The Role Of Banks In Spreading Equity Culture - Ashish kumar Chauhan, MD & CEO, BSE

Physical assets in India have provided great returns in the last decade, but the trend seems to have run its course. Now, the capital market is expected to provide an attractive investment opportunity. The savings rate in India, which has witnessed a sudden downward trend in the preceding few years, is expected to improve, with investors returning to productive assets. Savings will be channelled into FDs with banks and into investments through stock exchanges, insurance, pension, etc. in a higher ratio depending on the risk appetite of investors.

With a robust and ever evolving regulatory framework, India scores highly in terms of financial stability. In fact, the country is doubly blessed with a progressive securities market regulator in the form of the Securities and Exchange Board of India (SEBI) with the primary functions of regulation and development of the capital markets in the country, as well as an independent central bank in the form of the Reserve Bank of India, which has the critical responsibility of ensuring financial stability.

India has an active Ministry of Finance, which recognises the need for a developed capital market that can be instrumental in helping capital formation in the economy. Hand in hand with the regulators, the Ministry of Finance has been creating policies conducive to balanced growth and an investor-friendly environment in the country.

Stock exchanges are instrumental in helping to build capital, and they have been doing so for over 138 years now. The capital raised with the help of stock exchanges not only enables and empowers institutions to add to production and hence the GDP of the country, but also leads to job creation. The Indian stock exchanges have proved their worth in capital generation, with two of its stock exchanges featuring among the top 15 in the world in terms of market capitalisation (BSE is the 13th while NSE is the 14th as per the June 2013 statistics from the World Federation of Exchanges).The Indian capital market is reputed to be quite robust, while at the same time progressive. It ranks amongst the best in the world as far as technological advancements and robust regulatory framework is concerned. The features that are essential in achieving a developed capital market are all available in India. Some of these are:

• Screen-based trading
• Two of the largest exchanges in the world
• Speed and scalability ranked among the top 10 in the world for both exchanges
• Real-time risk management systems employed by the two largest stock exchanges
• Settlement Guarantee through Central Counterparty (CCP)
• An extensive and developed banking network with real-time payment facilities across banks
• A robust Central Depository System (CDS)
• A Derivatives framework that is amongst the largest in the world

India has a large middle class population which serves as a potent job force and spurs consumption in the country. A recent publication of the National Intelligence Council – ‘Global Trends 2030: Alternative Worlds’ – projects a high growth rate for India, piggybacking on its huge, young, middle class workforce and middle class consumption in the following words:

All the analyses we reviewed suggest that the most rapid growth of the middle class will occur in Asia, with India somewhat ahead of China.
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To achieve and maintain the high growth rates required for India to surpass China as the leading economy of the world in the next 20-30 years requires massive investment in the infrastructure sector. Power, transport, distribution of water, utilisation of scarce resource and other infrastructure projects will be the focus for India in this decade. Public spending on these projects along with various Public Private Partnerships (PPPs) will spur growth across many sectors, while fulfilling the primary objective of infrastructure creation.

Thus, while infrastructure remains a massive challenge for the growth of India, it also offers tremendous opportunities for growth across sectors and classes. In the next five to seven years, India is expected to spend in excess of USD 1 trillion in this area. A part of this investment will come from Indian investors, while some part will come from foreign investors. A fast growing economy expected to develop at eight per cent per annum will create several profitable opportunities for different investors, depending on their risk appetite. There is ample space to offer investment opportunities in both equity (through stock exchanges) and debt (through banks and stock exchanges) to the investor class.

Physical assets in India have provided great returns in the last decade, but the trend seems to have run its course. Now, the capital market is expected to provide an attractive investment opportunity. The savings rate in India, which has witnessed a sudden downward trend in the preceding few years, is expected to improve, with investors returning to productive assets. Savings will be channelled into FDs with banks and into investments through stock exchanges, insurance, pension, etc. in a higher ratio depending on the risk appetite of investors.

In recent times, the valuations of the key stocks in the India, i.e. the BSE Sensex components, have been seen to be cheaper than their emerging market counterparts. According to recent comments by fund managers, India looks attractive based on its valuations, an analysis that is supported by the ‘Overweight’ ratings by many FIIs.

The Indian stock markets have a strong and robust structure, with an able and competent regulatory body (SEBI) supervising the markets. Foreign investors can feel confident that the Indian markets will remain orderly, safe, secure, transparent and efficient. In addition, they have representation from a wide variety of sectors vis-a-vis most of the emerging markets. This allows for them to act as a better gauge for the economy, and thereby to provide a fairly transparent instrument for foreign investors.
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India also holds a vital demographic advantage, with over 50 per cent of its population below the age of 25. Still, the penetration of capital markets is minimal and less than 1.5 per cent of Indian population has invested therein. The young Indian workforce is likely to invest in financial instruments for their old age pension, children’s education, healthcare etc. Whether they invest in the stock markets directly or through intermediaries such as mutual funds, insurance companies, pension funds, etc. remains to be seen.

Here, a safe guess would be that they will continue to invest both directly as well as indirectly. They will have, perhaps, many more choices of instruments and companies to invest in. Derivatives, which were not available in India until 2001, have become part of life in 2013. Index futures, index options, stock futures, stock options, currency futures, currency options, foreign index futures and options, etc. are all available to and widely traded by investors.

We, thus, expect the domestic investor population investing in capital markets (directly or indirectly) to grow from about 22 million (less than two per cent of India's population) to more than 250 million (about 20 per cent) by 2030 owing to the demographics, expected growth of the economy, lower cost of transaction services, reach of stock market intermediaries, higher levels of financial literacy, improved regulations, etc. This too is expected to aid capital formation in addition to helping job creation in this vast and fast growing economy.

With the investor awareness programs and other initiatives undertaken by the SEBI, BSE, etc., the market size in terms of number of market participants is expected to grow at a steady pace. The government has also provided several fiscal incentives for medium and long-term investors in the Indian capital markets, including exemption from capital gains tax if an investor holds shares for more than a year.

Banks form an integral part of the value chain of investment by retail investors. In the last decade or so, the role of banks has only increased. With the introduction of the Applications Supported by Blocked Amount (ASBA) facility, applying for IPOs has become easy for investors as the money is blocked only till the time the allotment happens. Due to this innovation, the listing process has been brought down to less than 15 days from the earlier period of 45 days. This has qualitatively improved investor experience in the Indian capital market.

Many banks have created subsidiaries that act as merchant bankers for SMEs, thus helping the investment culture while also generating employment. Without the empowerment of SMEs, India cannot expect to progress, maintain robust growth and create jobs for its young workforce.

Banks with securities trading arms have enabled many investors with a simple and efficient way of investing, with the unique value chain that only a bank-security arm-depository participant combination can provide. Perhaps in the future, banks will take this to the next logical step by providing trading facilities at the branch level, especially in rural parts of the country where investors may otherwise be deprived of the opportunity to invest in the capital markets.

Banks, therefore, will be working as a complimentary framework to the market mechanism. It is expected that banks and markets will continued to leverage each others’ strengths, including the information technology to take India into a much more productive and growth-oriented future.