Developments in Indian capital markets: Road travelled so far and potential potholes
The stock markets have gone incredibly dynamic, while the regulatory authorities sit up attentively to initiate, monitor, and react as dictated by the market. This article is an effort to look up to a few important developments that have occurred as well as few cautions that prove to be fatal in times to come.
Increasing level of competitiveness as new stock exchanges are coming up: This is a good sign for Indian capital markets as new players are entering. This would increase the competitiveness of the stock markets and may be better deals would come up for the investors. MCX-SX started its operations last year. United Stock Exchange (USE) is expected to its operations in currency futures on August 31, 2010. USE will be the third exchange to start currency trading after MCX-SX and National Stock Exchange. The USE has 32 institutional shareholders, including 21 public sector banks and six private lenders, including ICICI Bank, HDFC Bank, Axis Bank, Federal Bank, Yes Bank and J&K Bank. USE will begin trading in four currency pairs including Dollar-Rupee, Euro-Rupee, Yen-Rupee and GBP (British Pound)-Rupee. The point need needs special concern in this regard is the new stock exchanges are coming with derivative products or highly leveraged products. The retail investor have not got the in depth knowledge of the complex instruments. Though a good investor education/ awareness drive had been in progress by almost all the major stock exchanges like NSE (National Stock Exchange), BSE (Bombay Stock Exchange) , DSE (Delhi Stock Exchange). The efforts of Ministry of Corporate Affairs (MCA) in this direction are also appreciable.
Consolidation of stock markets: Recent moves of The Bombay Stock Exchange (BSE) to have alliances with at least three regional stock exchanges (RSEs), and NSE to initiate talks with the Ahmedabad Stock Exchange (ASE) and CSE for an alliance are a welcome step in consolidation of Indian stock markets. Shares of companies listed on these RSEs will be available for trading on two national stock exchanges.
BSE has signed a memorandum of understanding (MoU) with the Madhya Pradesh Stock Exchange (MPSE). The Vadodara Stock Exchange (VSE) is likely to sign the MoU with BSE. BSE has offered a similar arrangement to the Jaipur Stock Exchange (JSE). BSE already has a tie-up with the Calcutta Stock Exchange (CSE), in which it has a five per cent stake. Similar effort is seen at the Ludhiana Stock Exchange (LSE), which caters for investors in Punjab, Himachal Pradesh, the Union Territory of Chandigarh, and Jammu & Kashmir, is in talks with the Delhi Stock Exchange, Kanpur Stock Exchange and Jaipur Stock Exchange for tie-up.
National Stock Exchange (NSE), joined hands with the Madras Stock Exchange (MSE) and signed MoUs with MPSE, VSE and JSE. ASE’s board had approved the tie-up with NSE, subject to approval from shareholders. This kind of consolidation efforts shall revive these regional stock exchanges and shall provide a platform to the small companies to raise capital an increase level of liquidity of the stocks of the companies that operate at the regional level.
lucidity regarding roles and powers of the regulatory agencies: The conflicts with regard to the jurisdictions of various regulatory agencies in context of issues like whether the SEBI is having jurisdiction over auditing firms like Price Waterhouse (auditor of blemished Satyam company) or is it IRDA or SEBI that has the power to control ULIPs have signaled the need fro reviewing the respective responsibilities and powers of multiple regulators. More transparency and unambiguity is need of the hour considering the pace at which the Indian capital markets are running.
Enhanced control of the SEBI over Mutual funds, FIIs and innovative financial instruments: Recently SEBI has tightened the screws over Mutual funds, FII with regard to participatory notes. Introduction of innovative products like ETF and ULIPs have added breadth to the markets and made more options available to the investors. But a serous concern is how exactly an average investor understands the complexities involves in such kind of products. The SEBI is considering launch of the complex derivatives like weather derivative or credit default derivatives in consultation with RBI. The strength the Indian stock markets have shown during the world crisis of 2008 need not erode. Whatever the new instruments may be issued, first of all investors need to be made aware of risk attached with them.
The increased volatility of stock markets: Though the speculators earn out of volatility of stock markets, yet the excessive unpredictability make the guanine investor shy away. May 19,2009 was the shortest trading session in the history of Indian stock markets, lasting a little over a minute and generating wealth of Rs 5,66,881 crore for investors. The Sensex made a rally of 2111 points with clear mandate of UPA government. This created the wealth of Rs 5,66,881 crore for investors. This volatility is a two edged sword. The retail investor may burn their hands with such high levels of volatility. Still less than 1% of the investors invest in equity is a testimony to this miserable state of affairs.
More frequent triggering of lower or upper circuit filters: Because of lesser depth of the retail shareholding and still concentrated shareholding power in hands of promoters and financial institutions, four times in the last five years instances that the Indian stock markets have stopped trading because benchmark indices hit the lower or upper circuit filters. Very recently it happened on May 18, 2009 when stock exchanges halted the trading within a minute of the opening bell. This is quite high when compared with other global markets. Just to illustrate Dow Jones Industrial Average, which has a circuit filter mechanism on the index, halted trading was 12 years back on October 27, 1997.
Few grey areas that still have not received adequate attention of the regulators:
There is need to widen depth of debt markets, role of credit rating agencies, correct information asymmetries are some problems at macro level. The efforts made are still paltry. At micro level, Issues of differential voting rights in regard to share with ADR/GDR (American Depositories Receipts/ Global Depository Receipts) have not been made clear. There is also strong need for the integration of Indian Accounting bodies like ICWAI- Institute of Cost & Works Accountants of India, ICAI - The Institute of Chartered Accountant of India, ICSI - The Institute of Company Secretaries of India to frame adequate accounting rules for new innovative instruments.
Asstt. Professor, University Business School, Panjab University Regional Centre, Ludhiana
वक़्त की पीर बखानती कविताएँ : मंगलेश डबराल
7 months ago
