SHAPING THE FUTURE OF INDIAN FINANCIAL MARKETS
Capital markets are an avenue for long-term funds for corporates. Due to the organised nature of capital markets in the form of exchanges, they have been amongst the easiest markets to transact in. Speculation has also been an important part of the capital markets since beginning. In essence, raising of funds for debt or equity or hybrid is why they are called capital markets, although the actual raising of funds happens with a very low frequency. In fact, one doesn’t see IPOs every day and every second. The markets for IPOs are also called primary markets. Given the low frequency of the activity and also the hard work involved in putting together documents like the prospectus, etc. and the marketing of the issues over a long duration, capital raising or IPO is not an exciting activity, especially from the media perspective. In contrast, secondary markets have caught people’s attention due to the high frequency of trading and the tick-by-tick movements of prices. They were called ‘satta bazaar’ even in old times. The secondary market allows already issued debt and equity to trade. It also involves speculation. Earlier, secondary market trading used to be done on a physical floor which was called a ring because the shape of the physical space was circular. Since 1995, the trading takes place on computer screens at the BSE and no one has to come to the BSE building to trade. Everyone can place orders with the BSE irrespective of where they are located.
MOMENTUM WITH AUTOMATION
Over the last 25 years, automation has increased the speed of trading manifold. What could be done in a few minutes started taking place in a second or less in 1992 and now it is done in the time frame of 1,50,000th of a second. The speed of trading along with advent of algorithm trading and subsequently co-location facilities has increased the trading volume manifold. As per estimates, in 25 years the Indian stock market volume has increased by 5,000 times. In contrast, the number of people investing in secondary markets hasn’t grown much.
CALLING MIDDLE CLASS INVESTORS
As per estimates, the number of investors trading and investing in Indian markets have not increased despite the fact that the per capita GDP and disposable income have increased manifold and the size of the middle class has gone up by over 10 times. So what could be the reason? The markets, designed for investments, have transformed themselves to trading markets. In India, in contrast, the number of people investing in capital markets doesn’t seem to have gone above 2% of the total population in the last 25 years, as compared to 25% to 50% globally. It also means that the Indian stock market investors can grow up by 10 to 25 times to reach 25% to 50% participation rate in the next decade when India enters the middle income group of countries. It will be a huge growth of investible capital being used for investments in the country. The Indian market capitalization of listed firms is expected to go up from USD 2.3 trillion currently to USD 10 trillion over the next
ten years. This increase in investor population and overall investments is possible if we are able to enhance further trust in the markets and distribute financial products to larger number of Indians who have never invested in the markets. It is also imperative that newcomers entering the capital markets are presented with the opportunity to invest in longterm less risky instruments.
WEARING MULTIPLE HATS
BSE has been focusing on distribution of financial products for investments instead of speculation and trading. The wealth of a nation cannot be built up only on speculative or short-term trading activities. The nation will have to learn to harness its savings into productive capital that is not a zero sum game but increases over time as the economy grows. BSE has developed several market leading and innovative frameworks like E-IPO, Bond Distribution, BSE Star MF, SME, etc. It has today emerged as a preferred platform for companies to raise funds as low as Rs 1crore to Rs 10,000 crore. With a market share of over 70%, the BSE bond platform has raised about Rs 2.5 lakh crore for Indian corporates since April 2016. Similarly, the BSE SME platform enables SME companies with a post issue face value capital of as low as Rs 3 crore to access the capital market to raise funds. BSE SME has now raised over Rs 2,000 crore for 231 companies whose market capitalization has stood over Rs 23,500 crore. Similarly, the BSE Star- MF platform is India’s largest digital platform to distribute mutual funds (MFs), commanding a market share of close to 80% amongst exchange distributed funds. It accounts for more than 50% of all new retail funds flowing into MFs. It has experienced a growth of over 500% in the last two years. In the current fiscal, the platform has processed a record of more than one crore transactions with a total value of over Rs 1.1 lakh crore. BSE Star MF now adds over 1,000 members per month and has 2,00,000 independent financial advisors, brokers, broker branches and associates in over 3,000 cities.
A REPOSITIONED ROLE
In essence, BSE has positioned itself as the Investment Exchange of India and achieved many of its objectives. BSE now plans to also provide insurance distribution through its distribution system available in more than 3,000 cities having more than 2,00,000 people connected with it who are highly literate and used to providing financial solutions. The BSE insurance distribution framework is expected to roll out in the next few months. The Indian financial distribution system is changing rapidly. BSE is playing a leadership role in adopting modern technologies to the growing needs of India like it has done for over 142 years. BSE has now truly become a catalyst for capital formation instead of acting solely as a platform for speculative trades.
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