Indian capital markets can grow three-fold by 2020 if reforms to increase retail participation, reduce cost of trade and enhance investment by pension funds are initiated, says a study by Ficci-Mckinsey & Company.
"In order to enable Indian capital market to triple in size by 2020, reforms are needed...," it said identifying low depth in equity markets, less retail participation, high costs of trade and insignificant participation by pension funds as major challenges for the markets.
Market capitalisation of prime bourses in India was about Rs 863,000 crore (Rs 8,630 billion) as on April 16 while the share trade quantity on NSE was 1.37 crore and on BSE 1.17 crore.
Although engulfed with challenges, equity capitalisation in India has grown over six fold, and trading value over 3.5 per cent in the last 10 years as the country took a number of regulatory reforms and witnessed many financial products.
To further increase these numbers, India is required to embark on major reforms to expand the retail customer base, spread the products beyond equities and make markets competitive to reduce costs, it said.
Indian primary as well as secondary markets are dependent on inflows from foreign institutional investors, who contribute more than 70 per cent of the trading volume.
There is a need to strengthen domestic institutional investors as well as retail participation, it said.
"Moving the Indian pension fund market closer to international levels could potentially create equity inflows of up to Rs 2,500 billion at current levels, giving a much needed boost to DII participation," it said.
The report further said the current retail equity share, excluding promoters' holdings, is low in India.
It suggested reduction in the complexity and cost of opening dematerialised accounts, increased investor education and indirect investor participation through mutual funds to bring in more retail participation.
"In addition, high net-worth non-resident Indians should be targetted by facilitating account opening and introducing reforms to simplify profit repatriation," it said.
It said costs per trade (brokerage commission, etc) are high in India and should be brought down. It has also suggested a dedicated SME exchange to enable small and medium enterprises to raise funds at a lower cost.
FICCI also said reforms are needed to deepen the corporate bond, warrants and interest-rate futures markets in India, and to streamline securities lending and borrowing.
