Sucheta Dalal :Denying Data
Sucheta Dalal

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Denying Data  

September 7, 2010

The government needs to set up a committee that will cut through NSE’s secretiveness and throw light on the true state of the Indian capital market

Ravi Narain, who heads the National Stock Exchange (NSE), has dashed off letters to the finance ministry, planning commission and others, ‘explaining’ a Moneylife report (9th September) about how Indian markets are shallow, hollow and illiquid. The report was entirely based on an answer in Parliament by minister of state for finance, Namo Narain Meena.

Now, Ravi Narain cannot contradict the minister, who clearly cited NSE’s own trading statistics, so he alleged that the numbers were taken out of context, although the entire answer is available on the Rajya Sabha website. Trading statistics ought to be routinely available on a stock exchange’s website or its annual report, but NSE, a monopoly exchange, is secretive, is fighting the application of the Right to Information Act and gets away by not even publishing its annual report on the website, although its chairman believes it is like a ‘public utility’.

So how did Ravi Narain justify that things were not as bad as the minister’s statistics suggest? Let’s recap what the minister said. His data showed that a few hundred people account for the stupendous trading volumes of Rs12,000 crore/day in the cash market and Rs100,000 crore/day in the derivatives market on the NSE, which accounts for 96% of trading in India. His answer also revealed that in a three-month period between April-June 2010, just 537 investors accounted for 70% of trading and merely 223 investors accounted for 60% of trading in the cash market, of which over half were proprietary brokerage firms.

Worse, a massive 50% of NSE’s derivatives trading turnover, the main pillar of the Indian stock market system, comes from just 106 investors, of which 58 are proprietary traders. Are they aggregating retail investors’ funds? In fact, some listed brokerage entities, earn the biggest chunk of their profits through proprietary trading, although they claim a few thousand branches to cater to retail investors.

Now, let’s look at Mr Narain’s justification. He throws a few random statistics—that the NSE has two lakh terminals in India covering 1,500 towns. And that the Exchange encourages investment from smaller towns by adjusting infrastructure costs against fees payable. Our question: How many of them register trades everyday? 

Typical of the NSE, Mr Narain says things are just as skewed abroad, but does not provide a detailed marketwise table. Ironically, NSE’s top two executives are among the highest paid in the country, but this has been justified on the froth of turnover and profitability of a near monopoly, rather than the spread or reach of the Exchange or the creation of an investment culture in India. Ravi Narain says that of the 3.3 crore people who paid income tax in 2008-09, 1.2 crore invest through the NSE. According to him this shows that “NSE has covered significant ground.” Mr Narain also points out that a large number of retail investors choose to participate in the capital market indirectly through mutual fund/insurance schemes. Well, mutual fund penetration is pathetic and money is moving out of equity funds.

The government needs to set up a committee that will cut through NSE’s secretiveness and allow some light to shine on the true state of India’s capital market. It must also ensure a regulatory regime where policies are based on what investors genuinely need, rather than the whims, self-interest and perceptions of bourses and regulators who operate out of high-security ivory towers. —
Sucheta Dalal

-- Sucheta Dalal