………Pratik Shah 02nd December 2010
India has been growing from 2004 until 2010 at an average quarterly GDP growth rate of 8.37 percent and is now a more than a trillion dollar economy. Suddenly, the entire world has its attention on the two most powerful and emerging economies ‘India’ and ‘China’. The last decade we have seen a paradigm shift on how Indian economy has performed; Beyond billion and multi-billion-dollar business deals on a regular basis, the stock market indices are at all-time high levels, real estate prices have touched stratospheric levels, domestic sales of automobiles have crossed the two-million mark and magazines are now full of advertisements for ultra-expensive jewellery, wrist-wear, pens and other accessories. The macro economic indicators have been positively showing signs of growth.
Nevertheless, the securities market has shown the most robust and calibrated growth over the decade. It is today one of the advanced barometers indicating the strength of the country’s economic growth.
Before moving on to the securities market in the current context, I would like to brief you on how the securities market has evolved in the last three decades
I would divide the Indian Securities Market growth into pre 1992 and post 1992 era. Prior to the early 1990s, most of the financial markets in India faced controls of pricing, entry barriers, transaction restrictions, high transaction costs and low liquidity. A series of reforms were undertaken since the early 1990s so as to develop the various segments of financial markets by phasing out administered pricing system, removing barrier restrictions, introducing new instruments, establishing institutional framework, upgrading technological infrastructure and evolving efficient, safer and more transparent market practices. Let me highlight more on this.
The Indian Securities Market before 1992 was characterised by restrictions on foreign investment, license raj, poor governance and transparency, lack of political will to liberalise, etc
Stock Exchanges were run as brokers clubs whose management was dominated by brokers. The regulations were fragmented & there was multiplicity of administration. Stock exchanges were regulated through the Securities Contracts (Regulations) Act. Trading was limited to Equity Shares through Open outcry trading system (Floor based trading) with longer settlement period. Primary markets were not in the mainstream of the financial system. Mutual funds were virtually unregulated with potential for conflicts of interest in structure. Private MF’s were not permitted to enter the market. Merchant bankers and other intermediaries were unregulated and there was no concept of capital adequacy. Investor protection was much on paper than in reality.
This era symbolized closed doors to Indian market, poor governance and backward technology.
The Indian Securities Market post 1992 saw the benefits of liberalization measures announced by the Indian government and the political will to open up the financial sector for foreign investment. The Indian securities markets have witnessed farreaching reforms in the post-liberalization era in terms of market design, technological developments, settlement practices and introduction of new instruments. The markets have achieved tremendous stability and as a result, have attracted huge investments by foreign investors. Let me highlight few of those
Securities Exchange Board of India (SEBI) was formed for regulating the markets and bringing primary and secondary market intermediaries within the regulatory framework.
Information technology emerged as a strategic tool to enhance speed, efficiency and transparency in market operations and financial sector reforms
Free pricing of securities came into play. Capital Issues (Control) Act of 1947 was repealed and the office of Controller of Capital Issues was abolished
There was a shift from Floor based trading to a fully computerised automated trading known as BOLT (BSE on Line Trading) and NEAT (National Exchange Automated Trading) System
Rolling Settlement was introduced in the market – reducing the settlement cycle to T+2
Dematerialisation (immobilization) of securities was mandated and today almost all securities are traded in immobilised form on the floor of the exchanges. The Depositories Act was enacted to facilitate the electronic book entry transfer of securities through depositories. Depositories like NSDL have played a vital role in strengthening the Indian Securities Market.
Foreign Investment was allowed in Indian Capital Market through Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) route
Indian companies and Mutual funds were lately permitted to access international capital markets within prudential limits
Wholesale Debt Market was formed for trading in Corporate Bonds and Gilts
Trading in Equity Derivatives instruments was introduced and was made available to all institutional investors
Mutual Funds emerged as an important segment of Indian Capital market
Regional Stock Exchanges lost their relevance and the entire market share was divided between NSE and BSE
Grading of IPOs was made mandatory and primary market has become highly regulated
More focus is on Investor protection and corporate governance
Margining of institutional trades and mandatory settlement through clearing house mechanism
Higher technology has enabled settlement through real time gross settlement systems. Today we have integrated trading, clearing and payment platforms which enables seamless settlement of transactions.
The participation in Equity, Debt and Derivative Markets is unprecedented.
This era symbolizes open door policy for foreign investors, use of information technology as a strategic tool, increased regulatory governance over market reforms and lays a strong foundation to grow exponentially in the coming years. As per Mckinsey study, increasing the market participation, expanding issuers, streamlining processes and deepening product markets are the key elements that will lead to a three-fold growth in India’s capital markets by 2020
The progress made by the Indian capital markets in the post-liberalization phase in terms of implementing international standard practices, widening and deepening of capital markets and the technological progress has been remarkable. It should, however, be noted that this period was also marked by greatest turmoil that the markets have ever witnessed. With timely and appropriate policy initiatives, systemic failures were avoided
The development of corporate debt market is, however, still relatively inadequate. The investors are mostly institutions with very few retail investors. Transparency is limited both in the primary and the secondary markets, liquidity is poor and many bonds are held till redemption
Future products, technology, migration of best practices from developed markets, regulatory vigilance, and development of debt and primary markets will be the focus areas.