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"The markets should be able to cater to both investors as well as traders…" - Views on News from Equitymaster
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  • Sep 25, 2000

    "The markets should be able to cater to both investors as well as traders…"

    The public sector in India is not looked upon as a source of inspiration. And as always, there are exceptions to the rule. Take the National Stock Exchange (NSE) for example (it is, unlike what most people believe, a public sector unit). The NSE has dramatically improved the way we conduct our transactions in stocks and bonds. A large part of the credit is rightly attributable to its first and incumbent Managing Director, Dr R H Patil.

    Dr. Patil has had an illustrious career (he retires on the 16th of November). He has been with the Reserve Bank of India, the Industrial Development Bank of India and finally with the NSE. He was also instrumental in the setting up of the Stock Holding Corporation of India and Credit Analysis and Research Limited (CARE).

    In a tête-à-tête with Equitymaster.com, Dr. Patil spoke of his vision for the markets, and why he believes that merging stock exchanges may not be such a good idea after all.

    EQM: The capital markets have come a long way in terms of technological developments and policies in the last decade. The NSE, undoubtedly, has been a front-runner in all this. Could you elaborate on your vision for the capital markets over the next five years?

    Dr. Patil: Basically, what I am looking for is richness in the markets. A sense of completeness where both the providers and seekers of money have ample options. For example, people have an option to either invest in equity for a longer time frame or for purposes of trading. The markets should be able to cater to both investors as well as traders. Earlier, only jobbers could effectively do day trading. Today, it is possible by all to invest for such short durations. The trading system should be able to meet the requirements of the investing/trading community.

    Money is a peculiar instrument. It is not only used for the present but also serves as a link for the future. Therefore there is a need for hedging instruments, to cater to the various needs of the markets. Again, taking the debt markets, investors should have access to different types of debt instruments, so that there is some option for every type of investor.

    EQM: The domestic debt markets continue to be plagued with illiquidity and lack of retail participation. Could you suggest some ideas, which could be implemented to improve the situation?

    Dr. Patil: The main problem in the debt markets is that there is an absence of adequate supply. The supply is limited largely to central and state government paper, which again is available only to large investors. Issues of debt securities tend to be for large investors like provident funds and banks. This leaves out the small investors, to whom companies offer fixed deposits. These instruments are unsecured and are therefore relatively inferior to bonds/debentures. As investors have little choice, they invest in government saving schemes such as the NSC and the PPF.

    Then again debt is captured by large players, leaving little or nothing for the retail investors. Therefore, unlike equity, it is unavailable to all.

    The government needs to do much more to develop the debt markets. Today if one were to buy government securities, it would take months for him to receive the physical certificate. If you wish to open a depository account (the Reserve Bank of India is the central depository in this case), you need to approach banks. But banks charge prohibitive costs making the investment unfeasible. This is another reason why debt markets have failed to take off.

    EQM: ALBM (a carry forward mechanism) on the NSE has been a runaway success. However, new products like futures are yet to take off even as talk of introducing options is widespread.

    Dr. Patil: Well, you must understand that the ALBM existed as a marginal facility for over two years before finally taking off earlier this year. Similarly, derivatives will pick up, as rolling settlements gain acceptance and popularity.

    Moreover, foreign investors were only recently permitted to participate in the derivatives markets. Domestic mutual funds are as yet debating the issue. But one thing is sure, like ALBM, derivatives will be a big success.

    EQM: With the advent of Internet trading, what role do you see for traditional stock exchanges?

    Dr. Patil: Here it is essential to highlight a key difference between the Indian markets and markets such as the United States, where e-broking has taken off. In the US, and unlike in India, order matching at broker level is permitted. In India, therefore, the Internet will only act as another medium for the Exchange to provide its services, rather than replace it.

    Such order matching at multiple levels breeds inefficiency in price discovery. If permitted, it will adversely impact investors.

    EQM: Internationally there has been a wave of mergers between stock exchanges (even across countries), which have been looking at expanding their reach. Do you see the possibility of such a development in India?

    Dr. Patil: Very honestly, it is absurd. The same question has been posed to the NSE. But an Exchange is not a collection of buildings. It is not like a car plant where to step up capacity you need more buildings and workers. In an exchange you need to add a mainframe computer. By merging exchanges, what do you gain? Nothing. Markets will decide who will survive. And even if some exchanges disappear, investors will not suffer as they have other options to conduct their transactions.

    A merger in a stock exchange means creating a single larger order book, which aids price discovery and provides liquidity. The deal entered to between London and Frankfurt does not create a single order book. It only allows securities of the other exchange to be traded, akin to a permitted security.

    EQM: Worldwide investors have been protected. In India, is there also a need to protect capital market intermediaries from investors who often do not meet their obligations to the broker?

    Dr. Patil: Historically, investors were protected because they were considered to be small as compared to the financial intermediaries. In this context, terms like investor protection came into being.

    In a real democracy interests of all sections, whether big or small, need to be protected. The relationship between a broker and an investor is, like any other business, contractual. Such contracts, which also call for arbitrage, are designed to protect the interest of both the investor and broker. There is equity before the law.

    EQM: Which book/author or person has influenced you most significantly in your personal life?

    Dr. Patil: I cannot pinpoint any single book. However, I like reading books on Indian and western philosophy, medicine and psychology.

    EQM: What are your passions/hobbies?

    Dr. Patil: I do not like to get deeply involved but prefer to keep a light involvement with my hobbies and interests.



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