Value Creation In The Next Two Decades Will Surpass All Records
3/21/2013 9:00 PM Thursday
The Indian capital markets have undergone a sea change in terms of transparency, efficiency and safety, says Ashishkumar Chauhan, MD & CEO, BSE, while highlighting the role of the government, the regulator, and the exchanges, as also the benefits of newer technologies and automation in value creation.
MD & CEO, BSE
Value creation is the process by which the worth of goods, services or the company producing/providing the goods/service is increased.
In the Indian stock market, the last two decades have seen fundamental changes. From floor-based trading, we have become completely automated since 1995. From physical trading, we have moved completely to demat (for trading) since 1998. From frequent trade defaults, we have become a settlement guarantee-providing country. We have also introduced several new instruments like index futures, index options, stock futures, stock options, currency futures, currency options, interest rate derivatives, etc.
From conducting trades across the floor, we have now become mobile. Algo trading has become commonplace. Co-location has become a part of the lexicon which was not even available until a couple of years ago. Smart Order Routing (SOR) has become a part of life. A Permanent Account Number (PAN) has become compulsory for trading and investors get confirmations by email/SMS etc. Unique Client Code (UCC) needs to be done for each and every client before trading starts for the specific client and Straight Through Processing (STP) sounds like a basic activity the Indian capital markets provide. SME is gaining ground and mutual fund distribution through exchanges has recently been announced. A strong regulator in the form of the Securities and Exchange Board (SEBI) has emerged in the last two decades.
In essence, a lot of changes, perhaps more than any other industry has seen, have taken place in the Indian capital markets. As a result, the Indian capital markets have become more efficient, transparent and safer.
As to whether all these changes been value accretive, by and large, the answer would be that huge value creation has happened in the Indian stock markets over the last two decades. Over the past 20 years, the Indian markets have seen a great move towards automating transactions processing. From floor-based markets in 1994, we have screen-based markets now. We have set up even risk management and settlement guarantee organisations called Clearing Corporations and depository institutions which keep stocks in dematerialised formats like banks keep money in bits and bytes for you.
Connectivity to banks has improved and surveillance mechanism has become real-time. Mobile trading, web trading, algorithmic trading, etc. have become commonplace. Sub-mili seconds response time is no longer aspirational but a reality. Cost of transactions and post-transaction activities in the Indian market have come down by 99 per cent in the last 20 years. However, the volumes in the market have gone up by 1000 times or even more.
How do we increase this penetration? How do we go from two per cent penetration to 30 per cent? This can happen through lower costs, increase in trust, better financial literacy and technology usage. Perhaps that would be the agenda for the next two decades.
1. Role of the Government – Development of capital markets and encouraging more retail participation
The government has been a prime mover of this phenomenal change that has taken place in the Indian capital markets over the last two decades, starting from setting up of the SEBI to the Over-the-Counter (OTC) Exchange of India to the National Stock Exchange (NSE), automated trading, The Depositories Act, Clearing Corporations, etc.
Almost all changes that have taken place in the last two decades can be attributed to the need of the government to provide efficient, fair and transparent capital markets to the Indian population. This will serve many purposes, including that of providing a channel for transferring savings from the household to the capital markets.
India holds a vital demographic advantage, with more than 50 per cent of its population below the age of 25 years. Still, the penetration of the capital markets is minimal and less than 1.5 per cent of the Indian population has invested therein.
The young workforce of India is likely to invest in financial instruments for their old age pension, children’s education, healthcare etc. Whether they invest in financial instruments by investing in the stock markets directly or through intermediaries such as mutual funds, insurance companies, pension funds, etc. remains to the be seen. A safe guess would be that they will continue to invest directly as well as indirectly. They will have, perhaps, many more choices of instruments, companies to invest in.
Derivatives, which were not available in India till 2001, have become a part of life in 2013, with index futures, index options, stock futures, stock options, currency futures, currency options, foreign index futures and options, etc. being available to and widely traded by investors.
2. Role of the Regulator – Making the market fair, efficient, transparent and more acessible
In the capital markets, a person invests with a trust that he is investing in the business as a partner or a lender. He may be willing to face losses if his investment calculation goes wrong. However, he will feel cheated if his identification of the business idea is correct but the system does not allow promoters to share the riches with other investors and only losses are shared with the other shareholders, or if the company does not return the money when the bond matures despite the company having sufficient money.
Companies were earlier required to give annual results. The frequency of publishing results has now been made quarterly. The listing requirements mandated by the SEBI have also grown more stringent and investor friendly. Coupled with initiatives like T+2 settlement (from the erstwhile account period-based settlement) and dematerialisation of securities to protect against fraudulent share certificates, the Indian capital market has come a long way.
With investor awareness programs and other initiatives undertaken by the SEBI, BSE, etc., the market size in terms of number of participants has been growing at a steady pace and is expected to accelerate once the high returns currently offered by alternative asset classes dry up. Government initiatives like the recently-launched Rajiv Gandhi Equity Savings Scheme will help attract new investors.
3. Role of Exchanges in Value Creation – Providing a low cost, transparent and efficient trading platform to investors
Transaction processing is what makes the market look like a market. However, the prime function of a market, surprisingly, is not transaction processing but price signalling. Squeaky clean price (not manipulated) is what one expects from a well functioning market – indeed, it is the obligation of a market to provide one. Transaction processing is a means to achieve that end. If a market has a great way to process transactions but does not worry about manipulations, that market might not survive for long.
In the last three years, BSE’s response time reduced from 300 milliseconds to 10 milliseconds and the number of orders went up from 75 lakh orders per day to 11 crore orders per day. In the Indian capital markets, the current working day lasts six hours and 15 minutes. BSE plans to change this system in the near future to a system that will give a response time of 100 micro seconds and can take three crore orders in a minute.
With the latest technology under implementation, BSE will be in a position to improve its speed by 100 times to a response time of 100 micro seconds and the throughput from the current 20000 orders per second to more than 200000 orders per second and possibly 500000 orders per second within the financial year 2012-13.
In essence, India has seen huge value creation over the last two decades. Technology, regulations and demographics of investors and potential investors from India and abroad along with new businesses, new business models and newer technology coming in to the commercial arena such as 3D printing, robotics, lifesciences, healthcare, genetics, nano sciences, etc. will create value over the next two decades that will surpass manifold the achievements that have been seen over last three decades.
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