Equity market: Racked by crises

IS THE equity market dead? The small investor would probably say 'yes'. The change in the systems that followed crises, such as the Ketan Parekh scam and the Unit Trust of India (UTI) fiasco, has caused confusion, especially among small investors, forcing them to hold on. While the storm seems to have vent its fury, at the end of the day the market was the biggest loser.

Have investors lost interest in the equity market? The turnover pattern on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) for 2001 would indicate this. Compared to 2000, the total turnover of the BSE and the NSE declined from Rs 22,55,041 crore to Rs 11,51,975 crore in 2001 - that is, by 49 per cent. In terms of individual exchanges, the loss is more pronounced at the BSE with a drop of 53 per cent compared to the NSE's decline of 45 per cent.

The NSE seems to be emerging as the preferred exchange for investors. In terms of market share it now commands 59 per cent of the market compared to the BSE's 41 per cent. The BSE has been gradually losing market share to the NSE. For instance, towards the end of this calendar, the NSE, on an average, had a market share of around 65 per cent.

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The year started of well with both exchanges clocking a good turnover in January and February. The first signs of trouble came after the Budget 2001. In its immediate aftermath, the market saw some selling pressure. The Ketan Parekh scam surfaced in March and the BSE Sensitive Index (Sensex) lost close to 16 per cent in a month. The extreme volatility led the regulator to impose regulations preventing short sales and additional volatility margins to curb speculation. Predictably, this led to a fall in market activity and the March turnover was nearly half February's.

The effect spread to April and May. With more information on the market scam coming to light, investor confidence suffered. By April, the turnover was down to almost 20 per cent of that in January. In fact, in April, the market was more or less calm with the Sensex losing only around 2 per cent, followed in May by a gain of 3.25 per cent. However, it was evident that the restriction placed on speculative activity had taken its toll on trading interest.

With the scam came large-scale structural changes in the market. Measures such as the compulsory rolling settlement, introduction of derivatives and a ban on badla were not expected to improve market interest. July and August bore evidence of the same. Badla was removed, the rolling settlement introduced and derivative products entered the picture. To top it all, the biggest institutional investor in India, UTI, was facing problems. This affected investor interest and the market registered a drop in turnover. July and August posted the lowest monthly turnover during the year.

Another interesting fact was the rising interest of institutional investors in debt instruments. For instance, the last nine months, mutual funds have been net sellers in the equity market and net buyers (by a very large margin) in the debt market. With interest rates weakening, the funds could get better returns on debt instruments with lower risk. This, perhaps, led to funds being pulled out of equity and invested in debt. This capital flight had a negative impact on the equity market.

Then came the September 11 attacks in the US. Markets the world-over went into a tailspin and India was no exception. The Sensex registered the second biggest monthly drop after March, losing close to 14 per cent. However, there was some market interest at this point, as valuations were deemed low and bargain hunters were on the prowl. The market has recovered since then, but the turnover has remained more or less steady.

In October and November, the Sensex gained 6.35 per cent and 9.71 per cent respectively. However, turnover failed to show signs of significant improvement. In November, single stock futures were first introduced. The product immediately caught the fancy of speculative players and is the most favoured product in the derivative market. The derivative market, not very active till then, began blossoming and posted its highest ever turnover.

With the dust settling over the scams and the market getting used to the new systems in place, there should be a recovery of sorts. But it is unlikely that the turnover in the spot market will return to the levels seen in 2000. However, watching out for the trends in the derivatives market, where the scope for speculation and trading is higher, would be more interesting.