Emerging Scenario of capital markets in India

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Ugc sponsored national seminar on Emerging Scenario of Capital Market in India Keynote Address By Dr Subhash Chander Professor of Accounting & Strategic management Dept of commerce & business management Guru nanak dev university, amritsar (India) Organised by kanya maha vidyalya jallandhar September 25-26, 2010

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CHANGE IS THE LAW OF NATURE And A VARIABLE WHICH REMAINS CONSTANT IS CHANGE

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IF INDIVIDUALS, ORGANISATIONS, MARKETS, REGULATORS, ECONOMIES DO NOT CHANGE AS THE ENVIRONMENT SURROUNDING THEM CHANGE, THEY WILL HAVE TO FACE EXIT

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WORLD ECONOMY INDIAN ECONOMY FINANCIAL SYSTEM CAPITAL MARKET ECONOMIC ENVIRONMENT POLITICAL ENVIRONMENT TECHNOLOGICAL ENVIRONMENT SOCIO-CULTURAL ENVIRONMENT LEGAL ENVIRONMENT

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India is changing and emerging as a stronger nation of the world and its success is market led

Rising GDP growth : 

Rising GDP growth % average annual GDP growth 1900 – 1950 1.0 1950 – 1980 3.5 1980 – 2002 6.0 2002 – 2006 8.0 2006 – 2010 7 – 8 Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1990-2000:Census of India (2001), 2000-2005 Finance Ministry Recently projected as 10% for 2010 as per news on TV India Story

Population growth is slowing : 

Population growth is slowing % average annual growth 1901 – 1950 1.0 1951 – 1980 2.2 1981 – 1990 2.1 1991 – 2000 1.8 2001 – 2010 1.5 Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1990-2000:Census of India (2001) India Story

Literacy is rising : 

% 1950 17 1990 52 2000 65 2010 (proj) 80 Source: Census of India (2001) Literacy is rising India Story

Middle class is exploding : 

% Million People 1980 8 65 2000 22 220 2010 (proj) 32 368 Source: The Consuming Class, National Council of Applied Economic Research, 2002 Middle class is exploding India Story

Poverty is declining : 

1980 46% 2000 26% 2010 (proj) 16% 1% of the people have been crossing poverty line each year for 20 years. Equals ~ 200 million. Poverty is declining India Story

Productivity is rising : 

Productivity is rising India Story 30% to 40% of GDP growth is due to rising productivity

Per capita income gains : 

(US$ ppp) 1980 1178 2000 3051 2020 (Proj) 5800 Source: World Bank Per capita income gains India Story

India is now the 4th largest economy : 

India is now the 4th largest economy India Story And it will cross Japan between 2012 and 2014 to become the 3rd largest

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The banks and securities markets are two competing mechanisms to channel savings to investment. The securities markets score over banks in the allocational efficiency, as it allocates savings to those investments which have potential to yield higher returns Hence, investments in capital market are preferred over those in the banks

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A well functioning securities market is conducive to the sustained economic growth of an economy: Augments the real savings and capital formation from any given level of national income, (b) increases net capital inflow from abroad, (c) raises the productivity of investment by improving allocation of investible funds, and (d) reduces the cost of capital.

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The Indian Securities Market Before 1992 Fragmented regulation; multiplicity of administration. Stock exchanges regulated through the Securities Contracts (Regulations) Act. Trading was limited to Equity Shares Open outcry trading system (Floor based trading) Longer settlement period   Primary markets not in the mainstream of the financial system.

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The Indian Securities Market Before 1992 contd….. Poor disclosure in prospectus. Prospectus and balance sheet not made available to investors. • Investors faced problems of delays (refund, transfer, etc.) • Stock Exchanges run as brokers clubs; management dominated by brokers. • Merchant bankers and other intermediaries unregulated. • No concept of capital adequacy.

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Mutual funds—virtually unregulated with potential for conflicts of interest in structure. Poor disclosures by mutual funds; net asset value (NAV) not published; no valuation norms. Private sector mutual funds not permitted. Takeovers regulated only through listing agreement between the stock exchange and the company. No regulation of insider trading, or fraudulent and unfair trade practices The Indian Securities Market Before 1992 contd…..

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Changes in Indian Capital Market Since 1992 AGENTS THAT HAVE TRIGGERED CHANGE IN THE INDIAN CAPITAL MARKET STRATEGY OF LIBERALISATION, PRIVATISATION AND GLOBALISATION LEADING TO FINANCIAL SECTOR REFORMS EMERGENCE OF INFORMATION TECHNOLOGY AS A STRATEGIC TOOL TO ENHANCE SPEED, EFFICIENCY AND TRANSPARENCY IN OPERATIONS Use oF innovation and creativity

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Changes in Indian Capital Market Since 1992 Contd…… Power to regulate stock exchanges delegated to SEBI by the Government. SEBI gaining maturity and becoming stronger day by day. bringing primary and secondary market intermediaries within the regulatory framework. improved disclosure standards introduction of prudential norms, and simplification of issue procedures code of advertisement for public issues to ensure fair and truthful disclosures introduction of book building for institutional investors capital adequacy norms for broker accounts Clause 16 of listing (Cash Flow statements) Clause 49 0f listing (Corporate governance)

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Changes in Indian Capital Market Since 1992 Contd…… Free pricing of securities - Capital Issues (Control) Act of 1947 repealed and the office of Controller of Capital Issues abolished Shift from Floor based trading to a fully computerised automated trading known as BOLT (BSE on Line Trading) and NEAT (National Exchange Automated Trading) System Introduction of Rolling Settlement – reducing the cycle to T+2 Dematerialisation of securities - The Depositories Act enacted to facilitate the electronic book entry transfer of securities through depositories

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Changes in Indian Capital Market Since 1992 Contd…… Emergence of Wholesale Debt Market Introduction of trading in Derivatives instruments Index Futures Stock Futures Interest Rate Futures Currency Futures Index Options Index Options Mutual Funds emerging as an important segment of Indian Capital market Irrelevance of Regional Stock Exchanges Grading of IPOs Venture Capital Funds regulated by Venture Capital Regulations 1996

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Changes in Indian Capital Market Since 1992 Contd…… Internationalisation of Indian Capital market: Foreign direct investment allowed in stockbroking, asset management companies, merchant banking, and other nonbank finance companies. Foreign institutional investors (FIIs) allowed access to Indian capital markets on registration with SEBI Indian companies permitted to access international capital markets through Euro issues Improved disclosure norms of international standard Application of IFRSs

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BSE IndoNext BSE and FISE (Federation of Indian stock Exchanges, which represents 20 RSEs), have jointly created an alternate national platform named BSE IndoNext, to enable SMEs to raise equity and debt, and facilitate trading in such companies, both old and new. Phase - I of the BSE IndoNext was launched on 7th January 2005 Changes in Indian Capital Market Since 1992 Contd……

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Currently currency futures are available on USE in 4 currency pairs - USD-INR, EUR-INR, GBP-INR and JPY-INR Currency and Interest rate derivatives present a unique opportunity that can potentially change the business landscape in India. However, it is also one of the least understood. Recognizing this need, USE has initiated a knowledge centre through which it aims to educate Indian businesses and traders about the benefits of derivatives and trading. Changes in Indian Capital Market Since 1992 Contd… United Stock Exchange of India Ltd. (USE) India’s newest stock exchange launched on Sep. 20, 2010 USE symbolizes India’s modern financial markets With 21 PSU banks, 5 Private Sector banks and 3 corporate institutions as shareholders, USE has a unique advantage helping it to build a liquid platform.

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Strengths of Indian Capital Market Quality of regulation Improvements in efficiency, transparency , safety & speed Trading in cash. Debt, MFs and derivatives Growth in volume of securities transactions Advanced risk management systems Reduction in transaction costs Fully automated trading system Compliance with international standards Strengths of Indian Capital Market

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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, “Capital Markets 2020: Going for 3X”, conducted by McKinsey & Company released at the FICCI Annual Capital Markets Conference, CAPAM 2010 on 20th April.

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Issues for Research in capital market Analysing efficiency of the Spot and the Derivatives markets Evaluating the performance of IPOs Studying the stock market anomalies Volatility at Indian Stock Exchanges Relationship between Spot market and the Derivatives market Integration of Indian capital market with the global capital markets Impact of Investments by FIIs on the Indian capital market

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Issues for Research in capital market Contd…….. Event studies involving the impact of corporate announcements on share prices Analysing the growth of debt market in India Studies related to Mutual Funds * Performance evaluation of mutual funds * Growth of the mutual funds * Investors’ perception towards mutual funds Evaluating the regulatory framework of Indian capital market Examining the disclosure practices of companies Convergence of accounting standards to IFRSs

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Knowledge Creation by NSE and BSE

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I thank the organisers for giving me an opportunity to learn and The Audience for giving me a patient hearing