How hollow is the Indian Stock Market? -I

The massive daily turnovers of the two national bourses hide some shocking facts, as the finance ministry’s startling revelations in Parliament reveal.

Narrow, shallow, illiquid and concentrated in the hands of a few individuals located in a few centres — that describes the state of the Indian Capital Market, nearly 20 years after India embarked on financial liberalisation and ostensibly unleashed a boom in stock investing and spreading the equity cult. In fact, the boom is eyewash and this information is provided by none other than the minister of state for finance, Namo Narain Meena, in response to a question in Parliament (Unstarred question 1669) on 10 August 2010 by Rajya Sabha MP Sardar Sukhdev Singh Dhindsa.

Mr Dhindsa asked for the number of client identities and PAN identities who actively traded in the National Stock Exchange (NSE) and contribute to 50%, 60%, 70% and 80% and 90% of total trading turnover on an average, on a daily basis in the cash equity market and in the equity futures & options segment. He asked for these numbers to be provided for the three-month period from April 2010 to June 2010. The numbers are absolutely startling.

According to Mr Meena, only 30.90 lakh investors traded on the NSE’s cash market in the April-June quarter. Of these 52% were retail, High Networth Individuals (HNIs) and corporate customers. Institutional investors and proprietary traders accounted for 48% of all trading (24% each).

Slice the data further and these figures should be extremely worrisome for policymakers.First, 90% of trading in the April-June 2010 period came from just 192,200 investors, says the Minister. Break it down further and the Minister says 80% of turnover came from just 41,654 investors. In other words, 1,50,546 investors (78%) accounted for just 10% of trading turnover.

Cut it further and it gets worse. Just 8,727 investors accounted for 70% of turnover among which 413 were proprietary traders, mainly brokerage houses. The Minister goes on to say that 60% of trading came from a mere 1,563 traders and half the trading turnover (50%) came from a shockingly low 451 of which 156 were proprietary traders! Mind you, this is data for a three-month period and not one single day.

The National Stock Exchange (NSE) records an average daily turnover of over Rs12,000 crore in the cash segment (up from over Rs4,500 crore in 2005-06) and over Rs83,000 crore in the futures and options (derivatives) segment while the Bombay Stock Exchange (BSE) records a daily turnover of over Rs3,000 crore in the cash segment. While these numbers are much higher than what they were a decade ago, but they are misleading.

The derivatives segment of NSE is seven times larger than the cash segment and the main source of NSE’s profits and therefore massive salaries of its top management. So, shouldn’t it have more participants and a less skewed participation? Instead, the numbers here are downright scary and indicate that this market is just a casino frequented by a small closed club. According to Mr Meena, only 5.75 lakh clients traded in derivatives in the three-month period. Of these, 90% of trading came from just 18,035 (including 520 proprietary traders). This means that 5.57 lakh clients (97%) accounted for only 10% of total trading while only 3% of clients accounted for 90% of the trading!

Split it further and the number drops dramatically. Only 2,188 investors accounted for 80% of derivatives turnover in the three-month period. Just 537 investors account for 70% of trading, 223 investors accounted for 60% of trading, of which over half were proprietary brokerage firms. And a massive 50% of trading NSE's derivatives trading turnover, the main pillar of the Indian stock market system, comes from just 106 investors of which 58 are proprietary traders! How skewed can a stock market be, which is supposed to include a wide swathe of population?

Further, the Minister says that the top 25 brokerage firms on the NSE accounted for 42% and 43% of the cash equity and equity stock futures and options turnover in the April-June 2010 period. Can you imagine the phenomenal influence on stock prices that these 25 firms (out of 1,055 in the derivatives segment) have on stock prices? Hopefully, some Member of Parliament will ask the finance ministry for the names of these firms. Since the NSE has been fighting against disclosures under the Right to Information Act and the data is not in its annual report, the only way that the India public can get information about the big national hoax of an expanding capital market is through questions asked in Parliament. It will also be interesting to ask if the Securities and Exchange Board of India (SEBI) has any special monitoring mechanism for the 106 investors who account for half the derivatives market turnover.

But to really put the information in perspective, you have to look at the massive trading numbers that hide these pathetic participation figures. In the April-June 2010 period, the NSE’s trading turnover in the derivatives segment was Rs58,31,715 crore and in the cash segment it was Rs8,47,300 crore. In comparison, the BSE’s derivatives turnover was a pathetic Rs7 crore while its cash turnover was Rs2,73,101 crore.

In effect, the NSE, with a 96% market share (cash and derivatives put together) is a virtual monopoly. Yet, misleadingly, we tend to talk about the NSE and BSE almost as though they are equally large exchanges. This is probably because the BSE enjoyed a virtual monopoly for all but the past 15 years of its 130-odd years of existence. 

Our perception about investor participation is also grossly misleading. According to the D Swarup Committee report, India has 80 lakh investors (who invest in debt and equity markets, either directly or through mutual funds and market-linked insurance plans). This official figure also represents a sharp decline from the two crore (20 million) investor population, claimed in investor surveys commissioned by SEBI in the 1990s.

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    COMMENTS

    viny k.samual

    3 years ago

    Thank you for posting almost all kind of tips. RipplesAdvisory

    ajay gurjar

    10 years ago

    IT IS NOT THEY WAY IT LOOKS BECAUSE MOST OF THE BROKER ARE HAVING POOL ACCT OR HAVE PROVIDED MARGIN FUNDING ALSO KNOWN AS LAS(LOAN AGAINST SHARES).SO MOST OF THE TRADE LOOKS LIKE BROKERS ARE DOING THE MOST OF THE TRADE BUT ACTULLY THERE CLIENTS ARE TRADING.DONT JUMP TO CONCLUSION SO FAST .BUT OUR MARKET REQUIRES MORE PENITRATION WITH MORE RETAIL PARTICIPATION SO THAT OUR MARKET IS MORE MATURED.I FEEL EDUCATION IN TRADING/INVESTING SHOULD BE PUSHED

    REPLY

    ROOPSINGH SOLANKI

    In Reply to ajay gurjar 10 years ago

    I guess every investor has to make trade through trader(broker)-but data provided in article is taking demat accounts as trading accounts-so it proves that data is related to individuals and brokers seprately-so dont get confused that retail trades are included in brokers trading-brokers are trading through their own demat account and clients are trading through seprate trading account.

    palash

    In Reply to ajay gurjar 10 years ago

    Gurjar ... you must start the education process by being the first volunteer. The minister talks about unique folios, which means that pool accounts for payins are not what is hiding retail participation. In any case, if pool accounts were hiding lakhs of individual investors' transactions, then SEBI ought to have been jumping up and down... i read somewhere it has a fancy tracking system to catch this nonsense... the system is a joke if people can simply pool accounts. In any case, this article makes me think our market is a big joke. Yet, in college we were told it is a barometer of the economy and everybody is jumping to be on television to offer an opinion.
    God knows what goes on ... mera bharat mahan, lekin hum sub sada pareshan.

    AJAY DIWAN

    10 years ago

    Its shocking to know the facts. I am sure SEBI & NSE, who always boost of high standards, know about all this. My salute to Sucheta & Debashis for the revealing article.

    P R Chandna

    10 years ago

    Indian stock exchanges (NSE & BSE) are no different from the Wall Street as described by Franklin Keyes in 1902 "Wall Street speculation fosters a ring of idle gamblers, parasite upon society, who prey upon the fortunes of the honest and industrious; such people are menace to legitimate business interest of the country and an element of danger to the public.”

    REPLY

    Roopsingh

    In Reply to P R Chandna 10 years ago

    The parasites are controlling political and money/muscle power,so there is no doubt these parasites will get evn more stronger-

    Natasha

    10 years ago

    One has to understand that the turnover in the stockexchange is not found in any other industry absolutely .
    and every one just takes part of the pie . The govt ,broker , exchange etc and corporates ,mutual funds .etc etc .
    Our markets are hollow . The above article sure was an eye opener .

    REPLY

    Roopsingh

    In Reply to Natasha 10 years ago

    The hollowness of markets is proved by same stock moving up 10% today and next day falling 8-10%,does this shows any fundamental strength of market or stock?absolutely NO-this just shows gambling of the stock by a selected group who themselves raise and lower the prices-they are at no loss-but actual looser is retail inestor who is unaware of casinoism.

    Shantilal Hajeri

    10 years ago

    Your article brings out an open secret.
    Hardly 3% of house hold savings go to the stock market. Even then, we have so many business channels dedicated to stock market. We have also several news papers dedicated to stock market.
    Nothing happens to a company in the short term. Even thenthe share prices of most of the companies fluctuate widely even in the short term. There is neither rhyme nor reason for such volatility. This is the handiwork of only few people. Less than 0.1% of the population is engaged in stock market. They behave as if they are the cream of the society and suffer from superioity complex. They look down upon the people who do not invest in stock market.
    It is high time the media stops hyping the stock market unduly.

    REPLY

    sumit kothari

    In Reply to Shantilal Hajeri 10 years ago

    Friends,
    the indian government has failed to eradicate poverty and also does not provide attractive careers to the majority of indians.
    so those who manage to reach the level of the middle-class have every right to want to earn more. how they do it, that can be improved.

    Roopsingh

    In Reply to Shantilal Hajeri 10 years ago

    I fully agree to your words and wish others should realise this TRUTH which is well proved through data in this article.

    ASHWIN SHAH

    10 years ago

    IN MARCH 2009 MARKET HAS REVERSED AND MAJOR BULL RUN STARTED FROM 8200 IN SENSEX.TILL THAN WE ARE MAKING HIGHER TOP AND HIGHER BOTTOM.AS LONG AS HIGHER TO -HIGHER BOTTOM CONTINUE WE SHOULD REMAIN BULLISH. BIG MONEY IS MADE ONLY IF WE MAKE TREND OUR FRIEND.MARKET WILL CONTINUE ITS UPWARD JOURNY TILL WE REACH PREVIOUS TOPS. SO REMAIN INVESTED SCRIPT SPECIFICALY WITH STOPLOSS.

    kirit shah

    10 years ago

    yes i do agree with the research made by u.there is no way such manipulated market in world.How a country with heavy debt can have bull market,even u.s market has the same story,one must find there details also.than u very much for alarming situation

    Jayesh Gala

    10 years ago

    insightful article.

    Vasudeva Kotti

    10 years ago

    Very nice article. Why the market is moving relentlessly. As a trader I'm more interested in capturing day to day spikes. Intraday trading is the best business to do in this type of market conditions.

    k a prasanna

    10 years ago

    Stock exchanges are well organized casinos. Those who are privy to specific info of companies play in market and make money. Most of the investors,whether short or long term lose money. Stock exchanges and stock brokers favorite slogan is - we help investors to make money/create wealth. But in reality,only they make money.

    natasha

    10 years ago

    i read one of the comments here stating that the next ten years are going to give the best returns in the stockmarkets .
    ---
    well i disagree completely , There is something called a BELL curve and we are just approaching that peak . ALSO you will note : ndia's large service industry accounts for 55% of the country's Gross Domestic Product (GDP) while the industrial and agricultural sector contribute 28% and 17% respectively.[22] Agriculture is the predominant occupation in India, accounting for about 52% of employment. The service sector makes up a further 34%, and industrial sector around 14 IT SHOWS a completely skewed economic model .
    also that its easy to make money investing . Well it isnt . only 5 % make good money ,the rest get hit .
    Parettos principle is applicable everywhere .. infalliablely an dmostly in speculative activities ..

    REPLY

    sumit kothari

    In Reply to natasha 10 years ago

    i really liked ur bell curve example. u say we are approaching the peak. can u commit to the obvious extension of that logic? r u ready to say we are going to fall?

    ASHWIN SHAH

    10 years ago

    ONE MUST STUDY SCRIPT MOVEMENT AND TRADE AFTER THROUGH STUDY. ALL SCRIPTS ARE NOT BULLISH/BEARISH. ONE MUST FOLLOW STOPLOSS THEORY STRICKLY. ALWAYS CALCULATE RISK REWARD RATIO BEFOR TRADE AND NEVER AVERAGES LOSSES.

    kishore ghiya

    10 years ago

    After steep fall from 21000 to 9300 in 8 months,reliance power and satyam recent scams,indian retail investors have lost faith in sebi and they r leaving at every rise of 1000 pts.No first time investors are approached by brokers or companies seeking funds.Harshad mehta,crbhansali,ketan parekh,rupal panchal did enough to scare away and result 80 lac investors from 2 cr.The sebi has failed in its duty and by keeping market out of reach to new small compnies,new exchanges,new small brokers to enter they are losing the game.Mr bhave after retirement should go for three month soul searching training at SEC usa.
    only quick justice,transparent decisions,competition and change of attitudes by indian corporate can bring back aand add new investors.All indian promotors must attend six month course called investor relation management that is availble at most of the business schools in USA. In india has anybody read about it?
    positive suggestion is cbdt should give tax break similar to mutual fund industry to investment clubs, and sebi should give grants and subsidiesfor promotiona concept called investment clubs. Without self help and informed decisions we shall never get rid of casino players because they are protected by New Delhi.Mr FM knows th4e names of 145 big traders who dominate 50% of the volume.Make market open to foreign brokers to service small retail investors and see the change.We have lot to learn from devloped share markets of USA,Japan and UK but who will tell us,media is also in the hands of 145 persons so let us wait till retail investor gets fed up with negative real rate of interest from fixed income market and starts thinking of taking risk in the market full of sharks (including myself as my total savings are in equity mkt)
    kishore ghiya rajkot mob 9825217857

    REPLY

    sumit kothari

    In Reply to kishore ghiya 10 years ago

    mr.ghiya,
    congratulations!
    that was one of the most enjoyable comments that i have read. it is a pleasure 2 read ur work.
    also good 2 know that u r invested in the markets.
    i myself have just last week sold off the remaining last of my investments.
    u very accurately mentioned the negative real interest rate.
    however stocks are yielding(both dividend and earnings yield) much less than fixed income now.
    so it is a greater negative real rate of return to go with stocks now.

    Anchal Mishra

    10 years ago

    Ganda hai par dhanda hai ye . The most corrupt financial mkt in the entire world is indian stk mkt and looks like it will always be like this only. shocking movements in scrips every now and then both sides defying any logic at all but watch dog always sleeps :( I can just wish this mkt to behave properly one fine day.

    REPLY

    Madhur Kotharay

    In Reply to Anchal Mishra 10 years ago

    Which other market do you know well, Anchal, before making these comments? Cyprus, Nigeria, Hong Kong, Australia, Argentina?

    'Shocking' movements are shocking to you because you may not know what is happening underneath. In low liquidity stocks, small chunks of buying moves stocks to upper limits. Indian large-caps are fully valued and a little value is still left in the mid and small-cap space. So bigger investors are trying to take exposures in them, making the violent moves. Obviously, there are many operators who keep playing such games, too. However, in many good stocks, there are underlying themes.

    Check out TTK Prestige. When the stock rocked up 20-30% in a week a few days ago, people touted an operator theory. I believed it too. After a few days, TTK Prestige management came out with announcements of new aggressive marketing strategies, and new product launches. Somebody knew these beforehand, I guess.

    Why should SEBI keep checking the price movements in every scrip? Study the massively researched, and huge USA market. Many well known names fluctuate 5 times more than Indian biggies. Recently, Cisco gave excellent results but cautious future guidence. The stock was hammered down 9%. Did you ever see TCS hammered down by 9% in a day on a cautious outlook? Cisco is quite huge and it is impossible to move it by these %ages just by any operator. But they move. At least, we have more sedate gyrations. And if you are a long-term investor, why should you worry about such fluctuations?

    Finally, what do you mean by "the market behaving properly"? Conform to your expectations about how it should move? I doubt if it will ever.

    Herd on the street: Deccan Chronicle, Patni, Ramsarup Industries, sugar stocks, Nirmal Kotecha, Larsen & Toubro

    Deccan Chronicle: Rumours of a stake sale are resurfacing. Mid-July, the stock charged on talk that the Gujarat-based Adani Group was going to acquire the company for $280 million-$300 million.

    Patni: There is talk of a stake-sale to Fujitsu or NTT. On Friday, the stock surged after it declared an interim dividend of Rs63 per share.

    Ramsarup Industries: Talk is surfacing in the market that Arcelor is now close to finalising a stake buy in the company. Ramsarup has two iron ore leases in Orissa, reportedly with reserves of 7.1 million metric tonnes and 45 million tonnes respectively. In June, the company had said it was in early talks with MNCs for growth opportunities in form of a tie-up, venture or a demerger   (Arcelor's name had come up even then).

    Sugar stocks: They are said to benefit after the government raised prices of ethanol for blending with fuel to Rs27 per litre from the existing Rs21.50 per litre.

    Nirmal Kotecha: Rumours are that he is accumulating shares in Su-raj Diamonds (and other diamond companies) and Networth Stock Broking.

    Larsen & Toubro: There is talk of a bonus in the offing. The previous bonus was on 3 October 2008 and the one before that was on 29 September 2006 (looks like the market is expecting a bonus every two years).

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    Herd on the street: Cairn India, mining companies, Texmaco, Titagarh Wagons, VLS Finance, Jagatjit Industries, Force Motors

    Cairn India: The market was crawling with rumours that Vedanta is in talks to take a stake in Cairn India.

    Mining companies: The government is proposing to make it mandatory for mining companies to share 26% of profits with local communities or to provide 26% equity in mining entities to the affected people, mostly tribals, where excavation of minerals takes place.

    Texmaco, Titagarh Wagons: The buzz is that the government will release rail wagon orders this month. In FY10, 18,000 wagons were meant to be procured and the same amount is supposed to be procured in FY11.However, no orders have been released in FY10. Had both years' orders been released, it would have meant an order-flow of Rs45 billion for the industry. The whole problem apparently started with four key wagon-makers writing to the railways, saying that no orders should be placed with the Rajasthan-based Cimmco Birla Ltd, revived recently under a Board for Industrial & Financial Reconstruction (BIFR) scheme. The letter raised legal issues about the tender criteria and ministry officials got involved. Orders from the railways came to a grinding halt.

    Jagatjit Industries: There is interest building up in this stock due to rumours that the family feud between Anand Jaiswal and Jagatjit Jaiswal is close to being settled. In March 2009, the Company Law Board (CLB) had ruled that there was no merit in challenging the allotment of shares with differential voting rights (DVRs) as it was legally permissible. Anand and Jagatjit had moved the CLB against the company decision in 2004 on preferential allotment of shares with DVRs, giving Karamjit 64% voting rights on his 32% stake in the company. At that time itself, the two brothers had apparently agreed to the CLB-proposed settlement where Karamjit would buy out Anand and Jagatjit's 12% stake in the company for roughly Rs730 million.However, according to the latest shareholding pattern, 2.15 million shares held by Karamjit Jaiswal are shown under the pledged or otherwise encumbered account and placed in an escrow account. In addition to this, there is also talk of a takeover bid from UB. Jagatjit owns Aristocrat Liquor, Binnie's Malt and dairy products, and also makes glass containers.

    VLS Finance: There is talk floating around of a favourable outcome in an ongoing case over Sunair Hotels. According to a report in Business India magazine, in 1995, VLS invested in Sunair Hotel and for Rs70 million, it got a 25% stake in this five-star hotel in Delhi, which runs the Metropolitan Nikko at Connaught Place. The balance Rs220 million was brought in by the promoters, the Gupta family, while a Singapore-based hotel chain, Accor Asia, was to bring in Rs10 million at a premium of Rs90. VLS also mobilised loans of Rs850 million, agreed to manage the public issue, and gave Sunair a security deposit of Rs100 million at an interest rate of 20%. VLS claims that within a year, Accor withdrew, and Sunair was not paying the quarterly interest on the deposits. VLS and the Guptas are mired in a legal battle over the property which, in 2007 itself, was valued at Rs8 billion. VSL says that according to the agreement, it would become the majority stakeholder.

    Force Motors: There are some rumours of equity-expansion plans. In March 2010, Bajaj Holding & Investment increased its stake in the Firodia-controlled Force Motors to over 19%. Force is a Pune-based maker of light, medium and heavy duty trucks and buses.

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