Gautam Mukherjee
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 foreign direct investment. The pledged FDI, by its very nature, may prove to be quite slow coming, and will, in any case, be consumed in pre-designated projects only.
The Indian public sector 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 foreign institutional investors. 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. In India, both the Bombay Stock Exchange and National Stock Exchange, rank 12 and 13 presently, and they need to gear up. They need to facilitate the expected doubling in market capitalisation within four years, if we need to experience the anticipated multi-year bull run.
The aftermath of the 2008 global financial crash, with safety nets erected everywhere, 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 per cent 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 per cent in terms of gross domestic product, 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 Mr 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 per cent of Indian shares, composed mainly of the 15 companies that account for 35 per cent 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 per cent of Infosys even as the company is also listed on New York Stock Exchange, the world’s Number one 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.
