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Indian Capital Markets

Trends and Dimensions

Ed by Uma Shashikant and S. Arumugam

Publishers: Tata McGraw-Hill, New Delhi

Price: Not mentiioned.

THE 1990s have been a period of dramatic change in the Indian capital markets. Virtually every facet of the market barring the buying and selling is no longer what it used to be. Be it trading systems, regulatory framework or market participants, `change ' has been the name of the game.

The advent of the National Stock Exchange, the transformation of the Bombay Stock Exchange, the role of the Securities and Exchange Board if India, the entry of foreign institutional investors (FIIs) and private sector mutual funds, paperless trading, in dex futures -- the list of changes is indeed a long one. Also throw in scams in every considerable mode of investment and it brings into light the fact that investors too have been through cataclysmic changes involving massive losses as well.

Even the valuation parameters of stocks have undergone changes as FIIs have imposed the valuation metrics of elsewhere. If one considers that all this has taken place at a period of enormous change for the corporate and finance sector (and most parts of the economy), it becomes clear that the 1990s was a period that represented change as never before.

It is in this context that this book has immense value as it provides a chronicle of some of the major developments relating to the capital markets, largely up to 1997. It is a collection of the 23 research papers that were submitted at the Second Capita l Markets Conference on December 23-24, 1998 by the UTI Institute of Capital Markets.

The coverage in terms of the topics provides a snapshot of key aspects of the corporate sector and the markets. The papers have been grouped under eight categories -- mutual funds, risk management, financial intermediation, individual investors, mergers and acquisitions, stock market efficiency, market microstructures and anomalies in the market.

The 23 papers between them provide a fairly comprehensive view of what's been going on and what adds to the value of the compendium is the fact that it is well endowed with key statistics and interpretations that are of interest and value.

While it is also possible that some of the quantitative stiff can put off some readers, even for readers with such a profile, a scrutiny of findings and conclusion can provide interesting insights. While the quantitative stuff may be of relevance and int erest to a select readership profile, the findings are ultimately the core of this book.

In one of the papers on mutual funds for instance, an interesting observation is the fact that the funds have not been able to show a consistent performance over time. `At best, they demonstrate continuous extra-normal performance for a couple of years, but they fail to sustain the performance over longer periods. There does not seem to be any consistency between fund objectives and risk parameters'.

This is something that is not only true for the 1992-1996 period which was subject of the study. Even in the subsequent period, this is of relevance. The performance of funds has been no different and what these findings go to show is that trends in fund performance have tended to repeat themselves over time.

In the same area, yet another finding of considerable import is from the paper on `Market Timing Ability of Fund Managers'. Based on a study of the performance of UTI's schemes, the authors conclude that ...``it implies that the fund managers buy when it is advisable to sell and vice versa. The absence of market timing can be observed even today. Now is the right time for UTI to emerge as a professionally managed institution as against an institution that has been continuously supported by the governmen t'' Even after the US-64 crisis and the Deepak Parekh Committee report on the same issue, the need for UTI to emerge as an independent and professionally managed enterprise is well recognized.

In much the same vein, quite a few other issues of import have been addressed. For instance, the paper on `unrelated corporate diversification and shareholder value' provides the view that around 30 to 40 per cent more value can be created if companies t hat went in for unrelated diversification were to be split into individual business segments.

The findings are not exactly new in terms of the conclusions. This is something that has been evident to trackers of the market as well as shareholders of the companies in question. Examples such as Larsen & Toubro and ACC stand out in more recent times. But what is important is that a rigorous study using specific quantitative methods confirms what has been intuitively known. One can only hope that numerous companies that still have diffused interest pay heed to empirical evidence of destructive nature of such a business profile on shareholder value.

The collection of papers also assume a higher degree of relevance if one takes cognizance of a key point made in the inaugural address by Prof K.R.S. Murthy. The view in question was that `after liberalisation, the state which underwrote all the risks ea rlier, is transferring them to organisations and individuals. The process of liberalisation can as such be regarded as a transfer of risk. The state cannot take these risks anymore because its economic strength vis-a-vis the rest of the world has decline d'.

This process is still going on in various sectors and the price and rewards are still being passed on to different segments even within the narrow confines of the capital markets. This book provides ample evidence to this effect and its direction. The tr ends are likely to continue and this is why many of the findings put together in the collection assume relevance. The UTI Institute has also picked out three papers as `outstanding' and these do seem to live to the billing in a relative context. Select f indings from these three papers are provided in the accompanying box.

While the relevance and usefulness of the collection are beyond issue, two factors that stand out and should be addressed by the UTI Institute of Capital Markets in such endeavour in the future are as follows. The first one is the timeliness of publicati on. For papers presented at a conference towards end 1998, the book could have and should have been on the racks much earlier. This would enhance its value. The second aspect is that the structuring of the papers as far as presentation goes could be made more contemporary. The papers have been presented in the conventional academic structure while a structure that pushes the findings to the forefront may be of more interest to a range of readers and also create greater interest in the manner in which th ese findings where reached. But for these two glitches, the book, with findings and data that are likely to be of use and relevance even years down the line, is a good reference point for all those with an interest in the capital markets.

S. Vaidya Nathan