Investing in Stock Market - BL

The securities market has grown rapidly over the last two decades, especially in the post-reforms period. The reforms, which included free pricing of capital issues, stringent disclosure norms, conditions for making issues, transparency in offer documents and accountability of merchant bankers in the primary market, provided measures for protection of primary investors.

Capital mobilisation

Book-building also aided the price discovery process and allocation of shares. These steps had a salutary impact as the number of people investing in equity increased at a compound rate of 22 per cent between 1985-86 and 2001-02.

Capital mobilisation, which used to be around Rs 100-200 crore per annum increased to Rs 6,000 crore per annum between 1991 and 1995-96. And from around Rs 7,000 crore per annum between 1995-96 and 1999-2000 to nearly Rs 20,000 crore per annum between 2000-01 and 2004-05.

This surge in mobilisation is the result of primary market reforms. Yet, the capital market has been able to mobilise less than 1 per cent of the total domestic savings. New technologies such as automated and screen-based trading, spread of trading terminals to nearly 400 cities, dematerialisation of shares, modernisation of support infrastructure, and other measures have transformed the secondary market, resulting in shortened trade cycle and safe settlement systems.

The credit for this should go to the Securities and Exchange Board of India which by 2001 also introduced risk-containment measures including setting up clearing houses, clearing and trade guarantee corporations and a strict margin system.

Expectations belied

The primary goal of a stock market is to facilitate capital flows to corporates. However, expectations have been belied. In 1989-90 corporates raised equity and debentures that constituted only 7.8 per cent and 8.8 per cent respectively of their total funds comprising capital, reserves and surplus, borrowing, provisions and current funds. But by 2003-04, these figures were 8.5 per cent, and 5.2 per cent respectively or 13.7 per cent of their funds from the market, which was a full three percentage points lower than in 1989-90. Thus companies appear to have been depending on the market only to a small extent. They have preferred borrowings (30.1 per cent) followed by reserves and surplus (29.4 per cent) in 2003-04. In 1989-90, reserves had contributed only 20 per cent. This is a tribute to the efficiency of corporates that have learnt to retain profits for ploughing back into business. A corollary would be that people's savings in corporate instruments, mainly finance companies are yet to achieve high levels of fund-use efficiency. This is but a small segment as, according to available information, less than 1 per cent of households invest just 1 per cent of their investible funds in shares and debentures.

Ills to investing

The disincentives to investing in the capital market are the risk element, volatility, manipulation and speculation in the secondary market, frauds in primary market, little confidence in brokers, and the frequent booms and bursts that can be hurting. These ills are spawned by over-trading, excessive short-selling and buying long supported by bank credit and margin trading in the name of liquidity enhancement. The question is, liquidity for whom? Is it for investors or traders who often buy and sell the same scrip several times in a day? Unfortunately, the economy's performance is gauged in terms of stock market indices. Thereby hangs a tale.