Indian Stock Exchanges - Research Paper Example

Indian Stock Exchanges India is a major emerging economy (Basu, 2004). It has liberalized, and while there are certainly mixed results (for example, a lot of the population lives in conditions that were popularized in the West in Slumdog Millionaire), there have been major opportunities for growth befitting a country that has more than a sixth of the world's population and is English-speaking (Palast, 2006). Unsurprisingly, then, India has developed some stock exchanges, primarily the National Stock Exchange of India and the Bombay Stock Exchange (NSE, 2011; BSE, 2011). The Bombay Stock Exchange is “the oldest stock exchange in Asia” and one of the older ones in the world, having been in operation for 135 years (BSE, 2011). In 1875, it was known as the Native Share and Stock Brokers Association, and is sometimes known as the Stock Exchange Mumbai. It is astonishingly large: It has the most companies traded and is one of the top ten stock exchanges in the world with a total capitalization of $1.28 trillion (BSE, 2011). Its electronic trading handles the fifth largest number of trades in the world. It is the second stock exchange in the world to obtain ISO 9001:2000 certification and the second in the world to receive the “Information Security Management System Standard BS 7799-2-2002 certification for its BSE On-Line trading System”. The BSE Index, SENSEX, is traded in Hong Kong. The BSE is a hybrid between an order-driven and market maker, quote-driven system (BSE, 2011). Historically, it used quote-driven systems, but anonymous screen-based trading systems and the trading of debt and other loan-based assets is done using an order-driven system. However, quote-driven mechanisms still guide trading in many illiquid stocks. Trading occurs between 9:00 AM and 3:30 PM under most circumstances. This is about as long as the NYSE, which trades from 9:30 AM to 4:00 PM normally. The securities and stocks exchanged on the BSE are classified into a few different types of groups. “BSE has, for the guidance and benefit of the investors, classified the scrips in the Equity Segment into 'A', ‘B’,'T', ‘S', ‘TS' and 'Z' groups on certain qualitative and quantitative parameters” (BSE, 2011). These groups are classified based on the type of asset being traded, the way the asset is traded and an estimation of quality. F Group trading, for example, is of fixed income securities, while T Group trading are scrips traded per trade which is used for surveillance. S Groups are Indonext segment stocks, which means that TS Group stocks are Indonext stocks traded under trade-to-trade surveillance. Government securities are traded in the G Group. Z Group trades are companies that have failed to comply with listed requirements “and/or have failed to resolve investor complaints and/or have not made the required arrangements with both the depositories, viz., Central Depository Services (I) Ltd. (CDSL) and National Securities Depository Ltd. (NSDL) for dematerialization of their securities” (BSE, 2011). The BSE Sensex is calculated using a Free-float Market Capitalization Model (MySMP, 2011; BSE, 2011). It is thirty blue-chip stocks, similar to the Dow Jones, which account for one-fifth of the capitalization of the exchange and are safe stocks with a proven track record. “The market capitalization is determined by multiplying the stock by the numbers of outstanding shares. This calculation is performed for all 30 stocks and then divided by the Sensex Divisor. The Divisor is derived from the original base value of 100 for the Sensex, so the index can be tracked over time. The Sensex is calculated every 15 seconds and then published to investors around the world in real-time” (MySMP, 2011). One study of the BSE found that a contrarian strategy, a strategy that tries to defy traditional wisdom such as Soros' famous pound-sterling coup (Locke and Gupta, 2009). The authors' test portfolio traded at 74.40% above average market return. While they found that risk differences between winner and loser portfolios as well as firm sizes and overreaction mechanisms were important, it is nonetheless interesting and a sign of a potentially different market structure that a contrarian strategy would be so effective in the BSE. The BSE was hard-hit by the 2008 credit crisis and economic meltdown (MySMP, 2011). It dropped from 14,215.33 to 7,697.33. This indicates a heavy tie-in with international systems. The BSE has begun to lose some of its luster in recent years (Savai and Shaaw, 2010). A two-and-a-half hour halt in trading due to technical issues involving “trade confirmation” underscored chronic problems with the exchange. “The BSE is losing its charm day by day...The working of the NSE is much better than the BSE” (Savai and Shaaw, 2010). The NSE is gaining ground in a number of ways and is increasingly viewed as more reliable. It is important to note, however, that in 2010, the Sensex was the best-performing international exchange (Savi and Shaaw, 2010). “The Bombay Stock Exchange’s Sensitive Index, or Sensex, gained 323.29, or 1.6 percent, to 20,355.63, the highest level since Oct. 14, as of the 3:30 p.m. close in Mumbai” (Savi and Shaaw, 2010). In a year of sluggish recovery, it grew 73%! The NSE, meanwhile, was created far more recently: “The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges. It recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country” (NSE, 2011). Its market capitalization has grown from 363,350 rupees in the 1994-1995 fiscal year to 7,139,310 rupees in December 2010 (NSE, 2011). This is a twenty-fold increase in fifteen years, a very large growth rate. Despite the BSE's large size, the NSE is expanding explosively and has become associated with better quality (Savai and Shaaw, 2010). The NSE is thus truly different from other stock exchanges, both internally (the BSE) and externally (the NYSE or London Stock Exchange) in several important ways. First: It is not localised, but is designed to represent the entire country. This is unlike the NYSE, LSE, Toronto Stock Exchange, etc. and more like the Amex or NASDAQ stock trading. Second: It is a tax-paying company which operates under large-scale government regulation and mandate. This is expressed in the fact that “The standards stipulated by the Exchange for trading membership are substantially in excess of the minimum statutory requirements as also in comparison to those stipulated by other exchanges in India. The exposure and volume of transactions that can be undertaken by a trading member are linked to liquid assets in the form of cash, bank guarantees, etc. deposited by the member with the Exchange as part of the membership requirements” (NSE, 2010). The NSE divided into several market segments, including Wholesale Debt Market, Capital Market, Futures and Options, and Currency Derivatives. Companies are allowed into several combinations of these markets. Membership in the NSE is three-tiered: “[T]he trading platform provided by the Exchange, the broking and intermediary services and the investing community. The trading members have been provided exclusive rights to trade subject to their continuously fulfilling the obligation under the Rules, Regulations, Byelaws, Circulars, etc. of the Exchange. The trading members are subject to its regulatory discipline. Any person can become a trading member by complying with the prescribed eligibility criteria and exit by surrendering trading membership without any hidden/overt cost. There are no entry/exit barriers to trading membership” (NSE, 2010). Criteria include corporate structure, capital adequacy, track record, education, experience and other factors of the company. The health of the Indian economy in general is commonly analyzed using the SENSEX due to it containing the largest Indian companies, being a reliable indicator of growth, etc. The reliability of this indicator seems at least at first glance to be very high. In 2008, when the global economy was in meltdown, the SENSEX suffered. Now it is growing at an immense rate, pointing to a health in the Indian economy, again as regarding macroeconomic statistics and not stickier matters like inequality (Savi and Shaaw, 2010; Palast, 2006). In February, Indian shares in general tended to go up, with Tata Steel a major driver of growth, and Asian currencies in general stood stronger against the US (Reuters, 2011a; 2011b). A seven-month low decline seven months ago was compensated for by Reliance Industries gains and growth in blue chips (Jain, 2011). Investors like India's leading financial news site, Top News, pick a few core companies as drivers of growth (Kakkad, 2011). In general, a few major changes are occurring in the Indian economy with impacts on the Indian stock exchange. First: Diversified IT and the outsourcing of IT continues to grow in the Indian economy (Kakkad, 2011). “CMS Info Systems announced that it has bagged a Rs 300-crore order from BSNL to centralise its billing. According to the agreement, CMS Info Systems would implement a centralised billing system for BSNL across three locations -Northeast, east and south for seven years” (Kakkad, 2011). CMS is a major growth company, and in general, the outsourcing of IT production is likely to only get more complex. Second: The Indian economy is getting FDI beyond the IT sector (DIPP, 2010). While the largest sector of FDI was still services, with IT outsourcing such as customer support a major part of this, other sectors such as the actual development and construction of computer software and hardware, telecom assets, housing and real estate investments, construction, power and automobile investments were twice as large as the services investment (DIPP, 2010). The evidence is that this new kind of FDI is actually staying in India and developing the country. Third: Globalization and financial liberalization is continuing. “Globalization is, of course, a much-discussed theme. But I believe India is the perfect venue to bring to it a new perspective. For India recently has grasped firmly the opportunities of globalization, as the international successes of so many of you in the audience can attest. At the same time, India remains a country struggling against poverty, inequality and poor living conditions for hundreds of millions of its citizen” (de Rato, 2005). This continues to allow Indian stocks to grow in line with the global economy and brings in foreign investment. Fourth: Macro-economic growth is continuing, and unlike in past years, it has been distributed somewhat more equitably. “The economy has posted an excellent average growth rate of more than 6.8% in the decade since 1994, reducing poverty by about 10 percentage points. India probably achieved greater than 7 percent GDP growth in 2005, significantly expanding manufacturing. India is capitalizing on its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers” (Forbes, 2005). Fifth: Indian companies are actually competitive with US companies (Donnelly, 2009). Macro-stability in the country has remained, even with recent growth. The SENSEX's recent growth is a sign of this phenomenon. Sixth: The Indian pharmaceutical sector is undergoing major growth, both as subsidiaries of or outsourcing destinations for Western companies and on its own (Kakkad, 2011). “Drugmaker GlaxoSmithKline Pharmaceuticals plans to launch pneumonia vaccine Synflorix and at least two oncology drugs in 2011 as part of its strategy to drive sales in India...two oncology drugs, Revolade and Votrient, would be launched by end of first quarter or early second quarter” (Kakkad, 2011). Similar, a major company, Venus Remedies, is launching a new oncology drug, Passion Oncobiz. This should lead to 10% growth for the company. In general, Indian pharmaceutical companies are beginning to move in innovative directions and threaten US and Western companies. There has been a shift towards a different, probably healthier, model of growth, too. Social entrepreneurship has become a major sector of growth (Menon, 2009). During the meltdown, one of the sectors that managed to not only grow but even see new companies emerge was the socially responsible enterprise sector. “[W]ith the slowdown taking the shine off urban, higher-income target markets, organisations focusing on ‘bottom of the pyramid’ audiences have become a reality” (Menon, 2009). Social entrepreneurial companies try to emphasize traditional values in India of community development, poverty aversion, equality and ethics emphasized by the Buddhist and Jainist traditions. Support and news for this change includes major journals and websites such as ThinkChangeIndia and Outlook Business (Karunakaran, 2009; ThinkChangeIndia, 2011). Both the socially responsible and conventional sectors of the Indian economy, as well as foreign businesses, are aiming for the “bottom of the pyramid” audience. In the past, growth in India was sharply divided along class and geographical lines, with an emerging middle-class and rich in the cities taking the lion's share of growth and much of the rest of the economy stagnating, with immense poverty (Palast, 2006). The change should not be exaggerated: Poverty is still a serious problem in India, and many rural areas are scarcely seeing any real change from the new global market. But the bottom of the pyramid is starting to grow, with real poverty reduction. If the bottom of the pyramid can grow, this will cause even more growth in the BSE and NSE. The picture is not uniformly rosy, though, even considering consistent growth, reductions to inequality and poverty and the success of the SENSEX. Oil and energy problems and shocks do plague the society (Kakkad, 2011). “India, struggling to balance between cutting its costly fuel subsidies and curbing inflation, may tweak fuel taxes in the February 28 Budget to cushion the blow of rising global crude prices on state-run oil retailers. Tackling the current informal structure of fuel subsidies would help investors put a better valuation on proposed share sales for Indian Oil Corp (IOC) and Oil and Natural Gas Corp, aimed at bringing in more revenues for New Delhi” (Kakkad, 2011). There are threats of shocks from the Middle East due to the large Muslim population in India and cascades through Pakistan and Afghanistan; similar, the long-standing border conflicts and saber-rattling with Pakistan, due to the effect of nuclear weapons, are a constant background and could cause stock market volatility. Major reforms still need to be implemented (de Rato, 2005). Ethnic struggles and problems are always a background issue as well. The country is extremely uneven, with some states like Kerala much poorer than others, and with the already-discussed city-country divide. This can cause instability in growth and a speculation-oriented economy. The country is English-speaking, which makes it very viable for long-term growth, but religious plurality and immense demographic and micro-cultural variation can make it very hard for FDI to succeed given that marketing by Western firms faces severe problems. Religious sensitivity has plagued companies like McDonalds, accused of using beef products in Chicken McNuggets and fries while claiming to be vegetarian-compliant (Schlosser, 2003). In general, then, Indian stock exchanges are poised for major growth. India was a leader of the non-aligned movement, and it seems that this can be shown in the orientation of the BSE and the NSE. The NSE's recent growth shows that the Indian economy and investors in the region value stability and quality control (Savi and Shaaw, 2010). After the US global meltdown, perhaps we might have something to learn from their quality control focus. 15% growth from Madoff-style securities or toxic assets may seem good in the short term, but we have seen the costs of this short-sightedness. A few investors can ruin the game for everyone and cause massive poverty. The growth of the SENSEX and the NSE point to the value to shareholders and investors of choosing long-term viability over quantity. In addition, the growth of social entrepreneurship in India and in the stock exchanges shows the benefit of combating inequality and providing services to the poor. Our stock exchanges could benefit from studying India. Works Cited Basu, Kaushik. India's Emerging Economy. MIT Press: Massachusetts. March 2004. Bombay Stock Exchange. “About”. 2011. Department of Industrial Policy and Promotion (India). “India FDI Fact Sheet”. 2010. Retrieved 1/29/2011 from http://dipp.nic.in/fdi_statistics/india_fdi_index.htm Donnelly, R. “India's Business Climate”. The Diplomat. February 2, 2009. Forbes. “Capital Hospitality” – India. 2010. Kakkad, Shalini. “Daily Indian Stock Market Outlook Fundamental Picks by FairWealth Securities”. TopNews. February 16, 2011. Karunakaran, N. “The New Wealth Generators”. Outlook Business. September 5, 2009. Krishnan, M. “India has most innovative social entrepreneurs: Schwab”. October 31, 2006. “Hindustan Times”. Jain, Sudeep. “Indian Shares Rise on Reliance Industries Gains”. Wall Street Journal. February 15, 2011. Locke, Stuart and Gupta, Katrick. “Application of contrarian strategy in Bombay Stock Exchange”. Journal of Emerging Market Finance. Volume 8, No. 2: 165-189. May/August 2009. Menon, N. “Social entrepreneurship in India”. The Economic Times. February 20, 2009. MySMP. “BSE Sensex History & Components”. 2011. Retrieved 2/15/2011 from http://www.mysmp.com/world-markets/bse-sensex.html National Stock Exchange (NSE). “About”. 2011. --- “Membership”. 2010. Palast, Greg. Armed Madhouse. Dutton Books. 2006. de Rato, R. “Prospering in a Globalized Economy. International Monetary Fund”. Presented at Mumbai, India. March 17, 2005. Retrieved 1/29/2011 from http://www.imf.org/external/np/speeches/2005/031705.htm Reuters. “Indian rupee ends largely steady post choppy trade”. February 15, 2011. ---- “Indian shares up; Tata Steel rebounds, Unitech down”. February 16, 2011. Savai, Hemal and Shaaw, Rajhkumar K. “Bombay Stock Exchange Halts Trade on Technical Fault”. Bloomberg. November 1, 2010. Schlosser, Eric. Fast Food Nation. 2003. ThinkChangeIndia. 2011. Retrieved 1/29/2011 from http://www.thinkchangeindia.org/tag/social-entrepreneurship/ Read More