One of the key areas which Sebi now needs to concentrate on is the role and, indeed, the future of the smaller stock exchanges in the country. When I started reporting on the stock markets in the early nineties in Calcutta, regional stock exchanges were a powerful force. Sebi was still to be given its statutory powers, and the chiefs of the countrys stock exchanges, in tandem with the finance ministry, took most of the key decisions in relation to the capital markets. Whether it was stock exchange infrastructure, or even issues like listing or multiple memberships, the regional stock exchanges, together with big brother Bombay Stock Exchange (as it was formally known then), had the final word. Turnovers those days were significant in exchanges like Calcutta, which virtually competed neck-to-neck with BSE. Even much smaller bourses like Guwahati had their share of the business, albeit small.
But the entry of the National Stock Exchange and the BSEs move to go national with its online trading network BOLT has changed all that. Today, even the relatively larger regional exchanges like Calcutta Stock Exchange are struggling, while several of the 20 regional bourses are staring at an uncertain future ahead. With NSE and BSE providing an electronic, national market, there is now very little room for the rest. As former BSE executive director and capital market expert M R Mayya points out, the share of the 20 regional bourses, which accounted for about 45.63 per cent of the total trading volumes in 1995-96, has now slumped alarmingly to only about 16 per cent by 2000-01 and currently, this stands at an even more modest three to four per cent of the total turnover in the countrys market. In such a scenario, the very existence of the regional bourses has come into doubt. Even the other alternative, the Over The Counter Exchange of India, is faced with a crisis of existence, but thats altogether another matter.
But why are we discussing regional exchanges With a national market being provided by both NSE and BSE, where is the problem for the investors, it may be argued. To answer this question, it is necessary to probe the matter a little deeper. The pattern of stock trading today is hugely skewed towards a handful of listed stocks. In fact, of the 10,000-odd listed stocks, only the top ten stocks dominate as much as 75-80 per cent of the trading volumes. If one broadbases this further, only the top 100 stocks dominate as much as 99 per cent of the trading, Mr Mayya points out. Where, then, is the depth in our markets What small investor interest are we talking about
There were thousands of small investors who picked up stocks in the public issue boom or around that period, who are today stuck in various parts of the country, with no exit route for their stocks, even as the myth of huge trading volumes continues in these two exchanges, concentrated around just a few shares. What about the thousands of listed stocks which have little or no liquidity It is here that the regional stock exchanges still have an important role to play. Their volumes have, admittedly, dried up thanks to the onslaught from the two biggies, but if these regional stock exchanges come together, they can together create a market for this huge number of illiquid stocks the investors are stuck with.
Consider, for example, an investor in Ludhiana who is stuck with shares of a Punjab company and cannot trade in them since even the Ludhiana bourse does not offer liquidity in this share. This share may also be available with an investor in Bangalore. If the regional exchanges of Ludhiana, Bangalore and others have an interface, a market can be made for a number of these illiquid shares. Mr Mayya, in fact, is heading one such endeavour the Interconnected Stock Exchange, which was founded by 15 regional bourses. While ISE, like some other bourses, is also a member on NSE, its own national segment offers a kind of interface for investors holding illiquid stocks in various parts of the country.
The exchange, which is fully automated, attempts to convert small, fragmented and illiquid markets into a national market where illiquid stocks can be traded. But whether it wants to give a leg up to ISE by getting brokers to participate more actively in the bourse, or wants to chart out some other form of consolidation, Sebi must now focus on how these regional bourses can come together and offer small investors a trading avenue. Because even if he had bought a share at Rs 10 and the stock is now down to Re 1, the investor cannot even book a loss if he does not have an exit option.
No matter how much the Indian market develops in terms of automation, rolling settlements and derivatives products, the small investor will not return unless there is true depth in trading. And if Mr Bajpai wants to see the long queues return to the stock exchanges, Sebi will have to ensure that regional bourses dont die as a result of the emergence of NSE and BSE, but are given the right ambience to chart out a survival strategy for themselves.