5.5.2 Institutional Contribution in Market Development

The contribution of institutional investors to the development and modernisation of our
capital markets has been significant, but it has not been as great as one would have expected:
• The institutional investors have played a major role in the professionalisation of the
capital markets in India. Their demand for high quality analysis and information has
helped spur the growth of these services in India. As little as 10 years ago, beta was
unheard of outside academic circles, P/E ratios were regarded as esoteric tools, the
financial press was very limited in circulation, and there were no earnings forecasts or
other equity analysis. Today, the country boasts of a very vibrant financial press, a very
active community of financial analysts, and a high degree of professionalisation of all
capital market intermediaries. Much of this has been greatly helped by the growth of
institutions that value quality of service more than personal relationships and trust.
• However, the institutions have failed to provide a major impetus to capital market
reforms. Both domestic and foreign institutions in India have resisted reforms as
vigorously as other market participants. Reforms in India have been pushed forward by
academics, by the financial press and by the policy makers (not necessarily in that order).
Many of these reforms have had to be pushed through by regulatory fiat even where they
were in the long run interests of the institutions themselves. In this sense, institutions have
been as myopic in their response to capital market reforms as anybody else. Three
exam
ples would illustrate this phenomenon:
Before India set up its first depository, institutions were most vociferous in their
complaints about the risks and costs of the paper based settlement system. But when© Centre for Civil Society, http://www.ccsindia.org. All Rights Reserved.
16
the depository started operations, they were most reluctant to start availing of its
services until SEBI mandated that a minimum percentage of their holdings must be
dematerialised. SEBI had to then go on to mandate that institutions could trade only in
dematerialised form. (Later SEBI extended this fiat to all investors trading in stock
ex
changes).
Institutions have also generally agreed that a shift from account period settlement to
rolling settlement is desirable. However, they did not embrace the optional rolling
settlement facility that was available for a long period before SEBI made rolling
set
tlement mandatory.
The institutions have long complained about the lack of hedging mechanisms in India.
However, after the derivatives markets were set up, institutions have been reluctant to
trade in it. Most observers believe that the success of the market would depend on its
first attracting enough retail interest to entice the institutions into it.