Overbearing secondary market: Time for business channels to refocus

For the public good, business channels must broaden their focus and look beyond stock market trading

The capital market in India has been booming for quite some time now. The swift recovery following the steep downturn of 2020 and the growth thereafter have been remarkable. Retail investors have flooded the market, with the number of demat accounts increasing by over 300 per cent in the past four years. A significant proportion of these investors are not well-versed in the market and have been lured by the prospect of making quick money.

 

This has created its own challenges. The Securities and Exchange Board of India (Sebi) has been cautioning investors to be careful while investing. Of late, the increased investor participation in the futures and options (F&O) market has been under its scanner. Sebi has repeatedly shared findings from various studies, highlighting how unsuspecting retail investors have incurred losses in the F&O market.

 

This column is not about the debate over the cash market versus F&O market. It focuses on how the secondary market dominates capital market discourse and highlights the need to increase investor awareness on issues related to the primary market.

 

It is well established that a deep, liquid, and well-regulated secondary market is essential to instil confidence in investors to participate in the securities market. Investments would come only if investors are confident in the rules of the game, the ease of entering and exiting the market, the objectivity of price discovery, and market efficiency. However, no one would disagree that the primary purpose of developing capital markets is to facilitate fund raising by corporations. That’s why fundraising is classified as a “primary market” activity, while trading in securities is considered “secondary”.

 

However, anyone watching business news channels on TV won’t get that impression. TV channels are besotted with secondary market news, not only during the trading hours but round the clock. 

 

In addition to real-time trading details, viewers are bombarded with data, past trends, street expectations of companies’ financial numbers, and more, along with advice and expert opinions on potential investment opportunities.

 

The common man often perceives stock market trading as the be-all and end-all of the capital market. Many find the stock market intoxicating. For valid reasons, the disconnect between the markets and the real economy frequently comes under criticism.

 

One must admit that the formats and practices followed for reporting trading news in the media have evolved over time to keep investors and other stakeholders glued to their TV sets.

 

One positive outcome of all this is the informative and meaningful public debate on various aspects of the secondary market. However, such a discussion is missing on the important issues related to the primary market.

 

To ensure investors and other stakeholders have a holistic picture, they need to be adequately sensitised to the underlying dynamics of the primary market, as the edifice of a successful secondary market must necessarily be built on proper knowledge and awareness of that market.

 

For instance, how many people are aware of the actual funds raised by corporations through the capital market? The total funds raised (equity + debt) by corporations in the last three financial years (FY22, FY23, FY24) and the first six months of this year (FY25 till September) were Rs 7,54,327 crore, Rs 9,21,556 crore, Rs 10,54,141 crore, and Rs 6,70,702 crore, respectively. These amounts are almost equal to, or even greater than, the incremental bank lending to companies during these periods. How can this trend be sustained? What is the current market sentiment and the ease of raising funds? What are the red flags and impediments?

 

Public issuances for equity would include initial public offerings (IPOs), follow-on public offerings (FPOs) and rights issues. An analysis of the objectives of raising funds could help in discerning the direction of macroeconomic growth in the country. Tracking significant exits by promoters and private equity (PE) funds, along with their plans to reinvest those amounts elsewhere, would be valuable. What are the trends in venture capital (VC) and angel investments in startups? How can this be facilitated? Which sectors are attracting major PE deals? What lessons can be learned for policy formulation?

 

On the debt side, while movements in 10-year government securities (G-secs) yields are covered, yields on bonds of other durations should also be disseminated, along with the spread of AAA-rated corporate bond yields over similarly tenured G-secs.

 

What have been the major private placements and public issuances of corporate bonds? What is the participation of domestic regulated institutions, such as mutual funds (MFs), insurance companies, and pension funds, in the primary and secondary markets for below AAA-rated bonds? What are the gaps between the stated policies and implementation, and what needs to be done?

 

Investments in real estate investment trusts (REITs) and infrastructure investment trusts (INVITs), instruments for monetising real estate and infrastructure projects, respectively, have picked up in the last few years. The combined amount raised over the last three financial years and the first six months of this year (FY25 till September) has been Rs 21,562 crore, Rs 6,360 crore, Rs 39,024 crore, and Rs 9,917 crore, respectively. What should be the right structure of projects to facilitate easy monetisation, and which sector projects are being preferred? What further reforms are needed for increased investor  participation?

 

Admittedly, the news covering these subjects, and other similar issues, won’t be as exciting and thrilling as the one covering stock trading. However, for the greater public good and adding substance to their content, media channels must put in best efforts to develop meaningful and easily discernible ways for reporting the developments in the primary market on a regular basis. 

 

The overbearing and overhyped focus on the secondary market vis-à-vis the primary market is surely a case of the tail wagging the dog, missing the larger picture.

 

The author is a distinguished fellow at the Observer Research Foundation, former chairman of Sebi, and a former civil servant