Time To Grow Up

 

Time To Grow Up

There is a strategic need to increase the size, depth and sophistication of our stock markets. Right now, it is about as poised as a determined little girl tottering about in her mother’s high heels. We may not be able to attract the trillions we need for development, purely through stage-by-stage drawdown of FDI.  The pledged Foreign Direct Investment, by its very nature, may prove to be quite slow coming in, and will, in any case, be consumed in predesignated projects only.

The Indian PSU banks are in a dreadful state, under-capitalised, over-staffed, and burdened with scandalous bad debts.  The remedy may be to privatise them, but it will be both slow and expensive, because of their extensive liabilities.

The stock market then, particularly a buoyant one, is the place to go to raise funds, inexpensively,  and against equity.

But, a lot needs to be done to widen the scope of the Indian bourses so that they can absorb a great deal more of FII.  We cannot afford to be officious, with layers of over-regulation Indian style either.  We must quantum upgrade of our real-time internet linkages, which are amongst the slowest in the world. We need to replicate, create and offer a range of investment products without caps and codicils, to provide liquidity to many of the equities, in the decent midcap and smallcap space, that FIIs presently avoid. And we need to streamline regulations to provide the reciprocity that other, top stock exchanges, around the world are used to.

Having said that, the current Indian stock market valuation has given it entry into the top twenty of global bourses. Still, it is only just at $1 trillion in market capitalisation, a fraction out of the world total of $ 64 trillion, as per 2013 figures.  

In the Asia-Pacific alone, Japan, Hong Kong, Shanghai and Shenzhen are all bigger, with three of the  four bourses from the same country, China. India, both the BSE and NSE, at rank 12 and 13 presently, need to gear up. They need to facilitate the expected doubling in market capitalisation within four years, if we experience the anticipated multi-year bull  run.

The aftermath of the 2008 global financial crash, with safety nets erected everywhere, over the past seven years, has been particularly turbulent for the developed world. And a period of adjustment and renewal is still ongoing.

In the interim, the old front-runners, still massive in market size from years of leadership, have been overtaken in terms of growth, by China and India.

And that is why a proportion of the seemingly endless global stimulus money, obtained at near zero percent interest, is pouring into this country, and will continue to do so. India has been adjudged the brightest prospect in the Emerging Market universe now and going forward. 

Global investment continues to flow into China, even though growth there has slowed from double digits to a little over six percent in GDP terms, because it remains one of the greatest manufacturing and infrastructure building hubs in the world.

In India, with the Modi Government seeking foreign investment vigorously for massive infrastructure and manufacturing  developments of its own; the quantum, flow and requirement of this foreign money is only set to increase year- on-year  throughout the next  decade. Assuming, as does most of the FII money, that Modi will win a second term as well.

But the FII investment coming into the bourses needs to spread out over a wider universe of stocks to reduce volatility and provide much needed stability. Today, the FIIs own 22% of Indian shares, composed mainly of the 15 companies that account for 35% of the market capitalisation. This is top heavy and concentrated over a very narrow band.  But the reason for this is that most of the over 6,000 listed stocks are hard to both buy and sell. So, for example, the FIIs own over 42% of Infosys even as the company is also listed on NYSE, the world’s No.1 bourse.  

The situation is so askew that the FIIs control the Indian stock market almost completely today. If they sell, it plummets, if they buy, it rockets upwards. For their own convenience, the FIIs tend to buy only the most liquid stocks, the ones tracked by the Sensex and Nifty. And the FIIs are the only ones that can invest billions of dollars at present, and with ease.

Yet, the great, about 34% rise in the price of Indian equity this year, has been achieved on the back of just $15 billion in FII investment approximately.  That such a small amount  can call the shots so comprehensively is highly illustrative of the daintiness of the Indian market. The FIIs have pumped in another $15 odd billion into the Debt Market too, but would invest much more if they were permitted.

The SEBI meanwhile, is busy attaching additional restrictions, such as its fresh curbs on participatory notes from less transparent entities from West Asia. The purpose of this is unclear, but the Indian authorities find it difficult to support  rapid growth,  perhaps fearing lurking threats to security or stability with the stock markets at all time highs.

After the FII holding, the only bigger figure is that of the company promoters themselves, at 28%; and this section is mostly static as promoters don’t usually sell their shares.

The other major influence in the Indian market are the mutual funds, financial institutions, insurance companies and investment banks , NBFCs etc., which together are known as Domestic Institutional  Investors (DII), and collectively own about 15% of the shares  today.

The retail investor, pitifully few in proportion to the population, is mostly conspicuous by his absence, except from share-loving Gujarat, and the city of Mumbai. Nevertheless, the punters, day-traders and so on, have no choice but to follow these big players and their doings and hope for the best.

The HNIs, once counted some ‘Big Bulls’ in their midst. Now, even with the growth of the market valuations to a modest $1 trillion, and given far more stringent oversight by SEBI, they cannot ‘make’ the market anymore. Some Indian stock market icons such as Rakesh Jhunjhunwala or Ramesh Damani are respected for their views, but again it is the FII majors that are today’s market opinion-makers.

But all this can be a great boon if the Modi Government makes up its mind to treat the stock markets as the main potential financiers of infrastructure and industry, and do everything possible to reform and grow the reach and heft of the BSE and the NSE.  

(1,094 words)

November 25, 2014
Gautam Mukherjee