The capital markets: Deep, safe, liquid

The Indian capital markets have seen far-reaching changes in the last 20 years. Take, for instance, the quantum of wealth created. Total market capitalisation has shot up from Rs 68,870 crore (the value of 1,191 companies listed on the Bombay Stock Exchange or BSE) in 1991 to Rs 59,84,875 crore (the value of over 4,000 companies listed on the BSE as on August 29, 2011).

The setting up in 1994 of the National Stock Exchange (NSE) brought in electronic trading. A year later, the BSE followed and in 1996 the National Securities Depository Limited (NSDL) was formed, ushering in paperless trading in equities.

The list has grown to include bonds, mutual funds and IPO applications. Mobile-based trading, which is in a nascent stage, is another extension of electronic trading.

Live quotes, which are now available on the television or internet, were unimaginable 20 years ago. Back then, shares bought or sold by an investor were delivered physically, and delivery could take days.

Mukesh Agarwal, senior director, research, CRISIL, points out that the settlement cycle is far shorter, involving less pain for investors.

Adds Motilal Oswal, CMD, Motilal Oswal Financial Services Group: "The IPO approval process has become fast and transparent, ASBA has brought in a lot of efficiency in markets, and the regulatory regime has been proactive."

That apart, the time to listing has come down to about just 10 days, while investors can better judge an IPO now due to availability of advice and services like IPO grading.

"There is immense scope to generate wealth, the secondary markets have become very robust, and there is lot of participation (from FIIs, DIIs, mutual funds)

thanks to regulations and improvement in corporate governance. Markets are now deep, safe, liquid, and investors have got lots of benefits - such as costs coming down," says Oswal.

"Disclosure levels have gone up, quarterly results and information on pledged shares is compulsory, so is the need to provide half-yearly summary balance sheets, and notably, the need to induct independent directors.

Life has become easy for retail investors," says Agarwal. Even in the bond market, things have become better due to electronic transfer, and now, there are clearing houses (for equity and debt) that enable settlement of trades.

One key change from the point of view of companies was the abolition of the Controller of Capital Issues (CCI) in 1992. To raise funds from the capital markets, companies then needed the CCI's permission.

The CCI determined the price at which a company could raise equity from the public as well as how many shares it could offer. A company with no track record had to necessarily come out with an IPO at the face value of Rs 10. Stock splits were introduced later.

Companies still have to seek permission from the current regulator, Sebi, and have to comply with rules, but there is far more freedom, especially on pricing. Companies can now tap global markets for funds at lower rates, consequently stay competitive and make big acquisitions - cases in point being the Tatas, Birlas and Bharti Airtel.

Things have certainly changed dramatically in the last 20 years. Going forward, more changes — including the launch of new products such as REITs and Index futures, entry of new players like pension funds and stronger regulations — can be expected.