India’s Sensex-30 and Nifty-50, trysting with new highs, have offered a spot of cheer amid gloomy economic news as the curtains came down on a forgettable year. But for investors who had significant allocations to equities, the index gains offered cold comfort. A BusinessLine analysis shows that while the Sensex has gained 15 per cent in 2019, 80 per cent of the listed stocks have made losses, with half of them sinking over 25 per cent. Indian stock market indices have always been poor barometers of the economy, thanks to the bulk of economic activity taking place outside the listed space. But now these indices appear to be losing their moorings to the corporate sector as well. This doesn’t augur well for the investor experience with equities in the long run. Given that it has taken many years of awareness efforts to rekindle the retail equity cult in India, the narrowing of the market needs to be reversed.

There are two reasons why the Sensex-30 and Nifty-50 have shown an increasing disconnect with corporate fundamentals. One, stock prices are ultimately slaves to earnings. But unfortunately for the Indian market, rising retail interest in equities in the last five years has coincided with an earnings drought. With the sluggish economy denting prospects for most sectors, only a handful of firms have offered predictable profits. The flood of liquidity into domestic equities has thus chased this select club of ‘quality’ stocks, bidding up their valuations to stratospheric levels. Two, the global wave towards passive investing has led to foreign portfolio flows concentrating in index names too, with the market-cap weighting of these indices actively aiding market polarisation. Institutions such as the EPFO and the NPS, which channel pension money into markets, have stuck with the narrow indices too, citing quality and liquidity concerns. Meanwhile, the IPO pipeline which is supposed to expand and refresh the listed universe has seen only a trickle, with deep-pocketed private equity investors supplying exciting unlisted firms with ample capital. All this has led to an unsustainable situation where, despite boasting of a 5,500-strong listed universe, much of the market action now revolves around just 150-200 stocks. Beyond these, both liquidity and the quality of regulatory and analyst scrutiny drops off sharply.

Widening market breadth needs to be on the top of SEBI’s to-do list for 2020, if the nascent equity cult is to sustain. Ushering more global index providers into India to design indices with broader market coverage and non-market cap-weighted methods could be one useful step. Developing the passive fund industry around the BSE-500 and Nifty-500, instead of the Nifty-50 or Sensex-30 is another. The large sums idling in investor protection funds must be put to productive use in funding independent research into smaller companies. SEBI must also tighten the screws on the exchanges to fix their lax oversight of the hundreds of listed firms that cut corners on governance and statutory filings.