Capital markets require a pep-up dose without further delay

M R Mayya

The decision of the regulatory authorities to ban trading in deferral products from July 2, 2001, like Automated Lending and Borrowing Mechanism, Borrowing and Lending Securities Scheme and Modified Carry Forward System, and to introduce compulsory rolling settlement in respect of 414 scrips that are the most active and account for over 90 per cent of market capitalisation, was a knee-jerk reaction to stock market developments in the first half of March 2001. As a result, markets are in the doldrums today, affecting not merely the stock-brokers but the entire capital market and the vast investing public.

The daily volume of trading dropped from over Rs 15,000 crore recorded on most of the days in the first quarter of 2001 to less than Rs 2,000 crore in the first half of July 2001 before recovering to about Rs 3,000 crore in the first week of August 2001. The decline in turnover in the regional stock exchanges was sharper, threatening their very existence. In fact, many regional stock exchanges have closed their local trading segments and are depending on their subsidiaries which have trading facilities on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) or on the Inter-connected Stock Exchange of India (ISE) for their survival.

A study has indicated that the average daily volume of trading in 375 scrips under compulsory rolling settlement declined from an average of Rs 4,321 crore in 2000 to Rs 391 crore on July 2, 2001, when the ban on deferral products came into effect. The improvement thereafter has not been significant. Scrips like ICICI, BHEL, Telco, MTNL and IPCL, which were very active, have suddenly become illiquid with volumes falling by almost 90 per cent from the peak levels in February 2001. The number of daily traded shares, which was just about 10 per cent of the total number of listed securities, has also declined.

Despite an excellent budget and fairly favourable economic conditions, particularly in the context of a good monsoon and also good corporate results—first quarter net profits of 2001-02 recorded over 20 per cent gains compared with the corresponding period last year on top of a similar rise in 2000-01 over 1999-2000—stock prices refuse to respond favourably. The Sensex, which had peaked at 6151 on February 14, 2000, hit a low of 3097 on April 16, 2000, declining by 49.7 per cent.

In the first week of August 2001, it was hovering in the range of 3200-3300—the level at which it was ruling in the middle of March 1992. In fact, Indian stock markets have been the worst performers in the Asian region since the beginning of the present calendar year. Scrip-wise, the picture is more dismal. Of the 375 scrips in compulsory rolling settlement, share values compared with the peak levels of 2001 depreciated by the end of July 2001 by over 50 per cent in respect of 126 scrips and between 25 and 50 per cent in respect of another 123 scrips. Only in case of 21 scrips, the fall in the value was less than 10 per cent.

The refusal of share prices to react favourably to fundamental factors is mainly due to structural problems in the market. Rolling settlements have taken a toll on speculative activities, which are the sine qua non of any healthy market. Speculators are hesitant to enter the market with no carry forward facilities.

Futures and options have yet to pick up, the daily turnover being about Rs 150 crore in the first week of August 2001. A number of issues, like the tax treatment for profits earned out of derivative trading, particularly as a hedge instrument, permitting forward contracts beyond three months, payment of turnover fees for registration for derivatives trading, electronic fund transfer facility to facilitate daily pay-in of differences, exorbitant cost of insurance, etc., have not yet been addressed despite repeated representations. Even if these problems are resolved, futures and options just cannot replace the banned deferral products.

The condition in the primary market is also pitiable. Against an amount of Rs 13,312 crore of equities raised in 1994-95, the amount raised in 2000-01 was just Rs 2,479 crore in the first four months of the current year. There was only one issue with a paltry amount of Rs 1.8 crore.

As a result, the sprawling network built by stock-brokers, with about 30,000 trader workstations spread across 500 centres all over the country, has started shrinking. Already about 500 of about 1,700 members of BSE and NSE are downing their shutters, while most of the members of the regional stock exchanges have already done so. The class of sub-brokers, numbering over one lakh, has virtually become extinct. Indian stock markets, which were lauded as being on a par with the developed markets of the world till recently, wears a desolate look today.

In order to put the markets back on the rails, as a first step, the authorities concerned need to restore status quo ante by permitting trading in all banned deferral products as there is nothing wrong with these products as such. Instead of undertaking a proper cleansing operation after the debacle that took place in the first week of March 2001, the baby itself was thrown away with the bath-water.
Compulsory rolling settlements also need to be deferred till various pre-requisites, like providing the facility of electronic fund transfer, easy access to bank finance, etc. are put in place. Stock futures, along with options on stock futures, can also be introduced as additional products. There need be no fear of any excessive speculation as the market will discard the instruments that are not needed.

What also needs to be done simultaneously is to ensure that a proper and effective system of monitoring and surveillance is put in place with no interference by market participants. It is equally important to ensure that market participants do not have any say in the appointment and promotion of key personnel manning the stock exchanges. Any delay in action can result in a repetition of what happened in the commodity markets when futures trading was banned in the 60s. Despite promotional efforts being made by the government today to revive futures trading in several commodities, the markets are refusing to respond.

Once the secondary markets revive, primary markets, too, may see some activity. About 80 companies, which have proposals to raise about Rs 2,400 crore, can be spurred to tap the market in the current year. Revision of the pricing policy coupled with a larger percentage of public offer instead of the meagre 25 per cent/10 per cent of capital required today to be eligible for listing can bring small investors back to the market.

These measures can go a long way in transforming the dormant, lacklustre stock market today into a vibrant and throbbing market, truly reflecting the process of liberalisation and globalisation launched by India Inc. a decade ago.

(The writer is chairman, Inter-Connected Stock Exchange of India Ltd. The views expressed are personal.)