The coming year promises to be one of realisation and acceptance. The last four years have been full of action for the Indian economy, thanks to the mantra of liberalisation. Dr Manmohan Singh had set the Indian economic 'tiger' free when he opened the doors of the Indian economy.
The intention: to make India stand on its own in a free, market-driven, global economic environment. And the Government's report card reads well on these counts. But somewhere down the line it does carry the message that the capital market is a place only for "people with a propensity to make huge profits without actually deserving them". Of course, some smart people do take advantage of the herd psyche prevailing in the market. But is that justification enough for the continued apathy towards stepping up reforms in the capital market?
SEBI, the regulatory watchdog, has done a commendable task so far. The post-scam period has been full of reforms. Its Chairman, D.R. Mehta, a true 'committee man', has reasons to introduce reforms through committee recommendations, but the sooner SEBI comes out with clear guidelines on depositories and venture capital the better it will be for the capital market.
SEBI has acted to the benefit of the small investor by accepting major recommendations of the Malegam committee. It has brought about transparency in operations, greater disclosure in prospectus—the offer document and cash flow disclosures. SEBI has also addressed issues related to investor protection. Reintroducing the proportional system of allotment will ensure greater small investor participation and broaden the market spectrum.
The end of 1995 sent shockwaves down the market with the country's No 1 traded scrip, Reliance, coming under a cloud of controversies. The delisting threat, the issue of duplicate shares and switching of shares by Reliance Industries created panic in the market. The company continues to maintain that there has been no wrongdoing and says no legal provisions were violated. A falling Reliance scrip also plummeted the Sensex (as Reliance carries 14 per cent weightage in the BSE Sensex).
The surge in volumes at the stock exchanges—the NSE accounts for Rs 400 crore worth of business per day in the present depressed market—makes it imperative that scripless trading is taken up on a firm footing. This will streamline settlement procedures and avoid problems of bad delivery and forged share certificates. Computerisation of regional stock exchanges—at present only the NSE and the BSE are on-line with the DSE to commence on-line operations—will bring in the much desired transparency in operations and boost investor confidence. Though SEBI allowed forward trading—essentially to increase liquidity in the stock market—on the eve of the PSU disinvestment pro-gramme in October, it is yet to be implemented.
If the insurance sector is opened up, money will flow into the capital market, and bulls may not have to starve as they did in 1995. In 1996, interest rates are expected to move southward and help boost liquidity. The dear money policy (with rupees few and pockets tight) pursued this year has seen inflation go down to 7.53 per cent (for the week ended December 2). Low inflation will lead to softening of interest rates, bringing cheer for the capital market. And India's rating has been upgraded to investment grade by international agencies such as Standard & Poor's and Moody's.
Though political uncertainty looms, a realisation has emerged that the direction of reforms is irreversible, only the pace may vary. Currency also should not be a cause for concern. The FIIs will obviously weigh the expected fall in the rupee to the growth expected in corporate earnings and this should see India playing host to greater FII investment in 1996. However, India should focus on attracting greater foreign direct investment (FDI). Besides being a stable long-term source of finance, FDI is a true indicator of the economic growth of a country. China attracts 10 times more foreign funds in FDI than portfolio investment, whereas in India, FDI is half of portfolio investments.
The corporate sector is still adjusting to the entry of global players. 1996 should see greater market segmentation and many more Coke-Parle affairs. Every industry will seek out its favourites which will in turn help the capital market to choose its own favourites.
In sum, the market should look up in 1996. The tiger will run, but the one who runs along with it will make money.
(Ashwajit Singh is president, Allianz Capital and Management Services.)
