The Hindu Business Line : To widen market depth — Players moot independent research body for mid-caps

STOCK market participants - foreign and domestic - are considering setting up third party independent agencies that would provide research on listed companies across various categories of market capitalisation.

The move is to tackle paucity of research, often blamed for the perceived lack of depth in the Indian securities market.

At the FICCI - SEBI global seminar on securities market, foreign institutional investors and domestic buyers maintained that lack of adequate information about stocks is a serious constraint to the development of the Indian equities market. Participants emphasised that this is an opportunity for creating a pool of small- and mid-cap research by an independent body.

"We need to have a game plan to bring mid-caps into a wider trading universe. Availability of research, whether it is through an independent body or through broking houses, is fundamental to this," said Ms Naina Lal Kidwai, Deputy CEO, HSBC.

Currently, research is limited to a handful of stocks and sectors. Market participants say the problem is that most brokers cover the same stocks. "Broking firms should extend their coverage to some of these small- and mid-cap stocks. There is plenty of research on the top 30 odd stocks but information drops significantly after that," Ms Hazel McNeilage, Managing Director - Asia, Principal Global Investor Ltd, said.

The problem of lack of research is becoming more acute with the increased focus on mid-cap stocks. Earnings growth of companies in the mid-cap index for the current year is a whopping 73 per cent compared with 18.2 per cent reported by the Sensex constituents. The largest company by market capitalisation in the mid-cap index is larger than the smallest company in the Nifty.

Over 30 companies in the mid-cap index trade over $1 million in value daily while seven in the Nifty do not. This suggests that there is room for a number of mid-caps to be moved into the Nifty making it important enough to warrant better research and information, according to Ms Kidwai.

Broking houses are wary of tracking too many stocks because of the cost attached to this. "Every stock that we decide to track has to be assigned to an analyst. Analysts cannot be overburdened by the sheer number of stocks they track, so quality research is becoming a bit of a problem. We keep our ears to the ground and only as and when we find an exciting story, do we assign an analyst to make a report," said the head of equities of a foreign broking house.

Independent agencies are being mooted as the ideal solution to break this cost-benefit logjam and help provide liquidity and market depth.

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