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Liquidity in the stock market is at low ebb. Of the outstanding value of stock available for trading on the bourses, only 0.5 per cent changes hands each day.
Cash turnover in the National Stock Exchange and the Bombay Stock Exchange put together now amounts to 0.5 per cent of the market's free-float. The proportion has halved from 1 per cent in 2008-09. The volume of cash trades has fallen even as the number of stock available for trading has risen.
Increase in free-float
With promoters shedding stakes in listed companies, the free-float available for investors to trade in has jumped 75 per cent in the last three years. Promoters have shed stake following fewer credit options, planned divestment and the government's norms of minimum public shareholding. The non-promoter shareholding (free-float) in BSE-500 companies has surged from 42 per cent in 2009 to 48 per cent now.
In contrast, daily cash volumes in the country's bourses have declined from Rs 15,770 crore to Rs 13,900 crore in the last three years. The shift from cash to derivatives could also account for the lower turnover in the cash segment.
What could be the reason for the lower churn? Retail investors cutting down on daily trades could be one reason. Shareholding patterns of listed companies reveal that institutional investors have upped their stakes in Indian companies significantly. FIIs held 12.9 of the market value of the BSE-500 companies in 2009 but now hold 17 per cent.
Churn in stocks
Some of the big names in the market such as Reliance Industries, Power Grid Corporation and Kotak Mahindra Bank have witnessed a decline in liquidity, that is, in the trades to free-float ratio.
In Reliance Industries, promoter holding had fallen from 48.56 per cent in 2009 to 44.7 per cent now. Cash turnover in the stock amounts to only 0.3 per cent of the free-float capital. This number was 0.8 per cent in 2009. In the stock of Kotak Mahindra Bank, this ratio has fallen from 1.5 per cent to a mere 0.3 per cent.
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