‘The regulators should be congratulated for having managed the system well’

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: Apart from the investors who take the biggest hit in terms of capital erosion in times of a meltdown, the broking community also suffers. There have been similar meltdowns that have happened in the past and each time there was a scam or a payment crisis of sorts that was created. However, this time around, while things look bleak, we have not witnessed any payment crisis and winding up of operations as yet. Dharmesh Mehta, head, stock broking with Enam Securities, one of India’s prestigious broking firms, in an interview with Akash Joshi of The Financial Express spoke about some of the reasons for this. He also threw light on how the market situation could improve. Some excerpts.

In these current testing times, what has been the impact on the broking community and how are people gearing up to meet the challenge?

There are good times and there are bad times, it’s a cyclical business. If you look at the past five years, say from 2003 onwards, the times have been good. In fact, they were fabulous for the business. So if people have been in the business for these years, I think they will have enough to tide over the next two or three years of tough times, if at all the tough times last that long. Moreover, if you see the volumes, they have not collapsed so much, and there is volatility. So because of the volatility there is business. The day the volatility goes away and the volumes drop, then the situation will really be bad. Now, on the second aspect of your question, as to how businesses are gearing up to face the challenges, let me put things in perspective. There are two sets of brokers, one is institutional and the other is the retail broker. For retail brokers there will be a cut down in the extent of operations, maybe employees and other fancy services. Already the volumes in the retail segment are down and they will not be able to bear the costs. For institutional brokers, the volumes are still okay.

One of the things we have seen, especially in India, is that this time when the markets have crashed, there has been no crisis as such. In the previous crashes, one could usually see payment crises all around. What could you attribute this to?

See for one, most of the outstanding build-up was overseas. Speculative activity for the last few months, say from January, was mostly by overseas players rather than domestic players. So even in this huge market crash, where some of the stocks have crashed by 70-80% in a matter of days, there has been no payment crisis and no stress on the financial system. Primarily because the regulators have ensured that people don’t come into such a situation. The systems and the margins are very strong and they ensure that a payment crisis situation does not come up. Also, the retail investor’s participation in speculative activity was very low, especially in the past six months. Moreover, retail investors are going through the mutual fund route rather than coming into the market directly.

Now, if there were a couple of things that you would want the regulator and the policy makers to change in order to strengthen the market further, what would they be?

One thing that the regulator has already done is to curb overseas speculation and I think this is healthy. I support this move completely. And the abnormalities have to be removed and the data continuation has to happen here. On the reform front, clearly some amounts of sops are required here, especially in the area of taxes. These could either be on the capital gains tax area or in the service tax area. Moreover, people don’t invest in the market due to reduced taxation, they invest because they want to make money and grow their wealth. Now, the policy makers can make this happen through the initial public offer market. They can offer strong government-owned companies at attractive valuations to the Indian public and no overseas offer. This way, the government can raise money, the investors get a chance to participate in extremely strong investment avenues and more importantly, the ownership of these companies stays in India. This will bring back retail investors to the market. So, along with tax cuts, IPO, the government could also look at relaxing restriction on banks for stock market lending.

Now, coming back to the market, when do you see an improvement happening? Are we completely dependent on the overseas inflow to see the market recover?