The Indian capital market is narrow, shallow, illiquid and concentrated in the hands of a few individuals. Here is the evidence
Whenever I point out that India’s investor population has plummeted from 20 million in 1992, when we embarked on our economic liberalisation programme, to eight million (D Swarup Committee report 2009), the information is greeted with shock and disbelief even by powerful people in the government.
This shows how the system works to hide inconvenient truths. Or how statistics can mislead, when they are used selectively. The response of the Union minister of state for finance, Namo Narain Meena, to a question in Parliament by MP Sardar Sukh Dev Singh Dhindsa reveals that the Indian capital market is, in fact, narrow, shallow, illiquid and concentrated in the hands of a few individuals located at a few centres.
The stark revelations came about because of the structure of Mr Dhindsa’s question. He asked for the number of client identities and PAN identities that traded actively in the market in the April-June 2010 period on the National Stock Exchange (NSE) and contributed to 50%, 60%, 70%, 80% and 90% of the total trading turnover on an average, on a daily basis, in the cash equity market and in the F&O (futures & options) segments. This provides an amazing frequency distribution.
Consider this. The minister said 30.90 lakh investors traded on the NSE’s cash market in those three months, but 90% of the investment came from only 1.92 lakh investors—in other words, the trading volumes of the bulk of investors are trivial and irrelevant. The number drops to a fourth (41,654) when you consider 80% of turnover. And, finally, 50% of turnover comes from a shockingly low 451 investors, of which 156 were proprietary traders. The scary part is that these are not one day’s numbers but an average of April-June 2010.
Trading volumes in the derivatives segment are seven times that of the cash equity market, but participation is even more skewed. Minister NN Meena says that there were only 5.75 lakh traders in this segment over the April-June period, of which just 18,035 provided 90% of the turnover. Slice it further and we find that a massive 50% of trading turnover comes from just 106 investors, of which 58 are proprietary firms. We have already published these scary statistics on www.moneylife.in, so here is an analysis of what this means.
The numbers ought to be a wake-up call for the government. Somebody needs to remind the Securities and Exchange Board of India (SEBI), that its statute makes it responsible for market development. We have written about this often enough, so let’s focus instead on regulatory issues. SEBI officials have always made heavy weather of identifying and punishing companies, brokers and speculators who manipulate stock prices. It even invested in an expensive Inter-Market Surveillance System to flag manipulative trades and possible insider trading. The efficacy of that system, if any, is still not clear to market watchers, given that price manipulation continues with impunity.
But we always imagined that SEBI had a giant task monitoring the exponential growth in trading turnover since 1992. In the past two decades, the average daily turnover in the cash market has risen from around Rs300 crore to Rs12,000 crore (NSE) and to around Rs85,000 crore in derivatives.
However, Mr Meena’s response suggests that the market is so narrow that tracking and punishing manipulation ought to be a lot easier. He said that the top 25 brokerage firms on the NSE accounted for 42% and 43%, respectively, of the cash equity and equity stock F&O turnover in the April-June 2010 period. Even otherwise, the minister says that only 106 participants account for half the derivatives market turnover. Surely, any manipulation there should be simple to track!
Tracking companies whose prices are being manipulated, we thought, would be more difficult, since there are so many of them. But Mr Meena’s answers to a query from Rajya Sabha MP Mohammed Adeeb have demolished those assumptions too. On 10th August, he told Parliament that the top 10 companies (out of 1,987 listed) accounted for 24% of NSE’s cash equity market turnover and a massive 38% of derivatives market turnover in a mere 203 scrips permitted for trading. So tracking them is simple.
The minister’s answer suggests that the NSE is nothing but a casino for a tiny minority. He told Parliament that 67% of all derivatives transactions are squared up intra-day. We find that most of the trading is concentrated on the Nifty index options; these account for 44% of trading volumes.
For whom does the stock market exist? In the 1980s, the Bombay Stock Exchange (BSE) was a virtual monopoly and seen as a brokers’ club. Now, the trading is automated and apparently nation-wide; the dominant exchange is the NSE and the lingua franca English; but it is still a club dominated by 25 brokerage houses with large proprietary trades.
When will the government admit to this hoax about a robust market or keep throwing at us the fact that NSE is the third largest bourse in the world in derivatives turnover? And how long will exchanges and regulators get away with the sham of conducting financial literacy yatras, while investors continue to desert the stock market?
Our close interaction with retail investors suggests several fundamental reasons for the exit of retail investors. Topping the list are the cumbersome market-entry procedures which are one-sided and loaded in favour of brokerage firms and depository participants (DPs). High costs, issues like mandatory power of attorney and one-sided arbitration procedures are other irritants. Ever since we started Moneylife Foundation, we are discovering the lethal role of portfolio management services (PMS) offered by brokerage houses. Even today, SEBI does not require any disclosure of their performance, with the result that high networth individuals are forced to take blind bets on these schemes and swear off the stock market after losing lakhs of rupees.
Instead of addressing these issues, SEBI has been busy destroying the mutual fund industry, which has suffered a withdrawal of over Rs11,000 crore since August 2009, when SEBI introduced a series of changes ostensibly to protect retail investors. The situation cannot be salvaged by gimmicky financial literacy seminars funded by the monopoly bourse. The NSE has a 96% market share and the 135-year old BSE has become largely irrelevant in the past couple of years, mainly due to a margining system that drove volumes towards the larger bourse. SEBI needs to understand that while low financial literacy is an entry-barrier, what is driving away existing investors are a pathetic grievance redressal system, an arrogant and inaccessible regulator and an unsympathetic monopoly bourse. Does the government care enough to fix this? — Sucheta Dalal