It’s déjà vu, to borrow a phrase from Yogi Berra, the renowned basketball player known for his unbeatable quips, when one thinks of the Indian stock markets in 2011. Markets will go up or down depending on broadly whether the foreign institutional investors come in or pull out, global events will impact the markets as will domestic

triggers. There will be some excitement about the government’s big ticket follow-on offers and IPOs trying to be inclusive and roping in the maximum amount of investors, like the Coal India IPO in 2010. There could be a scam or two like the insider trading that the Intelligence Bureau discovered in November-December. The challenge for the regulator, the Securities and Exchange Board of India, the two premier stock exchanges and the ministry of company affairs is to find the magic potion needed for the equity markets to break new ground in 2011.
The challenge will be to get in retail investors despite all the scams that have taken place under Sebi’s watch. Retail investors have collectively lost thousands of crores and have not got a paisa back. India’s over $1-trillion economy, with one of the highest GDP numbers in the world, has a woeful record when it comes to the equity markets. It’s the only market that has not penetrated through the length and breadth of India. After 60 years of Independence and a 135-year-old Bombay Stock Exchange, the wealth created in the equity markets is the preserve of people in the top five cities of Mumbai, Ahmedabad, Rajkot, Delhi and Jaipur. These five cities account for 80 per cent of the turnover. Compared to its Asian peers, the turnover-to-market capitalistion, too, is meagre with the Bombay Stock Exchange and the National Stock Exchange at a mere 20.1 per cent and 58.4 per cent respectively between January 2010 and August 2010. Compare this to China’s 181 per cent (Shanghai Stock Exchange) and Korea’s 161.9 per cent, both far younger compared to the BSE. In fact the number of stock exchanges has shrunk from 21 regional stock exchanges, plus the BSE and NSE, in 2001-02 to just four today. The number of demat accounts to the population is just 1.4 per cent compared to China’s 9.4 per cent and Korea’s 7.4 per cent.
The challenge, therefore, before the regulators is to make the stock exchanges or the equity cult more inclusive. Inclusive is the mantra for India given by the Prime Minister for the 21st century. This can come only through competition. The telecom, insurance and aviation sectors after competition saw astounding growth. The number of telecom subscribers jumped from 36 million in 2002 to 617.53 million, while the number of fixed telephone subscribers increased to 653.92 million till May.
Every sector has seen an increase in the number of people it reaches, banks cover 600 million while asset management companies cover 47 million. As against this, the capital markets account for just 15 million people.
The challenge in 2011 before the regulators and exchanges would be to build an infrastructure to cater to all categories of fund requirements in the country, says Joseph Massey, managing director of MCX-SE. “The bond markets, the small and medium enterprises exchange, interest rate futures market, are non-existent though they have been talking about it for several years.” The thrust, he said, should be to finish the unfinished task of completing the missing segments. This will mean deeper penetration though multiple services, banks, brokers and more stock exchanges. For three years, there has been talk of an SME exchange and the bond market has been in the making for the last 10 years.
India is also in danger of losing the race as a global financial centre. For instance, this year, China raised more through IPOs than even the US while it raised $12 billion through SME exchange, which is half of what India raised through IPOs in 2010. If the Indian capital market authorities don’t look out, the Indian markets, besides being non-inclusive, will remain a trading market and not a market for raising badly-needed capital for infrastructure and development.