The capital markets are always seen as a reflection of the economic health and growth of a country. Keeping pace with economic growth, the Indian capital markets have covered a long journey from the days of trading under a banyan tree to embracing the most-advanced technology in the field. Today, the Indian capital markets truly reflect one of the fastest growing economy in the world.
The basic purpose of the capital markets is to match the forces of demand and supply of funds and in the process, play a vital role in channelizing saving and investments in the financial system. In simple words, capital markets facilitate the buying and selling of debt as well as equity instruments, both in the primary and secondary markets. While equityinstruments comprise shares of companies traded in the stock market,fixed income instruments are traded in debt markets. The stock market and debt market together form thecapital market.
From an investor’s perspective, a developed capital market offers them a wide range of investment products to choose and decide what best fits their risk-return matrix. On the other hand, these markets are a good platform for raising long-term funds as they provide a wide range of financing sources for various projects based on the requirements and risk appetite of the borrower.
Not only is it important to ensure that these markets are well-advanced, but also crucial that the ‘advancement’ moves in sync with effective supervision and regulation. Just like capital markets are overseen by the Securities and Exchange Commission (SEC) in the U.S., we have the Securities and Exchange Board of India (SEBI) in India. The Board ensures protection to investors by following the best practices of enhanced corporate disclosure. The preamble of the Securities and Exchange Board of India describes its basic function as, “…to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto.”
As the market regulator in India, SEBI has taken several measures to increasethe level of corporate governance, reporting and strict compliance of laws in the capital markets. There has been adoption of legislation that curbs malpractices and frauds in the system, which are being implemented seriously. Overall, sound governance, strong regulatory set up and compliance standards have placed Indian capital marketsat par with international standards. In fact, India tops the list ofemerging markets on the score card checking corruption and transparency as per a report by Transparency International, which analyzed multinational companies across emerging markets like Brazil, Mexico, Russia and China, among others.
Stocks markets play a key role in a country’s financial system by providing an effective platform for raising capital to meetthe needs of the corporate sector by bring together companies and investors. These markets tend to capture the mood and reactionsof an economy towards policies, reforms, trade treaties, currency variations, political events, among other things.
The current records of the Securities Exchange Board of India (SEBI) reveal that there are 19 stock exchanges in operation in India with the BSE India Ltd and the National Stock Exchange (NSE) of India Limited being the largest and most popular ones.
Established in 1875, the Bombay Stock Exchange (BSE) is the oldest stock exchange not only in India but also in Asia. It is the largest exchange in the world in terms of number of listed companies.There are 5,986 companies listed on BSE compared to 2,877 on Nasdaq (U.S.) and 2,330 on New York Stock Exchange (NYSE) by the end of July 2016, as per World Federation of Exchanges. Its equity index, the S&P BSE SENSEX is India’s most tracked bellwether index. It is designed to represent the 30 largest, most liquid and financially robust companies across sectors listed with the BSE Ltd.
The National Stock Exchange (NSE) of India Ltd is a muchyounger stock exchange that started operations onlyin 1994. However, in this short time period, the NSE has earned great recognition in India and across the globe. Its popular stock index, S&P CNX Nifty is composed of the 50 most prominent, liquid and financially sound stocks found on the National Stock Exchange.
The market capitalization of both these exchanges is close to one another; The BSE has a market capitalization of $1.62 trillion while that of the NSE is $1.58 trillion. The graph below tracks the market cap of these exchanges over the past 16 years.
The stock markets in India are at par with their counter parts in the developed world and operate in an ecosystem that is innovative, reliable, technologically advanced, transparent and efficient, and at the same time offers a large number of highly liquid as well as solid companies to invest in.
A deep, vibrant and robust debt market is vital for the growth of an economy. It is essential to enable a strong and stable financial system that can mitigate an impending financial crisis as well as cater to the needs of a large amount of capital of the government and corporate sector. The debt market activity in India has grown rapidly since the beginning of the reforms and has met the resource requirements of the financial as well as industrial activity of the Indian economy. However, there is a great scope ofexpansion and enhanced depth of debt markets in India.
Broadly, debt markets are the ones for the issuance, trading and settlement of fixed income securities that are issued by corporate bodies, governments at the center and state levels, financial institutions or banks. The major components of these markets in India are corporate bonds, certificate of deposit and commercial papers, government securities, state development loans and treasury bills.
Within the broader debt markets, the market for Government Securities in India, popularly called “G-Sec” is its oldest and largest part in terms of trading volumes, market capitalization and outstanding securities. These securities are particularly important as the yields on the government securities – referred to as the risk-free rate of return – determine the level of interest rates in the economy. A major percentage of the population, despite their varied level of economic literacy, in India prefers to invest in the “G-Sec”.
While the market for other short-term (commercial papers and certificate of bonds) and long-term instruments (debentures and bonds) are active as well, the Indian corporate bond market is much smaller than government securities, in trading volumes. This reflects the vast scope for future growth of this segment, which did achieve a healthy 19% growth backin 2015.
Debt markets have been witnessing strong inflows in recent times, driven by a stable government and its reformist agenda, tamed inflation, a good monsoon year and a good overall feel about the economic environment. In the medium term, India will need approximately $650 billion for infrastructure build-out over five fiscals right up to 2020. Additionally, public sector banks need to raise around $25 billion of Tier I capital by March 31, 2019, to conform to Basel III regulations as per CRISIL estimates. These numbers will work as an imperative for further growth of these markets.
The graph below reflects the trend of Foreign Institutional Investor/Foreign Portfolio Investor (FII/FPI) net inflows into India’s equity and debt markets over the past 10 financial years.
Overall, stricter regulations, stronger legal framework, greater financial inclusion, transparency, stronger institutional investor base, well-developing infrastructure and monetary transmission are paving the way for making the Indian debt markets more efficient, well- developed and transparent.