[Assam] Equity Culture - The Statesman

[Ram Sarangapani]

This is an excellent article by Dutta. I remember a few years ago, we
discussed regional stock exchanges (at Guwahati in particular). Dutta makes
a good case, why we don't need those any more - because of online trading in
India. He also makes a very good case for the NER to develop what he calls
'equity culture' and the relationship *between capital markets and
investors, *and the urgent need to develop capital markets in the NE.

This is one important area where the NER needs to pay attention. Highlights
mine.

--Ram

**
*Equity culture*

By Rangan Dutta
A typical resident of the North-east is not much bothered about these
happenings at Bombay or National Stock Exchange, although this is changing
slowly.
The news pages dealing with stocks are usually not seen or read. Even highly
placed people are not aware of the meaning of terms such as market
capitalisation or derivatives.
*The innocence about the capital market has caused us dearly; our savings
deposited in banks resulting in an adverse Credit Deposit ratio.* *This
means availability of finance for others outside the North-east to borrow
for projects, trade or speculation. And money earning a low rate of interest
of 5-6 per cent on an average as of now gets eroded when adjusted against
inflation which usually rules at a higher level in the NER. So while others
gain, we watch and look for funds from the Central government for
development.
A market driven economy* *must have an expanding capital market for domestic
and foreign investors because to sustain its growth, it needs a steady flow
of investment.
*This in turn requires good performance of its economy and the corporate
sector reflected in high profits, which will induce investment and retain
the growth momentum. This has been taking place in India and most countries,
including the USA, from the 1980s; before this period, capital markets
played a smaller role than they do today. Several factors contributed to
this development. Securitisation has turned almost every income-generating
asset into a tradable instrument. "And technology has changed finance
perhaps more than any other industry except computing" ~ observed
London-based Economist Weekly. Next, the savings in the hands of citizens
induced growth of mutual funds and the ubiquitous fund.
Despite this, the main reason why equities have offered better returns over
a time frame is that they are riskier as "shares can go down as well as up"
and because of this very risky business, the returns are high. If share
prices only go up, the long-term returns from investing in them would
inevitably fail to match their lower risk. To this, must be added the
instinctive desire of men to gamble and the pleasure of unearned incomes.
Since the outset of reforms in the 1990s, the Indian capital market has been
influenced by these international developments.
Share trading is now anonymous, electronic and nationwide with about
10,000-12,000 trading computers spread all over the country.
There are no layers of intermediaries such as primary and secondary dealers
and only investors and brokers. As trading has gone electronic, regional
stock exchanges are now defunct and all settlements take place in a
dematerialised form that ensures prompt payments and transactions. There are
no entry barriers in intermediation at the National Stock Exchange; any firm
that puts up roughly a crore of rupees of collateral can become a member of
the NSE. Today, about a crore of Indians hold D-mat accounts and an equal
number have invested in mutual funds.
Share trading intensities of the order of 5 lakh trades a day are seen
usually at NSE which did go up to 1.4 million trades a day in 2001 and still
higher before the May-June, 2006 crash.
The average daily transaction is about Rs 2,500 crore. Over 5,500 firms have
been listed with the Bombay Stock Exchange though shares of 500 "blue chip"
and good companies are usually traded. Market capitalisation that is, the
quoted share price as of date of listed companies multiplied by the size of
the share holdings is still a staggering amount of more than Rs 25 lakh
crore, which is the combined wealth of the shareholders of the country. And
let us not forget that the Sensex was 3206 in 2002-03, reaching a peak above
12,000 in May. Where do we in the NER stand in the capital market?
As virtual bystanders, shares of a few profit making tea companies and
state-owned refineries of the North East are listed on the stock exchange.
It is reported that the East Zone D-mat accounts are about 15 per cent of
the country's total. The figure for the North-east must be a small fraction
of this total. The Guwahati Stock Exchange has ceased to function like other
regional stock exchanges. But we should not feel disheartened. Thanks to
electronic and print media, there has been a steady spread of equity culture
even in large district towns. During my recent visit to Bhagalpur in Bihar,
by no means associated with a corporate ethos, I learnt that its residents
earn on an average about Rs 5 crore annually by way of dividends alone and
share ownership is spreading due to efforts of the local chamber of
commerce, investment company and fund representatives. The multiplier effect
of this resource inflow is visible in the town in its construction and
service sector boom.
Equity culture brings about economic integration by participation in
ventures outside the North-east, enhances the knowledge of business and
economy and makes owners less and less risk averse which is at the core of a
market economy. This is an area where initiative is needed from the North
East Development Finance Corporation which could rope in NGOs and state
directorates of institutional finance to expand share ownership and create
wealth.
This will provide new job opportunities for the educated youth of the region
as in western India.

(The author is a former IAS official of the Assam cadre and presently
Scientific Consultant in the Office of the Principal Scientific Adviser to
the Government of India)
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