Relevance of Capital Markets

In today’s global dynamic market, the economic relevance of a Capital Market lies in its effectiveness. It is dependent on how effective the market performs in the two basic functions which are:

• Facilitating resource raising from community for financing organizations and government activities linked to growth
• Providing an organized market place for the investors to feel free while trading in stocks.

Despite significant improvement in the regulatory and infrastructural support available, the focus of exchanges in promoting capital raising has reduced in the last two decades. Exchanges have become more trading oriented disturbing the balance between the trading arm and capital raising arm. No significant changes are implemented pertaining to the products profile, range of services, capital mobilization, etc.

Read more about Indian Capital Markets, Types & Challenges on GWI.

India being a developing economy has somehow failed to create an environment for investment in capital market. Approximately only ~2% of India’s population is the direct user of capital market, whereas countries like China has over 15% of its population involved in capital market.

Broad market should be the national theme as it will involve huge number of investors resulting in more wealth creation and distribution in society. However in recent times, it is seen that the participation of investors is limited and is decreasing as can be seen from the daily turnover at BSE/NSE, which dropped significantly from 2010 to 2012 in equity (cash) segment.

Reasons for Low Participation in Indian Capital Markets

There are several reason for such Low investor participation.

1. The current distribution of Indian capital market is skewed toward the trading in derivatives.
2. The delivered equity segment is on a falling spree as speculation is taking the lead. There is a growing interest for speculation rather than participation in market. Indian Capital Market has certainly deviated from the investment perspective to speculation focus.
3. A shift of focus of market institutions has been witnessed which is damaging the very purpose of the market. Shifting focus from market development to increasing ‘top line’ without thinking about the long term economic growth is one of the major issues.
4. The process of laying extra emphasis on the process of generating revenue and turnover with least focus on business quality and its economic utility is making the gold lose its shine.
5. There has been lack of awareness about the products and the risk associated with the same. In order to earn some quick bucks’ people go after investing in derivatives without any experience or knowledge.
6. Also market institutions look for the cut (brokerage) in the transaction and often do not communicate the associated Risks of financial products to the participants thus misleading them to invest.

These events are nothing but the loss to economy as it costs economically to the participants.

Investor Protection & Awareness in India

I.Interest Rate Derivatives

The failure of interest rate derivatives for both short term and long term (Treasury-Bill Futures and 10 years Government Securities) had huge impact on the fund raising ability. Talking of a comparative analysis we see interest rate derivative is a much needed instrument in global market, however it failed to take off in India in spite of two launches.

II.Investor Protection Fund

Talking of investor protection, a corpus of upto 10 Lakh is set aside through investor protection fund. Also member’s default is taken care by the settlement guarantee funds maintained by the respective exchanges, still it is perceived to be lower than the depositor protection in the Indian banking system. (Banking offers protection of only Rs One Lakh which is expected to be raised to Rs 2 Lakh).

Investor protection in case of developed nations like USA is as high as USD 5,00,000 approximately 2.7 Crore. For Canada the figure is up to One million Canadian dollar which is nearly 4.6 Crore INR).

Also in India the protection to the investors is provided by stock exchange unlike the specialized government institution in the US and Canada. Thus it is now time for us to create an organization like FINRA in US to protect investors. This will ensure us to encourage participation and have a wide investor base.