In your interest.
Online Personal Finance Magazine
No beating about the bush.
The best kept secret about the Indian capital market is that in 20 years of economic liberalisation and market development, we have reduced it to a mere casino
How wide is the public participation in the shining new India's financially successful stock exchanges? Here are some startling facts disclosed by minister of state for finance, Namo Narain Meena, in response to a question (1692) asked by Mohammed Adeeb, a Member of the Rajya Sabha.
On 10th August, the Minister said that trading in the top 10 companies accounted for nearly a quarter (24%) of the cash equity market turnover on the National Stock Exchange (NSE) in the April-June 2010 period. In the derivatives segment (equity futures and options) trading in top 10 companies rose to a massive 38% of all turnover. The NSE is a near-monopoly. It has a market share of 96% (cash and derivatives combined) and has absolutely no competition in the derivatives trading segment. Trading in derivatives is seven times that of the cash segment, accounts for the bulk of its profits and therefore fat salaries of the very few at the top.
The Minister also said in his response that 67% of all transactions in the derivatives markets are by day-traders who square off their transactions on an intraday basis. In the cash segment, only 36% of the transactions lead to delivery, the rest are squared off. The NSE has 1987 securities available for trading in the cash market and 203 stocks trading in the derivatives segment, including four indices.
The data shows that the market has neither depth nor diversity and only a small segment of Indians are involved in the market - that too in the form of speculation by day traders in a few select products including the main index, Nifty, one of the largest traded products. Currently, index futures account for 11% of daily turnover while index options account for a massive 55% of daily turnover. Interestingly, futures and options trading on the 200-odd stocks account for just 34% of its daily derivatives turnover.
Also, contrary to perception, institutional investors do not dominate the market. In fact, 52% of the turnover in the cash market as well as derivatives comes from retail investors, high net worth individuals and corporate investors. This is hardly a market that can hope to support a big disinvestment programme by the government or even the fund-raising plans of large Indian companies. No wonder, retail subscriptions to public issues have dwindled.
In its zeal to add more and more stocks to drum up more and more volume, NSE has added dozens of stocks that have no trading interest and therefore no liquidity in the derivatives segment. Just 106 contracts of India's largest paint company, Asian Paints, were traded on 17th August. Container Corporation, a giant public sector company, does not trade more than 10-12 contracts a day. Recently NSE added a scrip called Samruddhi Cement - the erstwhile cement business of Grasim. On 17th just three contracts of the scrip were traded.
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.
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).