Joesph Massey, MD and CEO, MCX stock exchange
A strong financial market with broad participation is essential for a developed economy. With India's growth story unfolding, there is a need to raise resources for companies to fuel the capital needs of the economy and also ensure that the benefits of growth percolate to bottom of the socio-economic pyramid. India's household savings, one of the highest in the world at 30%, can be channelised through equities, bonds and other instruments to achieve greater financial inclusion and improve the financial markets in India.
Of about the 7,800 scrips listed on the Indian stock markets, less than 3,000 are actively traded. Since the entire structure has a speculative culture, it exposes investors to greater risks and restricts real capital formation. Investors pay a very high cost of transaction, which can definitely be pruned by 50%.
On another front, the market for other forms of financial instruments, such as bonds and interest-rate futures, have not developed adequately. The equity segment currently accounts for more than 75% of market activity in India. In developed countries, the trend is the reverse, with bonds accounting for more than 80% of trading in some markets.
There's clearly a lack of broad participation. Of a population of over one billion, barely 18 million invest in equity markets. According to Sebi data, 10 cities contributed over 80% of trading volume in 2010.
|Of a population of over a billion, only 18 million are invested in equities and 10 cities contributed to over 80% of trading volume in 2010.|
The erratic behaviour in the equity markets also indicates that these are not only highly speculative but also lacks support from a large base. The Indian market is highly dependent on foreign institutional investors (FII) movement. Thus, any change in FII inflows and outflows lead to extreme changes in market indicators, despite unchanged fundamentals.
Recently, both Sensex and Nifty fell by over 15% in just 25 sessions. There are two main reasons for this irrational pattern. First, equity derivatives instruments are not linked to the underlying asset because of the very nature of cash settlement.
Economically, this arrangement is resulting in a parallel market for derivatives instruments without actual delivery of an underlying asset. Second, since a large portion of the already small equity free-float (less than 25%) is in the hands of institutions, the actual free-float of shares available with retail participants is tremendously low.
Another discouraging fact is the lack of transparency in the system. Though exchanges and other market infrastructure institutions (MIIs), such as depositories, and regulators have a repository of data, it is not available to the public.
No information on geographical spread of investor base or demat account coverage is disclosed to the public. For example, there is no clarity on where most of the 18 million demat accounts are held, disclosure of which would give an idea of extent of penetration. This opaqueness puts a question mark on their intention. Due to these structural hurdles, the advantages of capital markets have not reached many in the country.
Indian financial markets truly have a long way to go to witness inclusive growth, as was recently seen in the banking and telecom industries.
MD & CEO, MCX Stock Exchange (MCX-SX)