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Regulatory overlap stymied financial sector: 10th Plan

BS Economy Bureau in New Delhi

The presence of numerous financial regulators has affected the growth of a sound financial market in India, according to the 10th five-year plan.

In its review of the financial sector, the plan has also said the drop-off in liquidity in the stock markets for smaller firms could force them to tap overseas markets such as Nasdaq, which offer better liquidity prospects for them.

It says the absence of liquidity in the volume of trade for those below the largest 300 firms is quite extreme in India.

It says the reasons for the sharp drop-off include poor information disclosure, difficulty in short-selling owing to the lack of stock lending facility and poor information processing by badly motivated finance firms. The report adds that the lack of information and weak corporate governance are the most important obstacles for the stock market weakness in the country.

The paper says since the eighties, the markets have replaced the role of government bodies such as the Planning Commission in allocating resources for investment. But the lack of uniform development and their fragmentation have been major stumbling blocks.

As an example it points to the presence of five regulators, the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory Development Authority, Department of Company Affairs and Forward Markets Commission, with a new pension market regulator in the offing.

It says the most critical challenge for the financial sector policy is that of finding financial mechanisms for smaller firms.

They can access the equity market only at substantially higher cost of capital while in the case of debt their access drops off abruptly.

Besides it has also pointed to the unutilised economies of scale in the creation of interest rate and currency markets.

It says while, the National Securities Depository Ltd is a success story in the creation of a depository, the RBI initiated the creation of a new Clearing Corporation Of India for the debt market as a result of which "the government bonds continue to settle using the low quality depository that is run inside RBI".

The paper says better information disclosure norms would allow a successful speculative process for small firms. A vibrant takeover market would emerge that would make it possible to displace malfunctioning management firms and thus strengthen confidence in the running of the firms by investors.

It also says there is a need to promote venture capital funds and private equity funds which would enhance support to small and medium enterprises.

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