More transparency, deeper stock markets.
The Economy Survey has recommended a slew of measures for bringing transparency to and deepening the Indian stock markets.
For integrated development of financial markets, it said all regulations should be brought under the Securities and Exchange Board of India (Sebi). This recommendation, if implemented, would enhance Sebi’s powers, whereby it can have a say over insurance and commodities as well.
To improve transparency, it said overseas high net worth individuals should be allowed to register and invest directly through Indian intermediaries. This would help ban indirect ways of investment, like participatory notes.
The survey reported that despite a sharp correction in stock market indices, the year-end (December 2008) valuation of stocks, in terms of price/earning ratio of the BSE Sensex and NSE Nifty were 12.4 and 12.9 – the highest among select emerging market economies like South Korea, Malaysia, Thailand and Taiwan.
The Sensex also gave the best five-year return, of 65.2 per cent, among major Asian indices like Hang Seng, Nikkei, Kospi and SSE Composite Index by December 2008.
But the good news ends there. Following the global financial crisis, returns from the capital markets dipped over 50 per cent. There were only 37 initial public offerings (IPOs) in 2008, compared to 100 in 2007. The total amount raised through IPOs was only Rs 18,393 crore, down 45.8 per cent from the previous year. However, the average IPO size increased from Rs 339 crore to Rs 497 crore.
The net inflows into mutual funds, which had recorded a steady rise in the 2005-07 period, turned negative in 2008. Besides the exception of gilt and gold-oriented schemes, all other schemes saw a decline in their assets.
The private sector mutual funds witnessed heavy redemption pressure and witnessed a net outflow of Rs 12,506 crore. The Unit Trust of India also recorded a net redemption of Rs 2,704 crore.
Investors’ risk preference was also changed during the year. Public sector mutual funds (other than UTI) garnered Rs 14,587 crore. Investors also moved from growth-oriented schemes to income/debt schemes.
Reflecting the bearish trend, the market capitalisation declined sharply. The market capitalisation to gross domestic product (GDP) that was at 109.5 per cent in March 2008 fell to 49.7 per cent by March 2009.
The turnover of the spot market continued to rise on the NSE, while it declined by 6.4 per cent in the BSE. However, the turnover in the derivatives market in both NSE and BSE fell by 2.4 per cent and 65.8 per cent, respectively.
Foreign institutional investors (FIIs) and mutual funds slowed their activity in the equity market as well. During 2008, the investment by FIIs recorded an outflow of Rs 41,216 crore. The number of registered FIIs rose to 1,591 from 1,219. The number of sub accounts also increased to 4,864 from 3,644 in 2008.
