Stage set for the next leap

Written by Akash Joshi | Updated: Dec 31 2008, 06:17am hrs
The dream run for the Indian capital market continues unabated, this despite the fact that the market capitalisation has halved over the year. Over the decade, the stock market has more than tripled its wealth. From Rs 10 lakh crore the market capitalisation on the BSE has grown to Rs 30 lakh crore, a compounded growth of around 11.5%, beating most of the investment avenues and also the economy growth rate. The past decade has seen a lot of cleansing and so, even while things might look bleak at the moment, the stage is set for bigger things.

A decade ago, if someone told me that the Sensex would cross the 21,000-points barrier, I would have called him an idiot, says Harish Pandit a stock broker in Mumbai. The benchmark index was hovering around 4,000 levels 10 years ago and the country was beginning to flex its nuclear power with the Pokhran blasts.

But the setting for modernisation and structuring of the market had begun in the right earnest. The Unit Trust of India and its flagship US64 was once again in the spotlight. The managers of this extremely secretive fund, that governed almost half of all fund based assets in 1998, announced in September that the reserves of US-64 have turned negative to over Rs 1,000 crore. Within five days of this disclosure around 3% of the corpus was wiped out and the markets tanked. In 1998, all market participants would have to compulsorily track this giant as it had the power to shake the markets. And, it did not have to disclose its portfolio. We would sit together and decide where the index should be today, says a senior executive who was at the helm of an insurance company. US-64 and a few institutions would decide the fate of the markets. And 1998 could be marked as the year of beginning of the demise of this stranglehold.

In October 1998 the government infused Rs 3,300 crore in US-64 by issuing a Special Securities Scheme. The Deepak Parekh Committee, headed by HDFC chief Deepak Parekh had suggested a slew of measures to restructure UTI and also US-64. The committee had suggested a speedy transition of all assured return schemes with a portfolio of risky assets to NAV-based schemes. However, the lack of political will to shake the market structure delayed the decision.

The subsequent tech boom and the noise created by the Kargil war dwarfed the need to restructure the market luminary. The market had however seen the introduction of rolling settlement in July 2001. Till then, the settlement of majority of trades was done on account period basis, where trades done in a trading cycle of five days were consolidated, scrip-wise netted and settlement of such netted trades took place on a single day in the following week.

It took anywhere between one to two weeks for the investor, depending upon the day of his transaction, to realise the money for shares sold or get delivery of shares purchased. However, in rolling settlements, trades done on each single day are settled separately from the trades done on earlier or subsequent trading days.

But before this important structural development could come up, the market had witnessed the huge Ketan Parekh-led scam. The run-up in tech stocks and the subsequent market bubble that got created in 1999 and 2000 was burst in 2001. Ketan Parekh had created his famous K-10 stocks, which included several fledgling tech companies, and would drive up share prices in a frenzy. Aftek Infosys, rumoured to be one of the K-10 pack members, saw its share price climb from Rs 40 a share level to Rs 2,400 levels. It is alleged that several banking and financial institutions were funding Parekh.

Information from the data provided by the RBI to the Joint Parliamentary Committee (JPC) during the investigation of the scam revealed that financial institutions like Industrial Development Bank of India (IDBI Bank) and Industrial Finance Corporation of India (IFCI) had extended loans of Rs 1,400-odd crore to companies known to be close to Parekh. Eventually, on December 2, 2002, Ketan Parekh was arrested in Kolkata.

The subsequent fall in values caused the US-64 to get into trouble again and the need to restructure surfaced once again. On July 4, 2001 UTI suspended the sale and repurchase of US-64 units causing a huge panic amongst investors. The finance ministry stepped in and turned the heat on to have the then UTI chief PS Subramanyam to resign. And M Damodaran took over the reigns of the crumbling edifice and he immediately stepped into stem the rot and put the office in order. The CBI too joined in the imbroglio and raids the residences of several UTI employees.

After all the drama that ensued later, it was in December 2002 that the Parliament approved the bifurcation of UTI into UTI-I and UTI-II. The Rajya Sabha approved the UTI Bill 2002 which was already passed by the Lok Sabha, by a voice vote. The final nail in the US-64 coffin came in February 2003 when finally UTI was split into two. UTI-I became UTI Trustee Company also known as Specified Undertaking of the Unit Trust of India or SUUTI. UTI-II got christened as UTI Asset Management Company or UTI Mutual Fund.

Meanwhile, the market regulator had systematically strengthened the structures and systems. GN Bajpai, chairman, Securities and Exchange Board of India at 2003 Lex Mundi Global Forum said, In fact, some reforms such as straight through processing in securities, T+2 rolling settlement, clearing corporation being the central counterparty to all the trades on the exchanges, real time monitoring of brokers positions and margins, and automatic disabling of brokers terminals are singular to the Indian securities market. Indian disclosure and accounting standards are as modern, updated, potent and versatile as those of any other market.

And this set the stage for the markets to recover and it is from the mid of 2003 that the markets started rallying from 3,000 Sensex levels. This, along with the introduction of futures and options, created a vibrant market for Indian equities. Catching on with the global liquidity surge Indian markets zoomed past the 21,000 mark in January 2008. The subsequent global meltdown has also taken the market below the 10,000 mark. There are signs that the market could well test another low in coming days. But be that as it may, the pull-out of $13 billion by the overseas investors and the tanking of the market have not created any adverse payment situation in the market. The Sebi has indeed created some strict norms and the exchanges are following these guidelines says a lot about the maturity of the Indian markets. The fact that each time there was a crisis like situation the regulator has stepped in and set things right, using conventional and unconventional means.

This indeed is a credible achievement over the last 10 years when players like insurance companies, US-64 or some individual could actually run the market up or down. This has created a significant platform for the regulators to expand from here on. The introduction of exchange traded gold funds and exchange traded currency derivatives, Nifty futures being traded in Singapore, is just the beginning of the market expansion. The year ahead is likely to see more products coming in and widening the platter. There is a lot expected on the corporate debt side as its failure to catch up could easily be one of the under achievements in the Indian capital market scenario.

The indices may move up or down, but clearly the stage is set for Indian capital markets to take the next leap and climb on to another level.