Ladies and Gentlemen, it gives me great pleasure to address this august gathering and share my views on the role of capital markets in achieving the larger goal that our country is striving for – a USD 5 trillion economy by the year 2025. I would like to thank FICCI for inviting me to this Conference.
In my address today, I would like to briefly recapitulate the role capital markets have been playing in the recent years in economic development as also the expected role towards contributing to the USD 5 trillion target.
A. Importance of capital markets in economic growth
As per the Economic Survey 2018-19, for a USD 5 Trillion economy by 2024-25, a sustained economic growth rate of real GDP of 8% is needed. This kind of sustained economic growth requires a virtuous cycle of savings and investment. A robust financial sector which can continuously supply capital resources and efficiently allocate the same to seekers of funds is crucial for creating the savings and investment cycle.
In this context, the theme of the Conference focusing on increasing robustness of the capital markets is aptly chosen and timed and I hope that the discussions during the Conference would throw up many new ideas.
B. State of the capital markets and way ahead
I. Fund raising:
For achieving the 5 T target, an increase in private investments is crucial. For invigorating such investments, the fund-raising activity ought to pick up. This can be by way of equity viz. through IPOs, QIPs, etc. or by way of debt viz. loans, corporate bonds, etc. or by various hybrid instruments viz. convertibles, REITs, InvITs, etc. The role SEBI can play in this arena is by strengthening robustness of the frameworks, easing the process and by providing new avenues for fund raising. Let me further elaborate on this.
Equity primary market
There has been a steady primary market activity in the equity space in the last 2- 3 years. The equity capital raised by listed companies through various modes was around INR 2.4 lakh crores during 2017-18 and 2018-19. During the first five months of this financial year, equity raising is over INR 1.4 lakh crores. While raising of equity capital through IPOs has been falling, the companies have raised equity capital through other routes such as rights issues or QIPs or preferential allotments.
SEBI has been taking measures for boosting investor confidence, ease of capital raising and further refining the primary market framework. We revamped and simplified our base Regulations for equity fund raising- i.e SEBI (Issue of Capital and Disclosure Requirements) Regulations in 2018. We have also recently reviewed and revised our Buyback Regulations.
Aimed at reducing the listing time for an IPO from T+6 days to T+3 days, SEBI has introduced the use of UPI with ASBA facility as a new payment mechanism. The implementation of this major initiative is happening in a phased manner so that operational issues are eased out over time.
SEBI has also taken measures for new avenues for fund raising. A separate segment called “Innovators Growth Platform”, with easier listing norms, has been set up at stock exchanges to help technology start-ups to raise capital. Considering the demand for Differential Voting Rights (DVRs) especially from companies in the tech space, a framework for DVRs has been recently notified albeit with safeguards to ensure that the governance standards and the interest of the minority shareholders are protected.
Going forward, in the spirit of strengthening the robustness of our frameworks, we are working on several initiatives. Rights issues, in particular, have recently seen a pickup in activity. SEBI had put out a consultative paper to reduce the timelines for rights issues. We will be soon taking a view on this subject.
The concept of ‘promoters’ has been prevalent in India for a long period of time. Globally, rather than promoters, the concept of ‘controlling shareholders’ is more prevalent. Keeping in mind changing realities of the global and Indian markets, we are examining the relevance of the concept of promoter in today’s times along with whether any changes to SEBI Regulations are warranted in this regard.
A framework can only be as robust as the enforcement of its provisions. SEBI has been enforcing many of its regulatory requirements through a Standard Operating Procedure implemented by the stock exchanges. We are in the process of strengthening this procedure further.
Corporate bond markets
As per one estimate, to achieve a USD 5 trillion GDP goal, credit supply needs to double to Rs. 188 trillion from approximately Rs. 98 trillion at present. From a corporate’s perspective, this would largely involve raising of debt through two options- either loans or corporate bonds.
As there has been a conscious effort to move from Bank Credit to other forms of credit, securities markets will have to further step up and provide the much needed debt capital for fuelling investment and generating the desired growth. In fact, to achieve the necessary credit mobilisation to reach the 5T target, the development of corporate bond market is a sine qua non.
Fund mobilisation through corporate bonds has increased from INR 3.18 lakh crore in 2013-14 to INR 6.5 lakh crore during 2018-19. In the current financial year, INR 2.56 lakh Crores has been mobilised till August.
The Government and regulators have been taking measures over the period for the development of bond market. Even in the recent budget and subsequently in an announcement by the Hon’ble Finance Minister, several initiatives to develop the bond market have been announced. An important measure by SEBI has been a framework for listed large corporates to mandatorily meet 25 per cent of their financing needs through issuance of debt securities. We are likely to see the outcome of this measure by end of this financial year.
Going forward, the corporate bond market needs to expand to cover a larger set of issuers, a wider set of investors and instruments of a wider maturity range.
As of now, the corporate bond market is dominated by issuers with ratings of AA and above. The share in issuance of papers rated below AA is around 10%. The creation of an institutional mechanism for providing credit enhancement / credit guarantee support, as announced by the Government, would provide comfort to investors for investing in lower rated bonds and would help such companies to
raise funds from bond market. Regulatory relaxations to institutional investors to invest in bonds of such issuers would also be an important measure to improve demand for such securities. Another reason for an averseness towards lower rated bonds is the experience of poor recovery in case of default. An effective implementation of IBC would provide an additional layer of confidence and security to bond investors.
On widening the investor base, an often-desired goal is to increase retail participation in debt securities including Government securities. The announcement made by the Hon’ble Finance Minister in this year’s Budget, relating to inter-operability of RBI depositories and SEBI depositories, is expected to have a positive impact towards this end. We are also in the process of enabling an App based subscription mechanism and UPI based participation which may facilitate increased retail participation.
On wider maturity options, it is necessary to touch upon the issue of a continuous yield curve. Since a corporate bond is generally priced on the basis of price of G-Sec of comparable tenure, it is important to have a robust, continuous G-Sec Yield Curve which is currently lacking.
New Products for mobilising funds Municipal Bonds
To enable borrowing of funds by municipalities, SEBI had notified SEBI (Issue and Listing of debt securities by Municipalities) Regulations, 2015. However, till date, only 7 municipalities have raised INR 1489.90 crores through issue of municipal debt securities.
We have recently rationalised the framework under these Regulations. The definition of issuer has been expanded to include bodies such as urban development authorities, city planning agencies, etc. performing functions akin to those performed by municipalities. Various requirements such as monitoring agency, project implementation cell, Government backing, maintenance of 100% asset cover, etc. have been relaxed to ease fund raising through the framework. With these measures, we expect an uptake in the issue of municipal bonds.
REITs and InvITs
Infrastructure and real estate are two sectors where the spill-over to the other sectors of the economy is one of the highest. Therefore, any boost to these two sectors automatically translates into a multiplier effect on the rest of the economy. The Budget 2019-20 has announced that the Government would invest Rs. 100 lakh crore on infrastructure in the next five years i.e. Rs. 20 lakh crore per year. Considering that the total infrastructure investment during the FY 2018 was about Rs.9.5 lakh crores, the Government announcement amounts to doubling the infrastructure investment per year.
During FY 2018, the contribution of Central Government, State Government and private sector funding of infrastructure projects was about 44%, 33% and 23% respectively. Going forward, the share of private sector funding need to increase substantially.
While raising equity and debt by private sector for green field infrastructure projects in challenging, one way of enhancing the funding capacity is through giving an exit route from the completed project so that developers, investors and lenders can redeploy the fund in new and under construction project.
REITs and InvITs are vehicles through which the funds deployed in completed projects could be provided exit which in turn could be recycled into new and under-construction projects. SEBI has taken several initiatives over the last few years to strengthen the regulatory framework for these two products. We are also analysing a framework for easing the process of preferential issue of units by REITs and
II. Foreign investment
The increase in domestic investment to support a 5 T economy has to be necessarily supplemented by foreign capital inflows.
As on March 31, 2019 a total of 9,390 FPIs from 59 different countries were registered with SEBI. FPI Regulations have seen a sea change over the last couple of years. The recently notified regulations inter-alia provide for relaxed requirements for registration and KYC documentation, which are expected to further facilitate FPI investments in India.
III. Secondary markets
A robust secondary market is essential for a thriving primary market. Turnover in the equity cash segment across all stock exchanges in India increased by about 5% to INR 87.2 lakh crore in 2018-19 from INR 83.2 lakh crore in the previous year.
NSE ranked 2nd and BSE ranked 11th globally in terms of the number of trades in equity shares. In case of equity derivatives, NSE ranked 1st, 2nd and 8th in the world in terms of number of contracts in stock index options, single stock futures and single stock options respectively.
SEBI has taken several initiatives to rationalise and strengthen the secondary market operations, viz. inter-operability of clearing corporations, improving the risk management framework, physical settlement for single stock derivatives, review of eligibility and exit criteria of stock derivatives, measures to strengthen Algorithmic Trading and Co-location / Proximity Hosting framework, measures regarding cyber security, framework for innovation sandbox, etc.
That mutual funds enjoy trust of and have caught fancy of investors is reflective in the fact that the industry AUM has increased from around INR 11 lakh crore four years ago to around INR 25 lakh crore now. Number of mutual fund folios have also doubled during the same period from around 4 crore to 8 crore.
However, there is much scope for further growth if we compare with global markets. While the global average for industry AUM to GDP ratio is around 60%, the corresponding figure for India is only 11%.
In the medium term, especially keeping 2025 as the target year, the outlook for Mutual Funds looks quite positive. We have been working with the industry to improve penetration to the B-30 areas, especially from the retail investors. AMFI has projected a four-fold growth in AUM over the next decade. There has to be an increased focus on penetration, targeting new set of investors, self governance and investor education & awareness to achieve this.
Alternative Investment Funds
Another vehicle which can contribute significantly to channelizing funds of investors into the capital markets is Alternative Investment Funds, especially for sophisticated and institutional investors. AIF investments have seen a significant jump in the last few years. On a cumulative basis, the investments made by AIFs stood at INR 1.1 lakh crore in March 2019 vis-à-vis only around INR 7300 crore in March 2015.
SEBI is in the process of taking steps to further strengthen the framework for AIFs in areas such as standardisation of the private placement memorandum and benchmarking framework for performance disclosures.
To conclude, equities market in India is world class in terms of regulatory framework for primary as well as secondary markets, trading volumes, depth and liquidity. This market is fully geared for meeting the requirements of 5 trillion economy.
Measures have been taken for development of corporate bond market. While private placement issuances have seen a rise in the last few years, the secondary market in terms of trading and liquidity is yet to develop. Clearly, much more needs to be done.
Increasing the share of private sector investment in infrastructure projects, especially green field projects, is challenging. REITs, InvITs, as vehicles for takeout financing, are likely to gain more and more importance.
Mutual funds, Insurance funds, Pension funds and AIFs, supplemented by foreign investment, would provide significant pools of funds for the projected 5 trillion economy.
I convey my best wishes for the event.
(SEBI Chairman delivered this speech at the inaugural session of the 16th Annual Capital Market Conference – CAPAM 2019 in Mumbai on 26th September 2019)