Commentary/Yazad Darasha

Derivatives and depositories will add long-term depth

Isn't it amazing that the Indian stock markets have not reacted adversely to the political shenanigans rocking New Delhi for the last two months? The markets -- as represented by the various indices of course -- appear to have taken all the 'democratic' happenings in the capital in their stride, and are simply awaiting a shakeout. They are moving sideways, and all the technical indications are that they will continue to do so unless jolted by some incredibly good or bad news.

A while ago we saw how Indian business and industry had become more or less immune to political upheavel -- all the childish games of power played by the cretins who pretend to rule us -- as long as long-term economic objectives were kept in sight. Perhaps the same maturity has finally arrived at the stock markets as well.

Of course, we would love to have seen the markets' reaction had one of the Yadavs -- Laloo Prasad and Mulayam Singh -- had ascended to the gaddi. But one gets the feeling the reaction would not have been too drastic. What we are witnessing seems to be a wider separation of business from politics, and that is certainly a welcome sign.

In the meantime, there has been much talk among the mandarins of the finance ministry about measures to revive the stock markets. The goal is clear: Finance Minister Palaniappan Chidambaram has given away so much to so many in his budget, that he desperately needs the accrual from the disinvestment of public sector equity to balance his books once again. And that accrual can only come if the stock market has the depth to absorb the PSU paper that will flood it.

To that end, Chidambaram has abolished tax on dividend received by shareholders, given infrastructure paper a lot of tax breaks, reduced corporate and personal taxes, etc etc.

All the so-called market-friendly steps enunciated in the budget (may it be passed in Parliament without amendments, amen) appear to meet this short-term target of PSU disinvestment. Perhaps it is also time for some long-term measures, to see that the markets do not experience short-term depth, then return to somnolence.

One of the most important needs today is a hedging mechanism. Without any way to hedge exposure, the larger players will continue to dominate, because they have a higher stop-loss capability. The smaller players who are slightly weak on money muscle will continue to shy away from large exposures.

If there was a hedging mechanism available, even the smaller players would play in the big league, thus deepening the market on a sustained basis.

It is in fact this lack of a hedging facility that brought the market to its knees after the Securities and Exchange Board of India arbitrarily abolished badla (or forward) trading. The fact that badla was reinstated two years later in a watered-down version only added to the problems. No one was willing to use it, while the SEBI sat back and congratulated itself for putting it in place.

It is high time we looked carefully at the possibility of introducing derivatives like options trading and futures trading to the Indian stock markets. If we can have such mechanisms in the commodities markets, one fails to understand why the stock market cannot have them.

There is another aspect that is bound to add fillip to high-value trading on the stock markets -- paperless trading. A lot of market players will not enter in a big way today because the threat of being saddled with pieces of toilet paper in the form of fake share certificates has never been higher.

Stock exchange presidents may deny it hotly, but the fact is that of every 100 share certificates delivered to a customer each day, between nine and twelve are forged, especially so in the myriad regional exchanges. This fear is certainly keeping the small investors away. And anyone will tell you that the small investor is, if not the spinal column, the abdominal brace of any stock market.

So why doesn't the small investor go the mutual funds route, where the threat of fake share certificates is non-existent? That question is best answered by a quick look at the performance of the mutual funds over the last twenty years. Abysmal is too kind a word to describe this performance.

We have already set up a central depository and more than two dozen companies have already dematerialised their shares for trading through the depository. But methinks the process of dematerialisation should pick up some serious speed.

When we wanted industrialisation to spread beyond the narrow, congested confines of urban areas, we offered advantages like sales and income tax reliefs to companies setting up industries in rural areas. Why can't we do the same thing for the depository? If a company sees a real benefit in issuing paperless equity to the public, it will certainly do so. And help the cause of paperless trading in the process.

It is not that these two measures will suddenly make the stock markets come alive again. It is that these are but two small steps that can be taken quickly to keep going the process started by Chidambaram. The SEBI, under chairman Devendra Raj Mehta, has shown that it can move pretty swiftly and surely when it wants to. I don't see why it has been sitting on its haunches doing nothing significant in the last six months or so.

More than reviving the markets for the express purpose of getting a good price for PSU equity, what we need is a market regulator being seen to be concerned and acting for a long-term revival.

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