Indian Capital Market: A
Global Benchmark
By Gopal K Agarwal,
The
government should know that speculation is an integral part of the capital
market. It has to control speculation and not remove it. If speculation is bad,
then the government should understand that currency is the biggest promoter of
speculation and we have to move towards a barter system.
Technological advancements and extended reach have catapulted Indian capital market in a different league
altogether. The vast geographical network created by stock exchanges along with
brokers and sub-brokers throughout India, is unparalleled in the world. More
than 900 members of NSE cover (as on April 2003) a total of 353 cities through
a network of 2,765 VSATs and about 886 leased line connections.
Add to this the network of 213
depository data participants of National Securities other Depository Ltd (NSDL)
with their branches at 1,718 locations, other members of Regional Stock
Exchanges, approximately 750 members of Bombay Stock Exchange (BSE) and 122
Depository Participants of Central Depository Services Ltd (CDSL), together
these cater to an investor base of more than 4 million accounts. If we also
take a conservative estimate of 20 sub-brokers per broker we get more than
30,000 sub-brokers all over India.
The total capital employed by the 770
corporate members of NSE (for whom the data is available). It is more than Rs
12,603 crore as on March 2001. Add to this the employment generation through
servicing of 4 million investors' DP account and broking, subbroking offices Electronic
network has provided trans- parency to investors with regard to price and time
parity. Every investor in the country has instant access to online trading,
providing him liquidity for his investments. Almost 100 per cent delivery
transactions at stock exchanges are carried out electronically and are
instantaneous. The infrastructure of NSDL has achieved so much success that
even Finance Ministry is looking towards it for its ambitious project of
creating National Tax Information Network (TIN).
In a short span, the derivatives
market has achieved a turnover of Rs 4,398,548 million in the year 2003. The
success of futures market in the derivatives segment has encouraged the
government to open up commodities futures and provide similar trading mechanism
to intermediaries involved in agricultural products, thereby bringing reforms
to the commodities market.
The capital market has now become a
catalyst to overdue banking sector reforms. Although Electronic Fund Transfer
(EFT) or Real Time Gross Settlement (RTGS) is not in place as claimed by the RBI,
the apex bank and its associates are working overtime to adapt to online
networking and implement anywhere banking.
Another revolution which is taking
place in the market is Straight-through-Processing (STP). It is a move to
automate trade processes from initiation to execution to settlement. It
involves electronically capturing and processing transactions in one pass, from
the point of first "deal" to the final settlement.
Current practices involve costly
multiple data reentry from paper documents and other sources that are
susceptible to errors, discrepancies, delays and possible fraud. STP enables
orders to be processed, confirmed. The government should know that speculation
is an integral part of the capital market. It has to control speculation and
not remove it. Currency is the biggest promoter of speculation and we have to
move towards a barter system cleared and settled electronically, in a shorter
time period, more cost-effectively and with fewer errors than under traditional
methods such as phone, fax, email etc, that require human intervention. Once
this is fully implemented, the Indian capital market will have no parallel in
the world.
However, there is a caveat.
Technology in itself cannot contribute to the development unless it reaches the
masses. This role has been effectively played by a strong force of professionally-qualified
market intermediaries who are adequately capitalised and are technically savvy
with entrepreneurial zeal. With the implementation of SEBI Act 1992 and recent
amendments giving it vast powers, the regulatory framework is strong enough
to take care of compliances and investors' protection.
With all these things in place, the
market is poised to take a quantum jump only if Government takes care of the
problems of the market with all its subtle aspects.
The problems being faced by the
markets are enumerated below:
Over-regulation is the main problem.
Of course, effective regulations are a must. However, if regulations are so
rigid that its compliance becomes impractical and impossible in normal
circumstances then instead of reforming the intermediary, the government will
end up killing it. In the process, well-intentioned intermediaries as well as
investors will prefer staying away from the system. Also, there is a multiplicity
and overlapping of regulators like Sebi, RBI, Ministry of Finance, Stock
Exchanges, Depositories etc. Regulation is through multiple regulations like
Securities Contract (regulation) Act 1956, Companies Act 1956, Income Tax Act
1961, Service Tax, Indian Stamp Act 1899, The Limitation Act 1963, The
Negotiable Instruments Act 1881, Benami Transactions (prohibition) Act 1998,
Indian Contract Act 1872, and Indian Penal Code.
Intermediaries have to bear high
costs including establishment, infrastructure and employees cost, technological
cost which include networking, equipment and software cost, cost of
capitalisation and most important is the high cost of compliance and regulatory
fees like Sebi fees, NSE turnover tax, stamp charges, service tax, compulsory
insurance and annual membership fees. The government and the regulators have to
understand that if they want investor services at a reasonable cost, they
should work with the intermediaries.
Absence of banks and other modes of
financing like margin trading, is leading to a shortage of liquidity to the
intermediaries. Non-involvement of intermediaries in the decision-making
process is another major problem. Further, the Government has not given
sufficient importance to market intermediation- tion by giving it an industry
status. The plea bargaining mechanism which avoids lengthy court battles and
allows early settlement of disputes, is also not yet implemented.
There is absence of self-regulatory
organizations (SRO) which can understand the problems of the market in a
better way and can give practical and effective solutions. There is no uniform
Stamp Act across various states and the government has not come out with
clarifications regarding digitally signed documents.
Recently, the Company Law has
proposed to levy cess under section 441 on turnover at the rate of 0.05-1 per
cent, where the beneficiary is the manufacturing sector but the cost will
have to be borne by the service sector also, and that too on the basis of
turnover at a rate which is higher than the commission being charged by
intermediaries from their clients.
Recently, SEC chairman William
Donaldson said that a regulator has to con- sider the proper role of market
intermediaries and self-regulatory organisations, participants to ensure that
their views are heard on how markets should work.
Back home, Sebi has appointed an
eight-member committee of eminent economists who will file a report on the
regulations of the capital market. It now hopes that the view of this committee
will help design a proper framework for ensuring smooth and successful
operations of the market and give Indian markets an international perspective
and make it a global benchmark. It is time intermediaries are understood in
the right perspective. Only then can the practical problems be solved
properly.
The
author is Member, central Economic Cell, BJP
