T N Ninan: Vaulting ambition

WEEKEND RUMINATIONS

Pretty much everybody acknowledges that India's stock markets are much better run and better regulated than before, with up-to-date technology and trading systems, improved security and greater transparency. Portfolio investors from overseas would not be bringing in $10 billion annually if this were not the case. Indeed, it is sometimes claimed that India's stock exchanges score on specific issues (like the speed of settlement) in comparison with the leading stock exchanges of the world. It was only to be expected, then, that the regulator, the Securities and Exchange Board of India (Sebi), would begin to get ambitious and dream of a larger role, going beyond India's geography. The Sebi chairman, M Damodaran, has spoken in recent weeks of not just preventing the 'export' of India's capital market (ie reversing the trend of Indian companies floating paper overseas) but of getting companies from the region around India to access capital through the Indian market. In a way, this ties in with the finance minister's stated objective of making Mumbai a regional financial centre.

The domestic scheme that Mr Damodaran has proposed, to help companies raise capital quickly and cheaply from institutional investors, just as they would by issuing Global Depository Receipts in Luxembourg and elsewhere, will probably fly; indeed, this would be a welcome addition to the IPO options that exist in India and it may persuade some companies that Mumbai is an easier bet than going overseas. Meanwhile, the confidence to talk of expanding regionally must come from the realization that trading volumes in Mumbai (though not the fresh capital raised) compare favourably with rival exchanges in East Asia. Still, the regional ambitions seem premature. For it is only when we set ourselves up in competition with others that we know where we truly stand. And as soon as we set ourselves international goals, the many limitations of the Indian system become apparent.

To start with, there is the question of currency risk that international firms must consider before they decide to list in India. With India's fiscal deficit still too high, and with the Reserve Bank's currency policy probably too rigid for the comfort of the market, this would be an obvious deterrent. Next would come the quality of stock market regulation. This has certainly improved, but there is a long history of mis-steps that are still fresh in people's minds, and therefore international confidence cannot be high enough for companies to decide that regulatory risk is absent in the Indian market. There would also be questions about the supporting infrastructure: are India's accounting standards internationally aligned, and is the legal system what it should be? One merely has to list the issues, for the problems to become apparent.

Then, the constraints on international trading on the Indian stock market would have to go, if there is to be any hope of getting overseas companies to list in India. But international access to the Indian capital market is limited to foreign institutional investors (or FIIs). The market has found a way to circumvent this by creating the device called participatory notes, which are said to account for half the $80 billion that stands to the credit of FIIs. This suggests that the regulator is out of touch with market reality, and the logical thing to do is open up the stock market to all comers, so that individual and corporate investors from abroad do not have to resort to P-notes and hide behind FIIs. But the Reserve Bank worries about greater capital account convertibility at a time when economic reform in general has not gone far enough, and so this is probably a non-starter.

Finally, there are the physical hurdles: Mumbai will not have a presentable airport for another five years; nor roads to match. There is a scarcity of hotel rooms, and housing stock of the quality that expatriates will find acceptable. Living and working in cities like Singapore and Hong Kong is therefore vastly preferable to all but those who are native to Mumbai. In short, Mumbai as a regional stock market or as a regional financial centre is still a far cry.