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Post-Liberalisation Effects on Indian Stock Market
The market capitalisation ratio (value of listed shares/GDP) is regarded as a measure of size of stock market in a country and it increased from about 1:5 in 1991 to almost 2:3 by 1995. Equity capital of BSE listed companies almost trebled to 93 percent by 1995-96 which indicates a relatively important place attained by Indian stock market. The number of companies listed at BSE more than doubled between 1991-92 and 1995-96. The number of issues increases from 455 in 1991-92 to nearly 1700 each in 1995-96, however the issues steeply declined and reached 156 which is about one-third of 1991-92 level. The main reason was the stock scam during which the BSE Sensex more than doubled from about 2000-4000. This gave public idea of windfall gains and created a ‘herd’ mentality. Optimism generated from entrepreneurs by the virtual demolition of industrial licensing system and entry of small companies with the aim of quick money through price manipulations were other reasons for the unprecedented rise. The period saw a good number of non-manufacturing companies and also the purpose of issue varied from project finance to working capital. A number of public issues were made without proper scrutiny. This led SEBI to strengthen its criteria of public issue, now issuing companies should have paid dividend for 3 years out of preceding 5 years and a manufacturing company without the three year track record of dividend payment can access the securities market if its project has been appraised by a public financial institution or a scheduled commercial bank and the appraising agency participates in the project by way of loan or equity to the extent of minimum 10 per cent of the project. The aggregate market turnover increased significantly during the post-liberalisation period, the increase has been more substantial after 1995-96. Fall in turnover due to scam in 1992-93 following the exposure of scam was more than recovered in 1993-94. Another problem was that out of 6000 companies listed on the BSE, about 30 percent were not traded at all during 1998. Heavy concentration in turnover has been another important characteristic of the Indian Stock Market. Out of the turnover of 2400 companies listed on BSE in 1989-90, the share of top 50 was nearly 82 percent and it stood nearly at 86 percent in 1996.
“草率的自由化”-“Hasty Liberalisation”
The decision to liberalise stock market was sudden as a part of the ‘shock therapy’ without adequate preparation or understanding of the behaviour of the financial sector and of the major players – intermediaries, promoters, investors and regulators – in a country like India, and even ignoring the experience of the 1980s when initially the stock market was given a major push. The regulatory framework was slow to evolve. The Capital Issues Control Act was repealed even though there were securities scams. It was like that government was following a pre-set timetable. The process of liberalisation should have been more gradual. SEBI was inexperienced and in addition government failed to arm it with adequate powers in time. This enabled the private sector to misuse the new freedom and it resulted in a series of scam of various scale and magnitude. Even large houses and translational corporations took advantage of policy vacuum and issued shares to themselves at ridiculously low prices. Scam was unfortunately characterised by long drawn investigations, procedural delays and a slow acting judiciary which brought a lot of Indian stock market. Investor could not adjust to the rapid changes as now the public financial institutions, the industrial licensing systems and the capital issue control mechanisms could no longer be trusted to assess the feasibility, viability and profitability of investment projects. The atmosphere was ‘euphoric’ and investors were ignoring the risk factors revealed in the issue prospectuses of the so-called ‘vanishing companies’. Primary market dried up, investors lost confidence in stock market and households shifted from investing in shares and debentures. Companies had to again rely on assistance from banks and financial institutions. Liquidity crunch meant that investors could not exit company even after realising that the prospects of capital appreciation or dividend earnings were very poor. Having faced the scams it meant that investors would be more cautious in future, however this positive outcome was achieved at a substantial cost and brought the very concept of stock market regulation to dispute.
Key Lessons and Takeaways
The government is not always the best allocator of resources – Before the liberalisation of stock exchanges the funds raised through capital markets were channelled through the Govt. and the business houses close to centre were the ones which benefitted the most. This form of crony capitalism was detrimental to the growth of country as a whole, as the returns from equity due to inefficient allocation were less than what a free market system could have provided.
Market mechanism cannot be allowed free rein in any forms of society- The mechanisms and regulations in place before the liberalisation were stifling the innovation and growth of economy. The Government brought in a shock therapy by doing away with most of regulations in one go in the 1990s. This exposed the dark underbelly of free market mechanism. As there was information asymmetry, many companies were able to con innocent retail investors through price rigging. The IPOs that hit the market were priced at huge premiums. Stock markets work on basis of a Keynesian Beauty Contest where you do not judge the choice you are making on basis of its merits but on the basis of herd mentality. When the retail investors saw that there were windfall gains being made in stock markets, they jumped in without any prior knowledge or analysis and were duped by fly by night companies.
Importance of the role of regulator- Though there have been scams that have rocked the markets time and again, SEBI has been largely successful in increasing investor confidence and ensuring transparent capital markets. More stringent Disclosure policies imposed by SEBI resulted in decreasing the information asymmetry; it also took up initiatives to make investors better informed about their rights. Life was made easier for companies as well, as the simplification of procedures reduced the transaction costs and lessened time needed to tap the capital markets.
Importance of technology in system- When shares were traded in physical form it was a lot of hassle for investors to trade their shares. There only source of income were dividends from shares and they could not take advantage of increased share price. Introduction of Demat accounts has done away with problem of physical possession.
Promotion of Innovation- Many companies which today form the backbone of the Indian economy benefitted from modernisation of stock exchanges. The likes of Infosys & TCS tapped capital markets to fund their growth. The most recent innovative company to raise money has been SKS Microfinance which is working on model of social entrepreneurship.
In conclusion, this exercise has highlighted that liberalisation does not mean doing away with all checks and balances but putting in place a mechanism for market forces to function in a free and fair manner, keeping in view that no group is at a distinct disadvantage, thereby minimizing risk of systematic failure.
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