In the backdrop of a raging Pandemic, our Prime Minister has given a call for an AtmaNirbhar (Self-Reliant) Bharat. Reflecting on that, I believe, for a Self-Reliant India our capital markets which are extremely important for the economic growth of the country should also be Self-Reliant. To achieve this, we need some fundamental changes in our approach to build further depth, efficiency, and variation in the Indian markets. While our markets have evolved significantly over time, we still have some grounds to cover to be at par with the developed countries.
Some of the specific areas which require focus are:
1. Variety of capital raising instruments – Our regulatory framework does provide for a variety of capital raising instruments, though globally many other variations are routinely used. For example, while the issuance of Warrants and Convertible instruments are permitted in India, our regulations are less flexible than other markets with regard to tenure, pricing, investor types, conversion structure, put/ call options, upfront payment, underlying securities, primary v/s secondary offerings, etc. As we know, warrants/ converts are one of the most popular instruments used globally for capital raising. Our regulations must provide for flexibilities which are in line with the international markets.
2. Efficiency in the market – Efficiency of time to execute a trade and cost involved in accessing and transacting is extremely important for a developed market. Our secondary markets are quite effective from this perspective. However, we could look for more efficiency in the primary markets, the mutual fund industry, and the overall regulatory framework. Some initiatives like common KYCs, reduction in transaction cost using technology, a robust regulatory approval process, simpler and clearer regulations including pro-active guidance and not reactive action, an efficient litigation management system and a robust dispute resolution mechanism could go a long way in achieving this.
3. Access to the capital markets – Ease of accessing a market, both primary and secondary, is an essential feature. An investor should be able to easily invest and execute a trade in the market and a corporate should be able to raise capital with greater flexibility. Our IPO guidelines require a review based on international norms. For example, for large corporates above a certain size, a provision for a minimum amount of the public offering rather than a minimum % of equity as public offering may be considered. For a large sized company, just a good quantum of public offering would ensure proper liquidity of the stock in the market and take care of any concern around price manipulations. This will impact not only the corporates, but also the Indian markets and Indian investors. If this is addressed, corporates considering listing only abroad may consider a dual listing.
4. Takeover code and delisting guidelines – Corporate structuring, acquisition, entry and exit from the markets and takeovers are the backbone of a corporate strategy. These are also critical actions from a regulatory and capital markets perspective. Our takeover code has gone through several reiterations over time. However, still there are areas that do not reconcile with the common global practices. We need to reflect on provisions such as poison pills to protect an undesired takeover, provision for a 100% acquisition of the company so that all minorities are treated appropriately. Though some of these provisions are from other statutes, we do need to take a holistic view of them.
5. Deepening the investors base beyond top 30 cities – Despite touching almost a USD 2tn mark, our market is still concentrated in major cities. Contribution from beyond 30 cities is very small and less than 4 crore people participate in the capital markets. Our mutual fund AUM is less than 11% of GDP compared to ~101% in the US. We need to review our mutual fund regulations to facilitate players who would bring in technology-based nontraditional distribution system to go beyond the top 30 cities and help deepen the market.
6. Enhancing liquidity in the corporate bond market – Further, in recent times, liquidity is one of the key challenges faced by the mutual fund industry, particularly for debt funds. Equity funds, despite their large size, rarely have liquidity challenges because of the well-evolved and adequately liquid equity capital markets. Redemptions in equity funds can easily be met by liquidating the portfolio in the market. Even in the present unprecedented difficult situation, the markets are functioning well, and equity funds do not face liquidity issues. However, debt funds are handicapped by a nascent debt market that lacks depth and liquidity. For an open-ended debt fund where unit holders can demand redemption at short notice, liquidity in the market is essential. Redemption can only be met either out of new flows or by selling of underlying securities in the portfolio. An active and liquid debt market, like that of the equity market, could help overcome the liquidity issues of debt funds. While the Government bonds market is generally liquid in certain maturities, a vibrant corporate bond market across ratings and maturities is an absolute must for the growth of debt mutual funds.
7. Focus on new investment areas such as Gold, Real Estate and Commodity – Post the success of the Jan-Dhan scheme for an overall financial inclusion in the country, capital markets can play an important role in providing alternate investment opportunities. Facilitating investments through the capital markets in products like Gold, Land and Commodities could convert an otherwise illiquid asset into a more liquid and tradeable investment. There already exist platforms where investors can buy gold for as low as Rs. 5 and can accumulate it over time to trade or take delivery. This not only makes investment in gold liquid, but also enables proper recording of the trade. Similar innovative schemes can be launched for land and commodities. This has the potential to create liquidity for a lot of illiquid savings and bring them into the mainstream.
8. Digital IPOs – Our secondary trading platform and the clearing, payments and settlement systems are one of the best in the world. We have now also moved our follow-on offerings i.e. Rights issue, QIPs and OFSs on a complete electronic platform. While our IPO market is very efficient, moving the IPO issuances too on a digital platform can significantly decongest and simplify the process. Of course, the transparency of the process will also be far better. The current experience during this unfortunate pandemic suggests that we Indians are extremely quick at adopting new technology.
9. Regulations that embrace innovation – Finally, for any mature market a constructive and creative dialogue is healthy. Innovation is its hallmark which leads to improvement in productivity. If this is not understood well, innovation gets stifled within the confines of restrictive regulations. To innovate, imagination should be given a free flight to go well beyond boundaries. For a highly evolved market, we must start thinking about transaction-based regulations rather than regulation-based transactions. It would mean that we should let the system innovate based on its requirement and then approach the regulators for approval of the essence and intent of the transaction. Regulations can be written based on that.
Currently, any attempt at innovation of financial products is colored by the prevalent regulatory framework. If I were to draw an analogy from the film industry, it’s like whether the lyrics should be written first, or the tune should be arranged first. In reality, both the lyricist and the music director should have the flexibility to come up with melodious songs. While our regulators have made a beginning towards this by adopting sandbox regulations, we need to further expand this.
In conclusion, to make our markets globally competitive and for India to become AtmaNirbhar we must think differently. Time has come when we could do this. Are we willing to take the first step!
The author is Chairman, FICCI National Committee on Capital Markets, Founder & CEO, NovaDhruva Capital Pvt. Ltd
