Time for taking stock

THE COMPLETION OF 125 years by the Bombay Stock Exchange (BSE) is as much an occasion for taking stock of the capital market's unfinished agenda as it is for celebration. Of the latter much has been said including by the Prime Minister, but the most eloquent testimony comes from the stock exchange's history: that a small group of brokers transacting business under a tree could, amidst all odds, grow into one of India's mightiest financial institutions. Today the BSE has the status of an icon not only among capital market institutions but over the entire financial sector. Mumbai's pre-eminence as a financial and commercial centre has been in no small measure due to the presence of institutions such as the BSE. Until the recent advent of the National Stock Exchange (NSE), the BSE towered over all the other stock exchanges and transacted more than three-fourths of all share business in the country. The BSE Sensex of 30 shares has remained the benchmark to measure stock prices anywhere in the country.

Today the intense competition between the BSE and the NSE is radically transforming the capital market scene. The regional stock exchanges have been marginalised and by embracing new technology the country's principal exchanges are spreading into every nook and corner of the country. However, rapid expansion coupled with consolidation of the stock exchange business - an universal development incidentally - is not without its drawbacks. For the stock exchanges in particular and the capital market in general certain old problems remain even while new contentious issues have surfaced. The Prime Minister has addressed some of the obvious concerns: the neglect of small investors, lack of sufficient investor education, inadequate regulation and the need to spread the equity cult. The Government and the principal capital market regulator, the SEBI, have been seized of these right from the first phase of capital market reform. That agenda, however, remains unfinished.

Small investors should form the backbone of any vibrant stock exchange. In India, even after the commencement of reform, conditions have been anything but propitious for the retail investors. In the early 1990s inadequate regulation lead a few brokers to wreak havoc on the BSE and other exchanges. That not only stopped the much-needed liberalisation in its tracks but gave the stock exchanges an undeserved opprobrium. For other reasons too retail investors who fled the market in droves have not yet returned. The onset of technology on the trading floor and even in brokers' offices is both welcome and inevitable but as far as small investors are concerned it has had certain negative consequences. Technology adaptation is an expensive proposition the first time and at the outset it favours the bigger players - whether intermediaries or investors - over the smaller. While everyone recognises the near extinction of the individual brokers in the technology era, very few have understood the new barriers which individual investors have to cross now. Nearly all related capital market developments whether extension of online trading or demat have mystified ordinary investors even while they have furthered the reform agenda.

The way out is through investor education and enlightened regulation. Despite substantial progress here much remains to be done. For instance,investor education has mostly been equity oriented and has left out the vital debt segment. At a higher level the policy maker's fixation with the equity cult should be moderated to include the entire gamut of capital market instruments. Adding to the confusion is the rise of the new economy stocks, with their often absurd valuations. They have made fund managers discriminate against the old economy stocks. The BSE's successful century and a quarter reminds us that more needs to be done.

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