By: Uttara Choudhury

The 2018 edition of the One Globe Forum brought market regulators, industry experts and suppliers of capital together to examine the role of capital markets in expanding the Indian economy. “Capital markets are the largest source of financing for the Indian economy mobilizing savings and capital formation. It’s the part of our financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments,” said panel moderator Rashi Dhir, senior partner at DMD Advisors. “The vitality of capital markets is critical if India is to enjoy sustainable economic growth. Moreover, effective capital markets are crucial to the efficient allocation of credit and investment. They are a means through which capital gets allocated from public savings into long-term investments, firing up growth, employment, productivity, and infrastructure — all much needed in India.”

Bolstered by energetic buying by local and foreign investors, India is now home to the world’s eighth-biggest stock market, overtaking Canada for the first time. “I would like to acknowledge India has done a lot of things right, but how can we transform India’s capital markets?” asked Dhir.

Panelist Amarjeet Singh,executive director of SEBI, noted that investors started gravitating towards India after liberalization began with a bang in 1991, and the government boosted consumption through a job-guarantee plan, streamlining the indirect-tax system and opening more industries to foreigners. “In some sense, the markets have already transformed compared to where it was stuck 27 years ago. In the early 1990s, we didn’t have any foreign investors and now we have 9,000 foreign portfolio investors and over 40 mutual funds in the vibrant capital markets,” said Mr Singh. “We still have a long way to go compared to other developed markets which are far ahead of us.”

Panelist Kamal Bhatia, CEO and Co-Head, of O.C. Private Capital, in New York, said strong foreign interest in India’s capital markets reflect a widespread reappraisal of the country’s economic fundamentals. “India is shining as a capital market because for a long time it was viewed as a poor second compared to China when you talked about emerging markets, but now it has caught up,” said Mr Bhatia.

“One of the fascinating aspects about India is that for thousands of years it has been a country of entrepreneurs with “jugaad” or creative and frugal improvisation flowing through the veins of the expanding economy,” said Mr Bhatia, who has earlier worked at OppenheimerFunds, Inc. and pension fund giant TIAA-CREF. “From that perspective India is a fascinating place to invest, and grow your investment. That backdrop is a kind of microcosm of what you look for in an investing market. India already has a strong equity culture and the place where it needs to go next is to grow its credit market. To become a more powerful, well diversified economy beyond services, it needs to develop its credit markets.”

Venture capital that investors like PayPal co-founder Peter Thiel put into high-potential start-ups is on the rise — and, like the sun, it’s rising in the east. China and India, the largest emerging markets for venture capital, have doubled their share of the global market in just a few years. Indian startups attracted $17.6 billion of venture capital funding in the first nine months of 2017 with Internet and mobile start-ups accounting for a staggering 70% of the value of all of all the deals.

“My read is that India is doing just fine in the venture capital area. The US, particularly Silicon Valley, continues to be the largest recipient of investments, but India and Israel also rank very high,” said panelist Ashok Kumar Trivedi, Managing Partner, of Pennsylvania-based venure capital firm SWAT Capital. “India is one of the top countries for venture capital but there are a couple of areas in the capital markets where things are not so rosy,” he added.

The venture capitalist said Indians invested heavily in safe-haven asset gold, but it was just lying idle in homes. “India is blessed with a 30% household savings rate, one of the highest in the world, but all the savings get used up in buying physical assets like gold, jewelry and real estate,” said Mr Trivedi, who co-founded iGate Corp and sold it to Capgemini for $4 billion.

“Household savings don’t find their way into the capital markets to be put to productive use. Just 1% of India’s population invests in the capital markets and even the few who do are most comfortable with bank deposits, little bit in insurance, very small amount in debt and bond markets. This is in stark contrast to the developed world, where Americans have in their asset allocation, municipal bonds, corporate bonds, equities and so forth. All their money is used up for productive purposes,” he added. “India’s issue is not equity markets; it has a well-functioning stock market. India’s problem is a tiny capital market which really boils down to the bond market.”

Fellow panelist Mr Bhatia agreed that there was a need for greater investor education. “Foreign institutional investors hold Indian equities over long periods compared to Indian investors who take a short term view despite knowing the potential of these local companies better than anyone else,” said Mr Bhatia. “There’s a propensity to trade as they don’t have the investor education to understand that a lot of wealth creation in capital markets comes as much from good stock picking as making sound long-term decisions to hold shares in a portfolio. India has made good changes to its capital gains policies to incentivize Indians to treat stock market investing like investing, not trading. This should expand the parallel universe of Indian investors along with foreign investors. We need greater investor education.”

With a string of corporate scams in recent years the spotlight is on India’s opaque business culture dominated by powerful families known in Indian business parlance as promoters. “I would like the panel to focus on the many scams and how this can rock investor confidence,” said moderator Rashi Dhir.  

“SEBI has a strong two-fold mandate to both develop and regulate the market. From the regulatory standpoint, a market will not develop if investors don’t have confidence in the market, so it’s our job to ensure there’s no trust-deficit,” said Amarjeet Singh, aman of integrity who has had a 24-year-long illustrious career at the market watchdog. “SEBI was quick to investigate reports about possible leaks of company earnings being posted in WhatsApp chat groups limited to traders. We raided the premises of 30 to 40 brokers and dealers, and confiscated their mobiles and laptops,” added Singh.

SEBI ordered Axis Bank, which was among the 12 companies whose results were prematurely leaked, to conduct an internal investigation into the leak of financial information and to strengthen its handling of such data.

India beefed up insider trading rules in early 2015, expanding what constitutes “unpublished price-sensitive information” to include “any information” that is not “generally available” and that could have a market impact.

“You have to assure investors that the regulator is alive and looking at the market and punishing misconduct when it finds it. The second part is about corporate governance and that is where India has done a great job and it’s not SEBI alone, all the stakeholders – the ministry of corporate affairs, SEBI, and others have done a great job,” said Singh.

Fellow panelist Mr Ashok Trivedi agreed that there was a lack of investor education. He also said the most important missing piece centered on the need for a better developed bond market in India. “Indian households are very risk-averse, they don’t want to lose money but the same people are willing to invest in equity markets. Broadly speaking, bonds are considered safer than stocks and when dealing with investment grade rated bonds, the risk of a loss of principal is small,” explained Mr Trivedi.

“The majority of states and cities across America go directly to citizens for their infrastructure borrowing needs. The infrastructure in the US from coast to coast has been built on the back of long-term 15, 20, 30 year long bonds, not from equity. We don’t have to reinvent the wheel. To kick start India’s infrastructure build-out the country really needs to go into the bond market in a big way. The one thing the government can do is come up with creative tax policies and issue bonds,” said Mr Trivedi.

U.S. states, cities and municipal boards launch either taxable or tax-exempt bonds that are primarily sold to private individuals. Nearly 75% of the $3.6 trillion of outstanding debt issued by cities and states is owned directly or indirectly, by American households through a municipal bond.

Over the past century, the US has experimented with a variety of subsidy and incentive programs to help lower the borrowing costs for state and local governments and provide them with the flexibility to get everything from public buildings and bridges, to highways and airports done. There is no federal cap on the amount of tax-exempt municipal debt state governments can issue, but in 2014 an estimated $341 billion of bonds were put on the market. The three most notable programs are tax-exempt government bonds (often called tax-exempt munis), private activity bonds (PABs), and Build America bonds (BABs).

“By and large, they are all tax-free so these bonds become part of every U.S. retail investor’s allocation. It is safe, tax-free money. India should take a leaf out of America’s playbook to build its infrastructure. It’s the only kind of funding that will put India on the path of rapid infrastructure development,” affirmed Mr Trivedi.

Capital markets are the largest source of financing for the U.S. economy, supplying over $8 trillion in corporate debt and trillions more in mortgage funding. They also provide investment opportunities for families, directly and through mutual funds, 401(k)’s, pension funds and bonds.

London’s “Financial Times” reported that foreign appetite for Indian bonds has been strong over the past year. “Although they turned net sellers in March, foreign investors pumped a net $18.3 billion into Indian debt — including the relatively small corporate bond market — in the financial year ending in March,” reported the U.K. daily.  That compared with net sales of $1.1 billion in the previous financial year, when markets were jolted by the government’s disruptive “demonetisation” of high-value banknotes.

“The bond market in India can be very attractive to foreign investors who will snap up high-yield bonds. I was talking to Wall Street investors who said they wanted in and tried, but they had to jump through so many hoops,” said Mr Trivedi.

Foreign fund providers say they would like to expand their investment in Indian sovereign bonds, but are hamstrung by rules restricting foreign holdings to 5% of outstanding issuance.