Shri Ajay Tyagi, Chairman, SEBI
12th Financial Markets Summit of CII
Building India for a New World: Role of Financial Markets
September 16, 2021
1. I thank CII for inviting me to address this Summit.
2. Last one and a half year has been period of ‘Capital Markets’- the capital markets have come right at the center stage of the financial sector, emerging as a credible and prominent way for investing money by the investors, and raising resources by the corporates.
3. I will talk about the emerging market trends, amounts raised through capital markets and some of the recent steps taken or contemplated by SEBI. But first I will like to highlight the robustness of our market infrastructure, which has successfully gone through the real life stress testing on account of wide market fluctuations.
4. After the markets touched new highs in January 2020, as the pandemic started reaching global proportions, the market indices started falling in March 2020; the indices touched a low on March 23 which was around 40% below the January high. Since then, the markets recovered and, except for a brief period of fall in April 2021, have been touching new highs. As on date, the flagship indices are more than double of what they were at the lowest point in March 2020. In fact, during FY2021-22, the Indian equity markets have given best returns, in dollar terms, as compared to any other major jurisdiction in the world- whether emerging or developed markets. Huge increase in secondary market turnover during this period further tested the market infrastructure.
5. ‘Building India for a new World’ needs further encouragement and growth of the capital markets to meet the funding requirements of growing economy. Much more needs to be done – at present, capital market share in the overall fund raising in India is nowhere near the proportions in the developed countries.
6. Amongst the various recent emerging market trends in domestic market, I will like to focus in my address on some specific areas like increase in individual investors’ participation, secondary market turnover, improved fund raising, ESG investment and the corporate bond market.
Individual investors’ participation
7. Post the onset of Pandemic, individual investors’ participation in our stock markets has increased by leaps and bounds. The available data in this regard is quite revealing.
8. While these trends sound impressive, we still have a long way to go to deepen domestic individual investors’ participation in capital markets. As per global data provider Statista, in 2020, around 55% of adults in USA had their money invested in stock markets, while in India, the securities market penetration is just around 6.5% of the adult population.
Increase in secondary market turnover
9. Average monthly equity cash market turnover increased from INR 8 lakh crore in FY 20 to INR 13.7 lakh crore in FY 21, and to more than INR 15 lakh crore this FY till August . On the equity derivatives side, the corresponding turnover figures were INR 287 lakh crore in FY 20, which increased to INR 565 lakh crore in FY 21 and to around INR 1084 lakh crore in this FY till August. Overall, an increase of more than 90% in equity cash market turnover and more than 270% in the equity derivatives turnover in the last one and a half year has increased the market depth significantly.
10. Having a robust margining system is a must for ensuring a fair, transparent and reliable trading. During the recent period, SEBI has progressively further strengthened the margining provisions. These improvements have held the trading and clearing system in good stead in the present scenario of tremendous increase in turnover and individual investors’ participation in the market. Apart from adequate margining system, increased surveillance is another prerequisite. SEBI has accordingly beefed up its surveillance mechanism.
11. There has been a recent boom in fund raising through IPOs. The fund raised through IPOs more than doubled in FY21 to around INR 46,000 Crore from around INR 21,000 crore in the previous financial year. During current financial year, in just five months till August, the amount raised is already close to that raised during the entire previous financial year. The funds raised through IPO route are much more than those raised through either preferential issue or QIP route. Based on the applications filed with SEBI, the equity raising through IPOs this year is likely to surpass the highest amount ever raised in any financial year during the last decade.
12. Growing number of unicorns in start-up eco system is a testimony of the new age tech companies coming of age in our economy. These companies often follow a unique business model focusing more on rapid growth than immediate profitability. Recent filings and successful public offerings of such companies is an important landmark in further evolution of our equity markets. During the last 18 months, growth oriented technology companies have raised a sum of around INR 15,000 crore through IPOs. Their filings with SEBI at present show a pipeline of around INR 30,000 crore.
InvITs and REITs
13. InvITs and REITs have become very popular in the last few years for fund raising and monetization of infrastructure and real estate assets. As on 31st August, 2021, there are 15 InvITs and 4 REITs registered with SEBI. The recent success of these vehicles can be judged by the sizeable increase in cumulative value of assets under them. Put together, these assets increased from around INR 1 lakh crore as on 31st March 2020 to INR 3.4 lakh crore as on 31st March, 2021, and further to INR 3.52 lakh crore as on 31st August, 2021.
Alternative Investment Funds (AIFs)
14. AIFs have emerged as another success story. Last financial year saw 90 new AIFs registered with SEBI under different categories, taking the total number of registered AIFs to more than 700; the cumulative investments increased from around INR 1.5 lakh crore to around INR 2 lakh crore i.e. 33% increase in a year.
15. With the potential to attract a lot of capital, AIFs can be a suitable vehicle to channel funds from sophisticated investors, individual and institutional, to purchase distressed loans from banks and NBFCs. This would unlock the capital of Banks and NBFCs and make it available for fresh lending. A new sub-category of AIFs could be carved out for this purpose.
Sustainability Reporting and ESG Investment
16. Sustainable development and addressing the climate change concerns have emerged as priority areas. A marked increase in freaky weather incidents world over, including in India, in the recent times signal that the climate change effects are likely to impact everyone sooner than later. Thus, encouraging sustainable investments is no longer a fad, it is the need of the hour. The financial markets all over seem to be acknowledging this.
17. SEBI came out with Business Responsibility and Sustainability Reporting norms for the listed corporates. These norms were finalized after extensive consultations with various stakeholders including the industry and taking into account inter-alia our INDC commitments in the Paris climate change agreement. While, as of now, most of the other major jurisdictions in the world have such norms on ‘comply or explain’ basis, our norms are to be mandatorily followed by the top 1000 listed companies from the next financial year.
18. Meeting BRSR norms for the current financial year is voluntary. Considering the seriousness of the matter and as a sign of responsible corporate governance, I would urge the corporates to consider adopting these norms for this financial year itself. This may also facilitate attracting global capital targeted towards better governed companies.
19. Apart from corporate disclosures, ESG aspects of the asset management industry is another area of focus. While, on one hand there is increasing demand for ESG investments & disclosures, on the other hand, there are also concerns about green washing. We are keenly watching international developments in this area, especially by IOSCO and IFRS.
20. Meanwhile, the launching of ESG themed schemes by Mutual Funds in India has picked up in the last year or so. We are at present engaging with the industry about disclosing certain broad ESG related parameters in respect of such schemes.
Bond Market Development
21. The need for bond market development has been oft stated by various people from various forums. I can’t help repeating the same. There is an increased urgency for this now considering the infrastructure development ambitions in the country. As per trends in the corporate bond market, around 97-98 % ofthe corporate bonds raised are through the private placement route and around 90% of the issuances are of AA and above ratings. Trading in secondary market lacks depth and is largely dominated by mutual funds. We need more public issuances; issuances of relatively lower rated bonds; and increased depth in secondary market with many more players.
22. On its part, SEBI has taken certain initiatives and some more are in the pipeline. The measures taken by us include limiting number of ISINs in a year, mandating certain minimum borrowing through bonds for large borrowers and introducing RFQ platform to improve pre and post-trade transparency.
23. Reforms in pipeline include setting up of a Limited Purpose Clearing Corporation for repo in corporate bonds, creating a backstop facility to purchase investment grade debt securities in stressed and normal times and enabling a set of intermediaries acting as market makers in the bond market.
24. With the market currently skewed significantly towards higher rated bonds, having a credit enhancement mechanism to enable lower rated issuers to access the bond market becomes critical. Another important need is for development of a credible Credit Default Swaps (CDS) market to facilitate transfer and management of credit risk in an effective manner.
25. Finally, there is a need for unification of the bond market. The bond market in India is dominated by G-Secs. Corporate bonds are generally priced on the basis of G-Secs of comparable maturity. It is desirable that the two markets are unified, wherein, trading, clearing and settlement takes place on one platform, backed up by a holding structure that provides for frictionless transfer of bond holdings.
26. In a unified bond market structure, all the Market Infrastructure Institutions (‘MIIs’) involved in trading of these products, viz., exchanges, depositories, and clearing corporations would face the same regulatory regime, follow same standards and be inter-operable. Apart from bringing an increased competition amongst the MIIs, this would facilitate ease of trading as the market participants would face uniform rules of the game, and improve efficiency.
27. The idea behind this suggestion is to have increased investor participation in the bond market, including individual investors; convenience to investors in acquiring and holding bonds similar to any other security; and improving transparency & price discovery in secondary market. The recent surge in individual investors’ participation in markets offers an opportunity to harness their investment potential in bond markets.
Financial Literacy and Investor Education
28. It is extremely important for the investors in securities market to be consciously aware of the fact that such investments are subject to market risks. Before making any investment decision, they need to do their due diligence and not be carried away by unsolicited advice which may not be reliable.
29. SEBI conducts Financial Education Programme through Resource Persons to target various groups across the country. Also, along with market intermediaries/ institutions viz. stock exchanges, depositories, AMFI, etc., and through recognised Investor Associations efforts are made to create awareness and enable investors to take informed decisions.
30. SEBI has recently launched another investor education programme called – SMARTs (Securities Market Trainers) programme. Individuals and organisations with knowledge and experience in securities market and interest in creating investor awareness are empaneled as SMARTs. The programmes conducted by them are free of cost for the participants. Investors are also made aware of the do’s and don’ts of investing in securities market and their rights and responsibilities.
Possible Head Winds
31. Ever since the onset of the pandemic, we are living in uncertain times. This is a phenomenon world over. While the Governments are trying to increase the pace of vaccination, new variants and waves keep emerging. Going forward, the possible head winds could come from emerging macro-economic scenario which would inter-alia depend upon the extent of control over the spread of pandemic. The prevalent high P/E ratios are betting on earrings to improve in coming future.
32. The related issue is as to how excess liquidity in the system would be managed by the Central Banks including the timing and pace of unwinding. The level of inflation is another factor to watch. Given the uncertainty, it is difficult to predict the inflection point.
33. We are indeed looking at an altogether new world in the aftermath of pandemic. The capital markets have done rather well during this period and helped both investors and the corporates. It is important for the investors to be aware of the risks involved while making investments. The corporates, on their part, need to maintain high standards of corporate governance. The markets, especially the bond market, need to grow much more to meet the funding requirements of the economy. SEBI is open to new ideas and suggestions for further development of the capital market. I wish all the best for fruitful discussions in this Summit.