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Lack of formal mechanisms of savings has given impetus to fly-by-night schemes: CEO BSE

Stock exchanges have been an important source of capital formation in the country.

Written by Sandeep Singh |
May 27, 2013 3:31:52 am

Stock exchanges have been an important source of capital formation in the country. While investors come with their savings into markets,retail participation has not grown the way it should in the formal system. Ashishkumar Chauhan,MD and CEO,Bombay Stock Exchange who spoke to Sandeep Singh said that the scope for chit funds is created due to the formal system not able to reach out to the investors. Excerpts:

How do you see the current environment where the number of retail investors in the market is shrinking?

Post 2008 crisis,equity market volumes went down and have not come back internationally. In India too,retail participation came down as other asset classes were giving better returns. Investors generally chase past returns and they expect that past returns will be repeated and thus they chase a self fulfilling prophecy which is why bubbles get built.

In the last few years,gold and real estate prices have gone up many fold but the equity prices in last five years have not gone up on aggregate basis. While 2012 was a better year for equities,I think other asset classes won’t rise much as they have plateaued.

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In Japan and US,equity has started to move up and India can’t be aloof. I feel that different asset classes catch investors fancy and when their time gets over they get into the other and now it looks that when the interest rates are coming down. Current account deficit is shrinking,equity can be a good asset class and investors will come in.

So you think now is the time to be in equities?

There is an international trend where equities is coming into favour. However,there are local factors that should be kept in mind. Monsoon (which should play out in four weeks time),reasonably high WPI is now coming down,issues of demography,job creation,infrastructure creation and project implementation. If these are resolved,then these kind of rallies can last much longer.

Are you happy with the market development or you think more should have been done by you,the regulator and other stakeholders?

The issue is how you improve investment in productive assets. Today a large part of our savings are not going into productive assets,especially financial assets which ultimately help in creating jobs. A large amount of money is going out as investment in gold and silver. Just because we are not framing policies that can hinder such investments,money is going out. The other question is how do we take the formal system of savings to the masses because if you are not able to reach,which currently is the case,then you end up giving scope for these chit fund activities to pick up. Since we have not been able to reach out and create formal mechanisms of savings,people start getting involved into fly-by-night schemes.

Would you say that because the formal system has not reached the larger masses people have been lured by these chit fund companies?

Somewhere,I won’t be too much disappointed on what has been done but yes as a financial system we could have done more. I agree that we need to reach out there and we need to provide those options.

The overall framework of using financial system for capital formation and nation building is a new concept and is fast evolving. Everyone is working hard to make that system foolproof so that there are less defaults and people in that system are safe. But the other part is that you have not moved fast enough and a balance needs to be maintained.

Do you think Sebi could have done more to increase retail participation?

Sebi regulations have made the market much safer,more robust,transaperent,fair and efficient. India has done a good job in terms of setting this infrastructure. However,on the corporate governance front,the rights of retail investors have to be protected. While Sebi has done a good job there,we can improve on it further and that will create more trust in the broader mass.

What do you think is the role of a stock exchange and what concerns you?

In my opinion,it still remains to be the capital formation and exchanges are the only vehicle to efficiently channelise the household savings into productive asset.

The most important thing is to create jobs and that can’t be done by investing into unproductive assets. We have to create productive assets. I think that for the next 20 years,the job of India is to create jobs and for that stock markets have a huge responsibility on themselves to let people come,invest and get benefited in their investment and help in nation building and job creation.

You had said that a tax similar to STT should be there in commodities. Now that CTT has come,do you see benefits coming?

The main function of stock exchanges is capital formation and trading is a smaller thing. Investment in gold and silver only increase the current account deficit and the recent policy measure that has been introduced is more to curb that rather than increase trading in the stock exchanges.

In the recent past,Sebi chairman had raised concerns over pricing of IPOs. Do you think corporates are overpricing their issues and leaving little for retail investors?

Statistics show that many of them have not generated returns but it could be due to various factors including the overpricing issue.

I think that if you are giving 25 per cent to the public and 75 can be with the promoters,then by taking away large premium upfront and failing later on,one will not be able to create wealth for themself in the long run. Most promoters are aware of that and its not that they want to take high premium. Its just that in the last five years the business cycle has been such that people’s expectations have not been realised.

How do you see the importance of a debt market and what are you doing in that direction?

Debt market,globally,is several times the equity market and India can’t be different. We have to structure it and bring it into the organised market. So how do we remove the hurdles and create that infrastructure and institutions that create the trust in users mind?

India would require more debt for funding its infrastructure projects and even corporates would go beyond equity and hybrid instruments. BSE has to play a role for allowing the corporates to collect and create a secondary market which is robust and liquid. BSE has applied to start a debt market and we will work to create a robust primary and secondary market for debt.

What about your IPO plans?

We are working on the issue.

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