down when a group of investors ganged up to suppress the stock price of India's fastest-growing company, Reliance Textiles. The tactic backfired, but the image of the exchange was tarnished.

Just how long the market can come up with new stock issues is anybody's guess. ''The exchanges will have some hiccups - just by pure exhaustion,'' says Dr. Fredie Mehta, a director of Tata Sons. ''You can't run at 60 miles per hour forever.''

In India's economy, the market could crash under a large strike or radical shift in government policy. Once a shock comes and goes, however, ''the small investor will really flood in,'' says M. S. Ahluwalia of the Finance Ministry. ''The boom is a social phenomenon. We now have a middle class of young people willing to put money into a company. For the last 30 years, companies had to answer to the government. Now they answer to the people.''