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DEMOCRATISATION OF CAPITAL MARKET IN MOTIONFor the Indian capital markets, dismantling of the Controller of Capital Issues (CCI) in 1991 marketmarked the first step towards freedom. Till then, it was this government agency that decided the priceat which companies could come out with initial public offerings.Yet this new system was prone to misuse. Following the stock market scam of 1992, the governmentset up the Securities and Exchange Board of India (Sebi). The objective was to ensure the orderlyfunctioning of the capital markets and thereby restore confidence among retail investors who werebadly shaken by the scam. One could say that the democratisation of capital markets was set intomotion with the birth of Sebi.The opening up of the Indian equity market to foreign institutional investors was a landmark event.The stock market in those days was very illiquid, and largely controlled by a cartel of influentialbrokers. Such was the brokers’ stranglehold on the market that the Bombay Stock Exchange (BSE)was uncharitably nicknamed the Brokers’ Stock Exchange. Increased presence of institutionalinvestors improved liquidity and also broke the iron grip of the brokers’ lobby on the market.But trading still conducted on the floor of the BSE, freedom for retail investors from the dubiouspractices of their brokers was yet far. Broking fee in the early 90s was as high as Rs 2 on every Rs 100worth of transactions – nearly 20 times the fee today. Also, these investors were routinely fleeced bybrokers, who would not confirm trades during the day and then mark up buy trades to the highest priceof the day and mark down sell trades to the lowest for the day. The advent of screen-based trading bythe NSE changed this. With competition, brokerage rates went on a downward spiral, and it stillcontinues. The monopoly of the BSE was finally broken.The image of the stock broking industry in general and stock brokers in particular, has improved in abig way over the years. Till the mid-90s, the broking industry was a backwater business, understoodby few people, and controlled by a handful of players. But it is a much better democratic set up now.The other major landmark was the introduction of dematerialisation of shares in 1997 with the settingup of the National Securities Depository Ltd (NSDL). This spelt freedom for investors from perils of‘bad delivery’ in the form of fake or tainted share certificates.Earlier, a few reckless brokers going bust could spell trouble for the system as whole. This wasrectified when exchanges introduced a stringent margin system that put restrictions on positionsindividual players could take up without creating a potential crisis situation. The exchange put in placeguarantee funds (Trade Guarantee Fund by the NSE), which ensured that investors would not bedeprived of their dues if the brokers with whom they were dealing, went bust. The guarantee fundsalso ensured that the settlement process went through smoothly even if some broker were broke.The arrival of mutual funds (MF) provided an alternative avenue of investments for retail investorswanting a capital market exposure.Morgan Stanley mopped up Rs 1,000 crore in the maiden equity fund – a close ended fund with a 15-year lock-in period. Investors literally queued up to subscribe the fund, but without being aware of thedifference between a mutual fund unit and a share, leave alone the distinction between a close-endedfund and an open-ended one. For them the Morgan Stanley scheme was just like any other IPO, whichwould list at a premium to the face value of Rs 10. By the time Morgan Stanley had begun deploying
its funds; stock prices had begun to flail. Investors who had enthusiastically bought the fund wereshocked to find the net asset value (Rs 9.40) below par on the day of listing. During that time there was another open ended fund that was operating silently by the name ofKothari Pioneer, which was later taken over by Franklin Templeton. The prima fund gave return of100% within eight month of its operations. It was an open ended fund and investors loved it.Mutual funds have come a long way after 1994. Now we have sector funds, index funds, balancedfunds and MIPs. Yet the bulk of the customer for mutual funds is through corporates which invest inthe fixed income or liquid funds of MFs. Experts believe that the still stunted retail investorsparticipation will improve.In 2000 when the futures market became active, there was confusion initially and a feeling thatinvestors in India will find it troublesome to get hooked to equity derivatives, which were verypopular in global markets. But stock futures on Indian bourses today, stand at the forefront in theevolution of tradable financial products in the country. Nowhere in the world do stock futures see thekind of volumes the way they see in India. Across the world, Index futures are more popular whilestock futures play second fiddle. India is one of the few countries where index-related products are notas popular as stocks. Stock futures have a lot in common with the Badla trade that was prevalent onBSE for a long time. Investors who used to carry forward their stocks by paying an interest chargewere hooked on to futures very easily as these two products had a lot in common.While the stock futures market is very liquid, the same cannot be said about the options market. Thereis virtually no option market in India, feel fund managers and thus for hedging they prefer futures tooptions. Index options are getting more popular than the options on stocks.The range of investment products on offer widened in 2000 with the launch of the country’s firstexchange traded fund (ETF), managed by Benchmark MF. The Nifty bees as it is called invest in theNifty Fifty stocks and are traded on the exchange like a stock. The ETFs started getting attention onlyabout a year ago when institutional investors realised the potential of these products in terms of costsand liquidity. Now many funds have their ETFs and they are getting good responses from investors –retail as well as institutional.The latest ETF that is gaining popularity in the country is the gold ETF and this fund gives investorsthe option to hold gold in paper form. Since the NAV of the gold ETF is linked to the London priceand liquidity is increasing, the gold ETF is seeing a lot of retail participation as compared to stockETFs.The evolution from closed ended mutual funds and equity to derivatives and ETFs is a small stepwhen compared to the developed world. But what matters is that it is in the right direction. The restwill be taken care of by time.