The various measures taken by the stock market regulator has made transacting much simpler and safer for investors
The securities market has, in many ways, made tremendous strides in the past decade. It has grown exponentially in terms of the number of listed stocks, amount raised from the markets, market capitalisation and turnover on stock exchanges. Importantly, the rise in the fortunes of the securities markets has been inspite of the fact that fixed income bearing securities have increasingly become the preferred assets of the household sector.
In fact, according to RBI figures, the share of financial savings of the household sector in securities (including mutual fund units and government securities) has fallen from 23 per cent in 1991-92 to 7.5 per cent in 1999-2000. Nevertheless, there has been a broader shift in asset allocation from physical assets to financial assets and investor population has seen a rapid increase over the past decade.
The main reason for the increase in investor population, obviously, is the increased transparency in the stock markets. With the setting up of electronic trading systems at stock exchanges in 1995, price discovery is disseminated to the entire market and hence trading has become completely transparent.
Before electronic trading happened, order matching was done in a trading ring, with retail investors having no clue of the price at which their trade was actually executed. Often, brokers charged clients at rates that were markedly different from the actual transacted prices. In fact, this differential, known as 'gala' in market lexicon, had been accepted as part of investors' total transaction charges.
Screen-based trading, clearly, does away with problems such as gala, which acted as a disincentive for retail participants wanting to enter the market. Vallabh Bhansali of Enam Securities adds, "Indeed, it is easier for a retail investor to invest in the stock market today than it was a decade ago. This is so particularly in terms of access because a network of service providers through BOLT and NEAT has sprung up around the country. A lot of these service providers have high costs and are therefore more than willing to take on new clients, however small."
The advent of screen-based trading has also resulted in lower transaction charges for investors, not only in terms of lower commission charges (because of the increased competition), but also in terms of a lower impact cost (because of increased liquidity).
Another problem until the late 1990s was relating to the transfer of physical securities. Issues relating to bad deliveries with paper holdings were a major barrier to increase in retail participation in the stock markets. Dematerialisation (demat) of securities has solved this problem completely.
Also, investors have (with the regulatory push from Sebi obviously helping) adjusted well to the new system -- the percentage of deliveries made in the demat mode last month formed 99.8 per cent of total deliveries on the NSE, the country's top exchange. Arun Kejriwal, director, KRIS adds, "The concept of demat has reduced the trading lot to one share, and hence an investor with even a few hundred rupees can build a portfolio."
Another development, which albeit has not achieved much success, was the introduction of internet trading. Not only does net trading give investors unbounded access to the stock markets, it has also resulted in lower transaction charges because of the competition in the segment. Further, on the primary market front, disclosure and listing norms on the stock exchanges and public issue norms have been tightened.
Regulations for continued listing have also been tightened -- listed companies are now required to disclose periodically all vital price sensitive information to the market well in time.
The year 2001 saw a number of structural changes in the stock markets aimed at curtailing price manipulation, one of the biggest factors hindering active retail participation in the stock markets. Not only did the market regulator, Sebi, ban the age-old carry-forward system (badla), but also replaced the prevailing weekly settlement system with rolling (T+5) settlements.
In fact, the markets used to follow a fortnightly system in the early 90s, and the advent of rolling settlement means that investors now get their funds and securities much faster than they used to a decade ago. More importantly, the shorter settlement period goes a long way in curbing price rigging.
However, the new market structure, which has reduced scope for leveraged speculation, has resulted in a huge drop in trading volumes. Average daily turnover on the NSE last month was less than a third of the levels earlier in the year.
Speculators, nevertheless, have found succour in the derivatives market, which has picked up substantially this year especially after the introduction of stock futures in November. Derivatives provide market participants enormous leverage but at the same time, take care of the risk element with appropriate margins at different levels.
Derivative products also help investors manage risks associated with price volatility making it increasingly comfortable for investors to participate in the stock market. Clearly, transacting in the stock markets has not only become much simpler for investors, but also much safer. Nonetheless, brokers point out that the new stringent rules have increased paperwork in terms of client registration etc.
Vallabh Bhansali sums up, "The markets and procedures are a lot more transparent after the introduction of screen trading and the various rules introduced by SEBI, though the retail investor gets enticed by rapidly rising markets, more than dull markets. Unfortunately, this may remain so forever."
