Indian Market - a laggard

Eye-popping gains over the past few months notwithstanding, the Indian stock market has not been among the star performers of 2007. And if share turnover velocity is any indicator of the breadth of activity and liquidity in the market, India fares poorly compared with other (both developed and emerging) markets.

Share turnover velocity is the ratio of traded turnover to market capitalisation. Higher the ratio, better the liquidity and more widespread the activity in the market. Globally, investors are attracted to markets with high share turnover velocity as it means lower impact costs (the cost of entering and exiting a stock).

In stock markets across the globe, share turnover velocity has been on the rise over the past one-and-a-half years. In India, the trend has been the opposite, with share turnover velocity declining steadily.

Experts attribute factors like concentration of trading in few stocks and high-promoter holding in companies to this trend.

The share turnover velocity on BSE was as low as 28%, while on NSE it was 59% in June 2007. In January 2006, these figures were 36% and 75%, respectively, as per World Federation of Exchanges’ data. Share turnover velocity in some of the developed world stock exchanges like Nasdaq, NYSE, Shenzhen Stock Exchange, Taiwan Stock Exchange, BME Spanish, Borsa Italiana, Tokyo Stock Exchange and Deutchse Borse is very high and in many cases runs to over 100%.

“Trading in Indian exchanges is very concentrated. Though we have progressed on market depth, market liquidity and market activities remain a concern. Though BSE has the largest number of shares listed on it, the top 5% companies in terms of market capitalisation account for over 80% of the trading volume. Though it is better in case of NSE, it is still not the best,” says Ajay Bagga, CEO, Lotus India AMC.

He says that there is very low market participation, restricting the trading concentration to a few players. This is also due to the fact that promoter shareholding is over 50% in Indian markets, compared with 10-15% in countries like the US. For example, in Korea, there is a huge domestic base of mutual funds and retail investors unlike India.

Expressing concern over the decreasing share turnover velocity, JR Varma of IIM-A says that “this is also probably due to the fact that retail investors are finding the market less attractive and are worried about valuations. Also, barring a few stocks, liquidity has not improved much. Also, we have a very active stock futures market, which attracts day traders as they prefer to trade in futures where it is available, which may not be the case with other countries. The best way for institutions is to split the order between two exchanges to avoid the high impact costs,” adds Mr Varma.

The fallout of the low share turnover velocity in the Indian market is that institutional investors stop looking beyond the top 100 companies. Of late, they have been showing a higher degree of interest in second-line shares. But market players feel it is not much.

“Brokerage houses do not cover more than 100 top companies. So if funds want stock ideas beyond these companies, they have to deploy their own people, which is a costly affair,” says Mr Bagga.