Promises to keep

The NSE’s technological innovations have made it the dominant exchange for both stock and currency trading with an over three-fourth share of market volumes. But size isn’t everything and with competition vanquished, it falls upon the NSE to address some issues in the equity market.

Market size is fine but what about market depth? While turnover in the equity derivatives segment has more than doubled in the last five years, turnover in the cash market has actually fallen by a fourth in the same period.

It is also a fact that the cash market, where long-term institutions and retail investors bet on the fundamental prospects of companies, accounts for a mere 7 per cent of the turnover on the NSE. Even within this, the index stocks and blue-chips dominate. Though over 1,500 stocks are listed on the NSE, the top 100 securities made up 77 per cent of all volumes in 2012-13. The NSE needs to focus on building liquidity in the cash market, which is critical to retail investors and raising new capital.

While the number of listed companies in India is among the largest in the world, their numbers are shrinking. The number of companies listed on NSE as of 2012-13 is 1,666, with an addition of less than 100 in the last two years. That is indicative of more companies being suspended for non-compliance with rules and not enough new companies seeking to go public. Neither is a healthy trend for investor confidence in the markets.

The filing of financial results and intimating exchanges of corporate actions and mergers — timely compliance with these listing regulations are to be monitored mainly by the stock exchanges. But in the Indian context, quite a few companies simply don’t follow the rules.

And if they don’t, the exchanges simply shut them out of the exchange platform.

The worst-affected are public investors who lose all liquidity on their shares. For instance, NSE has suspended close to two dozen companies for non-compliance since January this year. The Securities and Exchange Board of India (SEBI), taking note of this, recently directed exchanges to impose fines first and suspend trading only in the case of consecutive defaults. There is a need for exchanges to monitor disclosures made by listed companies to ascertain the adequacy and accuracy of such disclosures.

While NSE has enjoyed considerable success in ramping up volumes, driven by derivative products, it hasn’t managed to get retail investors flocking to equities or even financial instruments despite its state-of-the-art trading systems. As India’s dominant exchange, it does shoulder this responsibility along with the regulators.

The moribund primary market is one indication of this. Stagnating demat accounts is another.

Falling retail volumes on the bourses, with the rising clout of institutional investors, is an ominous pointer too.

Apart from equities, the NSE has also enjoyed limited success in driving retail interest in other asset classes. The dedicated debt platform for retail and institutional investors hasn’t taken off in a big way.

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