To any investor who did a Kumbhakarna and left the Indian stock market for a long nap in 1994, its transformation in the last 25 years will seem nothing short of a fairy tale. Retail investors have embraced technology, the listed universe has expanded beyond recognition, transaction costs are near-zero and market participants are well-regulated. But rapid growth has also brought the market to a fresh set of cross-roads from where it urgently needs new direction.

Electronic reboot

When BusinessLine ran its first print, the Indian stock market was just waking up to the advent of the National Stock Exchange in 1993. The professionally run NSE was an unlikely challenger to the hoary 100-year-old BSE where trading was ring-based, paper-driven and orchestrated by a clique of all-powerful brokers. But investors took to the NSE’s nationwide electronic trading platform like ducks to water. Vexed with botched execution, lost paper certificates and payment defaults, they were quite ready to switch to a platform where they could trade dematerialised shares, view a real-time order book, punch in trades online and rely on the exchange to guarantee pay-outs.

With the BSE forced to follow suit, what followed was two-and-a-half decades of untrammelled growth in India’s equity cult. Between 1993-94 and 2003-04, the number of listed companies rose from 3,585 to 5,528, and the value of cash equity trades surged 18-fold from ₹86,000 crore to over ₹16 lakh-crore.

Institutions take over

But that was just the beginning. From the early ’90s when India opened its doors to foreign portfolio investors (FPIs) until 2002-03, they merely flirted with local stocks, investing ₹6,000 crore a year. But as the Indian economy took wing in 2003-04, they began a full-blown romance, raising investments to ₹45,000 crore that year and going on to invest ₹1.1 lakh-crore by 2014-15.

In the last four years, even as the FPI fervour has cooled off, domestic retail investors have warmed up to equities, mainly via mutual funds, pension funds and insurance plans. Domestic institutions buying over ₹1 lakh-crore of stocks in 2018-19 have proved an effective counter-weight to FPI sales. This has propelled cash turnover on the bourses to ₹67 lakh crore (December 2018). Rapid technology adoption in trade execution has, at the same time, spawned discount brokers who have whittled down transaction costs to near-zero. In the last 25 years, the BSE Sensex delivered a modest CAGR of 10.5 per cent. But the broader market has created enormous investor wealth, with its market cap vaulting from ₹3.7 lakh- crore to ₹143 lakh- crore, positioning India as the seventh-largest equity market in the world. This is no mean feat for a country where less than 5 per cent of the population dabbles in equities.

Rising regulations

One usually expects scorching growth in any sector to be accompanied by lax regulatory oversight. But with the Securities Exchange Board of India (SEBI) proving to be a vigilant and investor-centric regulator, the Indian stock market has been an exception. SEBI made an early start in setting the ground rules for market players with its regulations for brokers, merchant bankers, registrars and portfolio managers in 1992-93. Omnibus regulations for mutual funds were in place by 1996, and for credit rating agencies and venture-capital investors by 1999-2000.

These laws have been regularly updated to plug loopholes. So much so that India’s rules on insider trading, unfair trading practices and mutual fund categorisation today set a far higher bar on market participants than their global counterparts.

In recent years, SEBI hasn’t fought shy of using its penal powers to slap notices and disgorgement orders on market offenders. Nor has criticism deterred it from unpopular actions such as writing new rules for fund categorisation, freezing trades on volatile stocks or insisting on physical settlement of derivatives.

Thanks to all this, the Indian stock market, once akin to the Wild West, is now ranked highly by the World Bank for protecting minority investors.

What’s missing

But despite these positive shifts, new challenges are emerging that need urgent attention. One, while breaking new records on trading turnover and market capitalisation, the universe of listed stocks has stagnated in the last four years at 5,800-odd names. Regularly traded stocks number less than 3,000. If you apply filters for size, profitability and shareholder returns, it yields an investible universe of less than 300 stocks. As domestic liquidity floods into equities, new ideas are imperative to expand this stagnant pool.

Two, despite the secular growth in its secondary market, India’s primary markets is in an on-off mode. The lack of a well-developed primary market impedes fund-raising and a vibrant listed universe. Finally, for all its zeal in writing new regulations and issuing orders, SEBI has not been all that successful at taking enforcement actions to their logical end by prosecuting big-name market offenders. Governance infractions at India Inc continue to frequently buffet minority investors. Addressing these gaps is essential to ensure that the Indian market’s golden run continues.

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