Ashishkumar Chauhan values wealth creation over liquidity. The BSE MD and CEO explains that this is because more wealth leads to job creation. The BSE is Asia’s oldest stock exchange, whose benchmark, the S&P BSE Sensex, is looked upon as the barometer of the Indian stock market. In an interaction, Chauhan—who has been at the helm of the exchange since 2012— talks about the current rally, the safety of the markets and what inves- tors should do to stay safe . He also speaks on the pitfalls of encouraging a trading culture instead of an investment culture. Edited excerpts from an interview with BT:
The Indian equity markets have registered a one-way rally, touching record highs almost on a monthly or weekly basis. That has attracted a record number of new investors to the market who are investing actively whether directly or through mutual funds. Do you think there is a risk as they seem to be chasing past returns?
In any asset class, retail investors typically chase past returns. It means they look at the past one year and assume the future would be similar even though it is a well known fact that the past is not a good guide to predict the future. But this does not get registered in an intuitive manner. The fact that investors are chasing past returns is not an India-specific trend and is happening globally. And that is how the cycles occur in the stock markets. Today there is complete automation with KYC also being done through video. So, the past 18 months have seen new clients coming from practically every pin code. This is a larger spread of investors and, in some ways, they have not seen the down cycle. So, everyone will have to be cautious and be aware of what can go wrong.
That doesn’t mean that the rally is at an end stage. I think this rally seems to have much stronger legs than the earlier ones that we saw in 2000, 2001 or 2002. With China slowing down, India is now becoming more important. During Covid-19, we did well in terms of vaccination or even IT sector performance. India is currently looking much better. So, a change is happening but we need to wait and see how fast, how far it goes. China is cooling down but that doesn’t mean all investments will come to India unless we open up ourselves to welcome those people in a good way. The government has taken a lot of steps to make life easier for younger companies. But there are still issues related to red tape, political interference and labour at the state level that need to be cleaned for the states to become more attractive for investments. But overall, I think India is looking very nice compared to what it was two years back.
So, is that one of the reasons why India is the best-performing equity market globally this year?
As a market, we have a large focus on banking, finance and IT, including telecom that would include Reliance [Industries]. Some of the largest conglomerates from these sectors are part of the Sensex 30 and also comprise a large chunk of broader indices. These sectors have done exceedingly well. IT companies, for example, did not see their revenues going down nor [was] there any supply chain disruption since it is a services movement unlike a physical goods movement that saw China getting affected. Similarly, banking, which was extremely vulnerable, say, 5-6 years ago in terms of quality of balance sheets, has seen aggressive reforms by the Modi government. Broadly speaking, I think the net non-performing assets are very little compared to the size of the banking system and the GDP. There were a lot of worries related to bankruptcies that did not materialise but that does not mean it may not happen once the NCLT [National Company Law Tribunal] opens up fully. Even pharma—a big sector that is largely foreign facing—proved that it is innovative and capable in the most difficult times. If you look at these sectors combined, they account for a large chunk of our market capitalisation and, hence, in some ways we have done much better than other markets.
It is often said that when retail investors come to the markets, they enter at very high valuations and then burn their fingers when the markets correct. Do you think that’s a risk the first time and new breed of investors are facing?
Last year was an unseen or unheard kind of event, one which many call a Black Swan event. But that doesn’t mean other events will not happen. Equities is a risk market but many are investing and many are getting hooked to trading even while participating in high-risk derivatives. So, when the tide turns, we could see a lot of people who might have issues. But, overall, they have understood how markets work. We have a very large developed equities market. Not many countries with our level of economic progress have achieved that kind of trust by retail investors. But I feel we also have an inferiority complex. We think if we are doing it, then probably the whole world has already done it. We are pretty much the fourth-largest stock market in the world in terms of wealth and I am not saying this in terms of trading because trading beyond a point is froth and adds very little to wealth creation. Our market capitalisation of $3.5 trillion is around 3537 per cent of India’s total wealth. In other words, one out of every three rupees of wealth is now represented by the stock market. A large share of people coming into the markets today are youngsters who are technology savvy, and they study and read a lot, and many of them go through mutual funds rather than going directly, which is a very healthy trend. But that doesn’t mean when the tide turns, people will not be out there. Many experts today predict that markets would fall and it is possible that markets may fall abruptly in a few days, few weeks or years. But till that time, other people are correct.
But corrections can still happen?
The price-earnings ratio today is pretty much at a historical high level. Indexes are trading at high multiples. Overall, I think it’s also a reflection on the monetary and fiscal loosening across the world. And so, as and when it gets tightened, though you never know when, there will be some correction. It is difficult
to say how much India will correct as suddenly one more opportunity has come up, in a way without our hard work, and that is China. China is cooling down and its policies are affecting its private sector in an adverse way. And so, some of that money may get diverted to India. So, even if there is a correction, it might be slightly milder than what one thinks.
As a stock exchange, what are the additional measures you have to take when you see markets in such a phase where new highs are being touched almost every other day and a record number of new investors are coming in?
There is a perception that markets cannot go wrong. We end up giving some sort of an impression that somebody in authority is telling you the market will not go down so keep on buying. Most investors think I will not have a loss from an investment point of view. There are two parts to this issue. There is a transaction processing aspect wherein you buy and sell. Indian markets work on a T+2 basis. If you buy or sell, your settlement should happen and you should have either money or stock in your account. But that doesn’t mean brokers do not default. In the past 18 months, probably 30 brokers have defaulted across India. If you have selected the wrong broker, you may have difficulties. As an investor, you should be alert. If you bought something one year ago, it cannot be that you don’t even bother to check whether the stock is in your demat account or somebody sold it without your knowledge. Every week, every day, you’re supposed to get [an] SMS from the exchange and from the broker. This is important as there are literally lakhs of investors who later on come and say, ‘But it was supposed to be safe; what happened?’ So, safety [requires] a little bit of work from the investor side.
The second part is that once the stock comes into your account, you become an owner; then you need to worry about the corporate governance of that company. One shouldn’t think that if a stock has been bought at an exorbitant price and if it still goes up, it’s my brilliance but if it goes down, it is the fault of the regulators. Safety is a graded thing and [requires] some bit of discipline and work on the part of the investor. Markets can go down and you should be willing to take on the risk that you can easily handle. It’s not a guaranteed return instrument.
SEBI (capital markets regulator Securities and Exchange Board of India) recently gave the go-ahead to exchanges to switch to the T+1 settlement cycle from next year. Do you think India is ready to switch?
We are not new to this [T+1] as we already do real time [settlement]. Offer for sale happens pretty much in the same way. Even auctions happen on T+1 basis. So, in some ways India is already doing it in some areas. We are already equipped to switch to T+1, and that too on a massive scale. We are doing it today in other areas. If there is consensus and the regulator wants to implement T+1, then BSE will support the move. The way it works is that both the clearing houses [Indian Clearing Corporation Ltd and NSE Clearing Ltd] will have to be ready on the same day because we have interoperability. The clearing houses have to be at the same level of implementation. That is why SEBI has given some time to them to coordinate and integrate, and be ready with the technology.
The BSE and the NSE are the two leading exchanges of India. But there is a huge gap in terms of market share with NSE far ahead. What do you attribute that to?
The statistics are correct, but there is another side of statistics and measurements, too.
While liquidity is a good measure, beyond a point additional liquidity may not get you that type of additional benefit to society. But with wealth, additional wealth gives you more jobs and more prosperity. In SMEs, we have 70 per cent market share, which is wealth creation. In mutual funds and distribution, we are now at 90 per cent of all equity mutual fund transactions. Similarly, on offer for sale, on IPOs we have 70 per cent of the market, on bonds we are 70-80 per cent of the market. If India has to become a developed country, it has to focus more on wealth creation, on which we are extremely focussed.
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