The road ahead

Vikram Limaye, CEO of India's National Stock Exchange (NSE) outlines his vision of where the Indian markets need to focus in the sort to medium-term.

Obviously NSE has had a big hand in helping to shape the Indian capital markets ecosystem. Is there anything still missing in your view?

Vikram Limaye: There’s a lot that can be done from a market development perspective. The list is actually quite long, if we want to broaden the investor base. While 5% of household savings are in equities today and the equity markets in India are relatively well developed, we need to increase both retail and institutional participation in equity markets. For other asset classes, markets are at very early stages, whether it is bonds, commodities, currencies, credit derivatives, interest rate swaps, etc.

Part of it has to do with regulation, part of it has to do with the ecosystem not being developed the way it needs to be developed for these markets to take off. In many of these areas, institutional participation is not where it needs to be. Institutional capital in India is controlled by four different regulators, amongst whom there needs to be alignment to develop a market. Various people have to come together and move in the right direction. Obviously the Exchange also plays an important role. I’m hopeful of market development because people at senior levels in government and the regulators are interested in moving in this direction.

I do feel that a lot can be done in terms of surveillance of the market to ensure fair market practices and that trust in markets is enhanced. For that, we have to use big data analytics and artificial intelligence to see how we can try and predict patterns of trading and behaviour. 

From a systemic risk perspective, we need to keep on top of cyber security risks because that obviously is a huge threat. Unfortunately 99.9% uptime for an exchange is not good enough; it has to be 100%. And the cast of characters you’re dealing with for cyber security threats is increasingly sophisticated. Many of them could also be state-funded, so you have to stay ahead of the curve. Investment in technology is critical to be at the cutting edge of prevention.

Will the introduction of a common platform for equities and commodities later in the year make that easier or more difficult?

VL: It’s certainly easier for members, because you’re trading from one account and to that extent it’s easier to move margins and collateral across different segments if you’re on one exchange.

What’s the impact going to be on competition?

VL: The commodities market had a separate regulator called the FMC (Forward Markets Commission). This was merged with the securities regulator, SEBI. So now we have one regulator, which is why bringing commodities and equities together is also feasible. The first step was to permit the brokers to have a unified entity for commodities and equities. Competition will increase with exchanges being permitted in all asset classes.

And that is still on target for October?

VL: That’s right. NSE will be ready to offer commodities contracts from October 1.

This may be a bit of a cheeky question, but if you were still at Credit Suisse First Boston, if Credit Suisse First Boston still existed, and a client came to you and asked for comment on the Indian equity market and its pros and cons, is there anything that stands out that you think foreign investors would need to know about the current structure of the market?

VL: In terms of overall growth prospects, the country is in a good position. We have good macroeconomic stability and good political stability. Those are important ingredients for foreign investment. Over the last 18 months; there have been structural reforms that the government has put in place that have led to some slowdown in near-term growth for the economy. Growth is expected to pick up in the next two to three quarters once these reforms stabilise.

From an investor’s standpoint, I would say the markets are well regulated and risk management in the markets is very strong and amongst best in class compared to other markets. I think regulation has come a long way in order to facilitate foreign investment in India and fair market practices. More can be done in terms of new products, but that is a continuous process. We have a very robust futures and options market. In fact if you look at the volumes in options, NSE is number one in the world and in futures is number two behind CME. It’s a very large, well-regulated, liquid market.

The other good thing that has happened in the last couple of years structurally, which is a positive for the Indian market, is that the dependence on foreign investors has gone down. Three years ago, if FIIs had pulled out US$500 million from the market, it would have moved the index and the currency materially. Now domestic buying power has gone up quite significantly, because flows into domestic mutual funds have been very large over the last two years and even more so in the last one year post-demonetisation, so that’s a positive thing. It cushions volatility. Almost $1 billion a month in mutual fund flows is through systematic investment plans which is a steady form of investing small amounts periodically through cycles rather than trying to time the market. My hope is that it continues; we haven’t seen a major correction in the market to test that.

We need to have more quality companies to invest in. Today there are about 1800 companies listed on the NSE. We need to get more quality companies to list, to broaden the availability of investment opportunities. The government could use stable markets to list some of its public-sector undertakings and divest some stake.

The SME landscape is also a very attractive landscape. We have started a dedicated platform for SME listings called NSE Emerge. We’ve got about 120 companies that are now listed on that platform. The pipeline is very strong; I think probably another 40-50 are likely to list in the next six months. Providing access to capital to companies is an important part of our role as an exchange. For SME companies it’s particularly important because access to capital is one of the problems that SMEs have.

Is there much demand for remote participation; are you getting lots of foreign brokers wanting to trade directly on the local market?

VL: Demand for remote participation by foreign brokers wanting to trade directly on the local market, is sporadic and in form of inquiries. 

Local regulations (SCRA, SEBI, Tax) require foreign brokers wanting to trade directly on the local market to have on ground presence (India presence). Hence remote participation is not permitted. In the last decade, over 35 leading foreign brokers have established presence by setting up local legal entities. These entities are registered with SEBI as well as with Indian Tax authorities (PAN card, tax filings etc.); contracts issued by them are subject to local legal jurisdictions.

SEBI and NSE (for brokers who are its members)) have considerably improved the ease of doing business for entities set up in India, by permitting them to provide direct market access (DMA) facilities offshore.