The financial crisis and securities market regulation

While the over-the-counter market has shrunk on regulators clamping down following the financial crisis, activity on exchange-traded markets has risen significantly

How has securities market regulation evolved in the past seven years? Did regulators in India clamp down in response to the financial crisis?
In some cases there has been a tightening. For instance, exotic foreign exchange derivatives resulted in large losses for many companies as the crisis unfolded. Some of these companies took banks to court, which eventually led to new guidelines from the central bank. As a result, the over-the-counter market has shrunk considerably.
Activity on exchange-traded markets, on the other hand, has risen significantly. In 2008, the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India jointly permitted currency futures trading, which has since flourished, with average daily volumes of over $2 billion, despite a clampdown by the central bank in mid-2012.
In addition, market regulator Sebi introduced direct market access and algorithmic trading in equity markets in 2008, which has helped derivatives volumes increase exponentially and has helped add liquidity to the options market.
Some other products such as securities lending and interest rate futures were allowed with a large number of barriers, which led to an outright failure.
The good news is that regulators have taken on board market feedback and have made necessary corrections. The area that saw the maximum amount of tightening was investment management, with Sebi clamping down on the mutual fund distribution system, which was later followed by the insurance regulator for unit-linked insurance plans.
Of course, this had hardly anything to do with the crisis, although this area has seen the maximum impact in the past seven years.
Growth on the anvil
The latest economic forecast from the World Bank shows that India’s economic growth will accelerate in the next couple of years. That means:
a) Some of the growth will trickle down to company earnings as well. Profit growth rates should come back to 15% levels, says Motilal Oswal Financial Services Ltd; b) This economic growth will necessarily have to be accompanied by a rise in investment spending. That would mean the return of cyclical stocks; c) The Reserve Bank of India (RBI) is set to issue permits to a new set of banks. While their introduction will expand the market, any market share loss is likely to be borne by the public sector banks; d) The World Bank report stressed on economic growth returning to developed economies. That’s good for exporters, including IT; e) The new set of radio spectrum auctions to be held this year and the increasing trend of data usage should boost the fortunes of telecom companies.
To be sure, the policy response of the new government will have to be scrutinized to gain clues on how Indian stocks will do over a five-year term.
—Ravi Krishnan

Market-shy retail investors

Retail investors have shied away from the equity markets in recent years. In fact, in the last three years, retail participation in mutual funds has dropped, according to data from the Association of Mutual Funds of India.
The data includes equity-linked savings schemes, growth funds and balanced funds. In the last two years, net outflows of retail investors stood at Rs.15,852.7 crore and Rs.11,162.8 crore in 2012 and 2013, respectively. In comparison, net inflows of retail investors in 2007 and 2008 stood at Rs.29,899.8 crore and Rs.32,274.7 crore , respectively. Clearly, the risk-taking appetite of retail investors has fallen significantly.
Sure, retail inflows were the strongest in 2008 when the 50-share Nifty index of the National Stock Exchange had declined by as much as 51.8% and net foreign institutional investor (FII) outflows were as high as $12.18 billion. A closer analysis shows that Nifty started declining in the second half of 2008 while retail inflows were strong in the first half of that year. On the other hand, FII inflows have remained reasonably firm except in 2008 and 2011, when there was decline. In fact, except for 2010, the past two years have seen the strongest FII inflows in seven years. In 2012 and 2013, net FII inflows stood at $24.55 billion and $19.99 billion, respectively. FII inflows were the strongest in 2010 at $29.32 billion, when the Nifty had increased by nearly 18%.
—Pallavi Pengonda

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