Financial reforms to help Indian market grow three-fold, says Ficci

Increasing the market participation, expanding issuers, streamlining processes and deepening product markets are the key elements that lead to a three-fold growth in India?s capital markets by 2020, says a recent Ficci Report on capital markets. The study?Capital Markets 2020: Going for 3X?was conducted in a recent study by McKinsey & Company.

The report notes that though the overall growth in the capital market seems healthy, there are still some challenges to growth and deepening of the capital markets which need to be removed to achieve the target of growing the Indian Capital Markets to three times their current size by 2020. The key challenges for starters are low depth in equity markets: Indian markets have a lower trading velocity as compared with other markets such as China, Japan, the United States, the United Kingdom and Germany. Trading velocity in India has reduced over the time while it has increased in almost all other markets. Also Indian exchanges are also somewhat undiversified: equities and commodities comprise approximately 90% of trading volume. Most of the other markets have a much more diversified mix, with interest rate futures, foreign exchange futures and corporate bonds accounting for a sizable share of exchange trading. Then, only four cities? Mumbai, Delhi, Ahmedabad and Kolkata ?account for 85% of cash trading. The report also finds that Indian households invest much less in equity markets than their developed-market counterparts. As a result, retail equity ownership (non-promoter) amounts to only around 10% of total equity ownership, and has come down by 3% over the last seven years.

Interestingly, futures and options (F&O) contribute approximately 75% of trading volume in India, significantly more than in developed markets. As F&O are cash-settled, they make a minimal contribution towards capital formation. The report lays out some ideas for reforms across four key areas of focus to achieve these objectives.

The report suggest a dedicated SME exchange to raise funds at a lower cost and thereby expand issuers.