PERFORMANCE OF INDIAN EQUITY MARKET – AN OVERVIEW

PERFORMANCE OF INDIAN EQUITY MARKET – AN OVERVIEW

Introduction:

                        Indian Equity Market, better known as Indian Stock Market performs in a sluggish way since the second phase of 2007 and continues to be bearish until the first quarter of 2009. The Securities Contract (Regulation) Act, 1956 has defined stock exchange as “an association organization or body of individuals whether incorporated or not , establish for the purpose of assisting regulating and controlling business of buying, selling and dealing in securities.” The forces of equity market mainly depends on three reasons-i) global funding flowing into equity, ii) performance of various corporate houses, iii) monsoons. Indian Equity Market or Stock Market mainly deals with the two types of fund- venture capital fund and private equity fund and the transaction based on two major indices – National Stock Exchange of India Ltd. (NSE) and Bombay stock Exchange (BSE) being carried on decentralized form. Indian Equity Market also comprises of the debt market dominated by primary dealers, banks and wholesale dealers. Equity indexes are correlated beyond the boundaries of different countries with their exposure to common calamities like monsoon etc, highly affects Indian and Bangladesh market as well as global capital market also. Trade integration policy also affects the equity market bearing the close connection with the foreign investors. Since 1995, onwards both in terms of trade integration and foreign institutional investment (FII) India has made in advance. It is no doubted a lucrative field for profit making not only for long and for medium term investors also position and for short-term swing traders’ also very short-term intra day traders. There are 22 stock exchanges performing in Indian market.  Bigger are enlisted with NSE and BSE and comparatively medium and smaller companies are listed into OTCEI (Over The counter Exchange of India). SEBI (Securities Exchange Board of India) supervises all the function of Indian Equity Market.

History of Indian Equity Market:

                        The history of Indian Equity Market as well as capital market dates back to the 18th century when the securities of East India Company were traded in the country. Thus, the concept of share trading had developed a quite a long time back. Until the end of 19th century, the securities are traded in a very unorganized way and the main trading centres were Bombay (now Mumbai) and Calcutta (now Kolkata). Among those, two centre Bombay being the chief trading centre and mainly concentrate on trading of bank shares. During 1860-61 when American Civil war started trading activities flourished in India as Bombay became the main source of supply of cotton , that result into boom in share price. It was lasted for nearly half a decade and in July 1865, there was a tremendous slump in share prices. In 1875, the stockbroker association established a Native Shares and Stock Brokers Association to organize them selves. Before such initiative, the trading usually took place under banyan tree. However, such association was recognized by BSE in May 1927 under The Bombay Securities Contracts Control Act, 1925.

                        Prior to independence British Government was not at all concerned in economic development of India and for that reason Indian Equity Market was not at all organized and developed. That image was started to change at post independence period. However, the size of capital market was not impressive and the Controller of Capital Issue (CII) had the autocratic power to supervise and control the timing, composition, interest rates, pricing allotment and floatation costs of new issue. That rigid rules and policies unmotivated and demoralized many companies from going public for almost four and half decade.

                        In 1950, speculation became uncontrollable and stock market came to known as ‘Satta Bazaar’. Tata Steel, Bombay Dyeing, century Textiles, National Rayon and Kohinoor Mills were favorite scripts for speculators. Despite speculation, non-payment and defaults were non-frequent. The GOI (Government of India) enacted The Securities Contracts (Regulation) Act, 1956 was also characterized by the establishment of a network for the development of financial institutions and State financial corporation.

                        In 1960, this decade characterized by wars and drought and followed a bearish trend. The GOI banned the transaction of forward trading and ‘badla’ technically called ‘Contracts for Clearing’ various financial institutions like LIC, GIC helped to revive the sentiments by emerging as the most important group of investors. In 1964, the first mutual fund of India UTI had come into existence.

                        In 1970, ‘badla’ trading resumes with a disguised form of ‘hand delivery contract’. But the major set back came into the way on 6th July, 1974 when GOI promulgated the Dividend Restriction Ordinance. As per ordinance, dividend was restricted to 12% of Face Value or 1/3 rd of the profit under Section 369 of The Companies Act, 1956 which ever is lower. It lead to a slump in market capitalization at BSE by about 20% overnight and stock market did not open for nearly fortnight. Many Multinational Companies were opted out of India as they were forced to dilute their majority stocks in their Indian ventures in favor of Indian public under FERA, 1973. FERA dilution created on equity cult in India.

                        The decade of 1980, was the evidence of an explosive growth in Indian Equity Market. Many investors discovered this field for lucrative return as for liberalized Government policies. This decade Indian Equity Market explore the several new characteristics like increase in the number of stock exchanges, listed companies paid up capital and market capitalization rate.

                        1990, was the most important decade in the history of Indian Capital Market. The two new terms ‘liberalization’ and ‘globalization’ became to be known to Indians. The Capital Issues (Control) Act, 1947 was abolished in May 1992. SEBI, being the regulator of Indian Capital Market was entrusted with the power of new trading policies, free prices, euro issues advent of foreign institutional investors, new stock exchanges, entry of new players such as private sector mutual funds and private sector banks and primary market boom and bust. But the major capital market scam took place in 1990 in which brokers as well as bankers were involved. As a result, of such investors drove away from market. In 1991-92 a securities scam took place that facilitate to reveal inadequacies and inefficiencies in the financial system and prompted to reform Indian Equity Market as soon as possible. The BSE was subject to nationwide competition by two new stock exchanges- the NSE, set up in 1994 and OTCEI (Over the Counter Exchange of India) set up in 1992. The Securities Contracts (Regulation) Act, 1956 was amended in 1995-96 for introduction of options trading. The National Securities Clearing Corporation (NSCC) and National Securities Depository Limited (NSDL) were set up in April 1995 and November 1996 respectively to form improved clearing and settlement and dematerialized trading. In late 1990, Information Technology scripts were dominant on the Indian browses, known as ‘New Economy, scripts from Infosys, Wipro and Satyam.

                        Afterwards, Indian Equity Market entered into the 21st century and become witness of Ketan Parekh Scam. ‘Badla, was discontinued from 1st July 2001, and rolling settlement was introduced in all scripts. Internet trading was permitted in February 2000 and from June,2000, onwards trading of futures commenced.

Positive Key Features:

I)          Size and Scale of Indian Corporate Sector: Indian corporate sector is becoming a giant driver of global market day by day. Two hundred and nineteen companies in BSE 500 made more than 100 crores as PAT in 2008 as compared to 90 companies in financial year 2003.

 II)       Positive Infrastructure Spending Outlook: 

                              Outstanding Project Investment (OPI) as percentage to GDP stood at 55.9% in 2003 and increased to 128% in 2008.

Highest Investment savings rate: India has occupied the second place in investment and savings where as the first position has been occupied by the neighbor country China.

 III)     Strong Domestic Demand: At present era, India’s standard of living in mounting day by day. Domestic consumption has become 70% of GDP. Indian cultivators get the benefit from good monsoon this year and above all a good impact of sixth pay commission boost up the Indian market.

Present Scenario of Indian Equity Market:

                  Before second phase of 2007, the growth picture of Indian Equity Market was very impressive. After a detailed analysis, it was revealed that big FMCG companies used to reach to top with double-digit growth and its share was becoming attractive to the investors. Foreign Institutional Investors (FIIs) are to be registered themselves with SBI and RBI to continue their operation in Indian Equity Market. Foreigners are empowered to hold majority shares in Indian Equity Market apart from some restricted industries. In some specific industries, foreigners are entitled to have even 100% shares.  Over last few years with the facility of the online stock market, trading in India it becomes more convenient for FIIs to trade in India. As per detailed study on Indian Equity Market it is exposed that enhancement in foreign investment over the years, no doubt have emphasized the dynamism of Indian Equity Market.

                  The recent global recession absolutely crash the Indian Equity Market and it results into continuous downfall in Indian economy. According to a financial expert’s report, “the turmoil in international financial market has affected the region primarily through a fall off in portfolio flows and weakness in Equity Market. The latter has been mostly pronounced in India, particularly during the first quarter of 2008.” Actually, the downfall of Indian Equity Market has started a long back i.e in second half of 2007 and continued through out 2008 that affect South Asia mostly. The reasons behind this downfall are declination in portfolio flow, weakness in equity market etc. As per a Global development finance report Indian Equity Market mostly hitted by weak equity market. Currently Indian Equity Market in going through a bearish phase, which could be either a short term or long term mostly depending upon global oil price scenario. Indian economy has shown a growth at higher than 8% for last few years but the future of this growth stories is mainly depend on crude prices. Higher crude price will result into higher fiscal deficit due to bankruptcy of Central government as it happened in the year of 1991. However, this time the government is in much better condition and could survive higher crude price with out going bankrupt. Therefore, it is expected that in near future oil price will be stabilize. Probably the higher oil price can act as a ‘speed breaker’ to the Indian economy for the time being but in long run economy would continue to grow at a rapid pace and so will Indian Equity Market.  If an analysis is done on Indian Equity Market, it will be revealed that inflow of funds in Indian Equity Market will only result into small rally in the market.

                  In the current scenario, global cues would play important role in equity market, as financial crisis in U.S is not completely solved. As per SEBI, FIIs are the net sellers in the first quarter of 2008; they have sold equity of Rs. 11318.50 crores. Indian Equity Market sharply declined with the benchmark Index Sensex falling from 20,300 in January to 15,644 in March 2008.

                                               Indian Corporate Sector Performance

                                                                              Study of BSE 500 Companies

I)                   Profitability has improved in Indian corporate sector in the last five years that affect the Indian Equity Market a lot. EBIT(Earning Before Interest & Tax) in FY 2003 was 17.41 and in FY 2008 was 18.32 whereas PAT(Profit After Tax) in FY 2003 was 7.75 and in FY 2008 was 10.35. 

II)                 Indian corporate sector has shown a stronger Balance Sheet as compared to 2003 with 2008.

                                          Stronger Balance Sheet

Balance Sheet Ratios

In FY 2003 DEBT EQUITY RATIO was 0.62 and INTEREST COVERAGE RATIO was 6.16  in and in FY 2008 it was .057 and  11.67 respectively.

                                                                  (Source: CMIE Database)

III)              Corporate sector of India also publicized greater shareholders wealth creation. The Return on Investment (ROI) in 2003 was 15.50% whereas in 2008 it amplified to 20.80% that easily proved improving condition of Indian companies.

                                                                                              (Source: CMIE Database)

                  During one or two years, Indian Equity Market is crashed and the main reason behind that a change in the global investment climate. One of the primary trigger is the huge fear of the U.S economy going into a recession with foreign institutional investors trying to relocate their funds from risky emerging markets to stable developed markets. Hedge Funds and FIIs could have been the biggest sellers in the Indian market, booking profit and making the most of the unprecedented Bull Run that has dominated the Indian Equity Market for a long time now.

                  Volatility in commodities market has also significantly affect equity market. The current volatility also linked to global bourses. There is a big correlation among global market. In the local market there has been a huge build up in derivatives position and volatility led to margin calls. Many IPOs have sucked out liquidity from the primary market into the secondary market.

                  Analysts expect the market continues to be choppy until unless global liquidity and commodity prices are stabilized. According to Adrian Mowat of J.P Morgan, “it is expected that the Sensex can fall another 10-15%. India is trading 65% premium to emerging market and India is playing catch up with other declining global market.” India cannot escape from global meltdown. With fears of an impending US recession high, so country is likely to be secure. It is interesting that Indian markets were hit the most among all Asian markets. Investors will have noticed that in the third quarter corporate shows significant declination in both sales and profit growth as compared to the same quarter a year earlier.  

                  When coupled of data showing the export target for the year will be missed by a wide margin and that the industrial sector has suffered a sharp slowdown, it was inevitable that stock prices would have to come off their dizzy highs. FII had moved to the sidelines in the secondary markets even earlier and they have been net sellers of 2200 crores (Rs.22 billion) in January. There is no doubt that valuations had become expensive even after 10% correction from the market peak, the Sensex trade at a straggling P/E multiple of 24.5, which is not cheap in anyone’s book.

                  Indian Equity Market is affected very much due to global recession. However, Indian economy is protected from the impact and hopefully will continue to grow due to robust domestic consumption. The growing financial capital markets of India being encouraged by domestic and foreign investments is becoming a profitable business more with each day. If all the economic parameters are unchanged, Indian Equity Market will be conducive for the growth of private equities and this will lead to an overall improvement in the Indian economy.