Tags:
Journalism of Courage
More choice in the financial sector bodes well. MCX must provide robust competition to NSE
The approval for MCX-SX to set up Indias third major stock exchange comes in a year when interest in the financial markets among retail investors has reached its nadir. So,as a move to perk up interest among investors,this is a step in the right direction. The primary justification for a stock market to exist is to provide liquidity to companies listed there and create an easy investment avenue for the middle class. As the world economy lurches through a prolonged recession,with daily liquidity at the cash market in Indias National Stock Exchange plummeting to just about Rs 12,000 crore,it will be interesting to observe how the new exchange is able to ramp up liquidity. For the Indian economy,this will be the measure of the success of this bold new venture.
The Indian financial sector has lagged behind the rest of the economy as a means to raise funds to maintain a trend GDP growth rate of 8 per cent per annum. Since interest rates too are higher in India than in comparable economies,the combination of shallow liquidity and high rates has encouraged a raft of companies to move their financial requirements overseas. In the calendar year 2010,before the economy tumbled,the total primary issue was only Rs 48,654 crore. Compared with an aggregate bank credit of Rs 35,82,048 crore,this looks paltry and shows the extent to which the Indian economy depends on the latter. This asymmetry needs to be addressed.
To the extent that the new exchange is able to make retail investors come in to trade and small enterprises to list,the depth of the markets will improve. But before that,the promoters of the new exchange will need to show that they will follow the spirit and letter of the Sebi licence to instil best practices. As the rule stands,promoter groups have to keep their holdings in the exchange within 5 per cent of the total equity. This is the understanding with which MCX-SX has been given the licence,after a long court battle,which must be respected.
