Mr Ravi Narain , Managing Director of India's premier stock exchange, the NSE, has several unconventional ideas to encourage retail participation in the markets — inject pension funds into equities in small doses, promote exchange-traded funds and make free research available on every listed company. He and Ms Chitra Ramakrishna , Deputy Managing Director, also assert that the NSE is very much in favour of listing of the stock exchange, if the regulatory part can be separated.
Excerpts from an interview:
Chitra Ramakrishna (CR): The distribution network, frankly, is quite reasonable. Some of the top 10 retail brokers have distribution networks that match up to a small bank. So I don't think penetration is an issue.
The issue is market sentiment at this point in time — having the kind of products in which people can put their money. We never tire of talking about the potential of exchange traded funds (ETFs).
Typically, a Nifty ETF is an exposure retail investors can take without worrying about stock selection.
For the last decade or so, retail investors have come in each time there was a big IPO (initial public offer). We have not really had big issuances in the last one or one-and-a-half years. So, all these factors put together have kept retail savings flowing into conventional comfort products such as deposits.
Ravi Narain (RN): If you look at just about any country, the jump from 6-8 per cent of household savings invested in equities to 40-50 per cent has happened through pension savings. Pension money is really the game-changer. I am absolutely convinced that this is the way to greatly improve retail participation in the equity market.
This can't happen with direct household investments. It can only happen through the systemic equivalent of the 401K in the US. And we do have it, we have the EPFO, we have now the New Pension Scheme too. The thinking is that there is too much volatility in the market. But that is daily or weekly volatility. What difference does it make for 20-year money? On any 20-year horizon, this asset class is the only one that will produce a return to beat inflation by a significant margin.
The Indian markets have such a linear relationship with FII flows. How do we change this?
RN: India has very strong FII participation and very strong domestic retail participation in the market, what is missing is domestic institutions and foreign retail.
These are the two missing blocks. If we can open up our markets to these two blocks, then domestic institutional money can be the most effective counterweight to FII money.
CR: You can already see that. A large number of retail investors choose to participate in the capital market indirectly, through mutual funds and insurance schemes. For instance, LIC invests through the NSE. Considering that more than 3.25 crore individuals have insured for the first time with LIC in 2008-09, a large number of retail investors in unit-linked schemes are indirectly invested in the capital market.
About 4.30 crore mutual fund investor accounts, too, benefit from investments made on the capital markets.
The fact that the retail participation has gone up dramatically is also evident from the fact that the average trade size on the NSE has gone down by 80 per cent, from about Rs 1,12,000 in 1996-97 to about Rs 23,000 in the first quarter of 2009-10. Retail investors invest in small amounts compared to institutional investors. The NSE's average trade size is among the lowest in stock exchanges across the world.
But we cannot only flog the retail horse. To build market volumes, we need institutions, arbitrageurs and so on. For that, you need to keep an eye on taxes and duty structures. They are among the highest in the world in India. If they become too high, it is counter-productive; volumes will collapse.
Is the NSE in favour of listing of stock exchanges?
RN: We are completely for listing. Our consistent stand has been that we have a problem with listing prior to removing the regulatory function from the exchange. There is a conflict in a business being listed and also being the frontline regulator.
We keep arguing that an exchange is not like any other business and the developed markets are proof of that. How come the Australia- Singapore deal got turned down by Australia on the grounds that it was not in the national interest? How come the Canada-LSE deal got turned down on the grounds that it was not in Canadians' national interest? Then the NYSE-Deutsche deal…. We need to also look at an exchange through the national prism. Then how do we argue that it is like any other business.
There are mergers being talked about between exchanges across the world.
RN: There is a bit of a mega-merger mania going on around the world in stock exchanges and we are somehow in a minority view here that we think it is not a good idea for us to be getting into that situation. One view is that the mega mergers around the globe are happening because their growth has slowed down, so they are chasing high growing markets. Fortunately we happen to reside in a high growth market.
Are you afraid of competition?
RN: If we were afraid of competition, we would not have been running this business. India is one of the few emerging markets which has had a competitive framework for a long time. And, remember, NSE itself is a child of competition. What we are seeing currently is brokerage firms do get hurt and there are cycles, markets go up and down, businesses go up and down. I have seen three cycles in my short career. But they are not the end of the world. So, the NSE will continue to build markets across asset classes and across product ranges.
What about the Competition Commission order?
We cannot talk about it as the case is not yet over. Some people are talking about it. We choose not to.
Brokerages claim that extended trading hours didn't bring in the desired volumes but, on the other hand, resulted in higher costs. What's your take?
RN: Our point is very clear. The market needs to build a consensus. If the market says ‘extend till seven or 10 p.m.' we will do it and if the market says ‘stay with 3.30 pm', we will stay with 3.30. When we consulted the market, institutions were ambivalent.
Brokerages with a large distribution, serving a lot of small retail investors, said ‘extend market hours' and all the smaller brokerages with one branch or a limited number of branches said ‘don't extend'. We were not very clear what makes sense and, hence, we said let the market decide.
Do you need so many stocks in the derivatives segment? What filters do you apply? Since they are in the derivatives segment, they do not have any circuit-breaker. Recently, the stock of GTL Infra fell 50 per cent in a single day. RN: That filter is there. The exchange doesn't decide which stock to put into the derivatives segment. There is a SEBI-set formula based on size of market capitalisation and liquidity.
When it qualifies for that, we send a list to SEBI and the regulator clears it. That's how it is. It cleared a list of six seven stocks recently. We have been a little careful about not putting in subjective criteria.
No exchange staff should have that sort of decision-making power. I hear what you are saying, but tomorrow, I should not be able to say that I do not like this stock, therefore it will not be eligible for F&O. We want to eliminate the human bias.
The Options market is illiquid beyond the Nifty and some stocks. Will a common market lot for all address this issue?
CR: Even after so many years, there is always caginess about who should enter the derivatives market. This is seen as the logical way of filtering out the small guy from entering the derivatives market.
Even if we convert the Rs 2 lakh into a quantity-based thing, it will still be around Rs 2 lakh. Unless the mindset changes in the policy framework that even a guy who is buying 10 Reliance can buy its stock options.
Remember it was languishing even for Nifty. The options side was doing nothing till the Government made a change in the STT formula from notional to premium. That one single change, that day, gave rise to the kink in the curve.
What is the update on your SME platform?
CR: We have been going out and engaging with a lot of people in the SME community, the merchant bankers, venture capitalists, accountants, and so on. There is definitely a huge universe out there. But the bigger challenge is to create that ecosystem so that information on these companies is available to the larger public.
In fact, as a first step, more than a year ago, with Crisil, we launched an effort to put out research reports on all the NSE companies. In fact, today 1,250 companies of NSE have research reports. It is put up on our Web site, freely available to any investor. The same kind of effort we will bring to the SME platform too.
Any new products to be launched in the near future?
RN: Foreign indices, India VIX — when we get approval. The market is keen on it, as volatility is high. It is a good product.