India retail stock move unlikely to boost liquidity
The announcement by India’s finance ministry this week that it will open the country’s stock market to direct trading by foreign retail investors has left equity traders unimpressed.
They do not see a likely boost to liquidity in the local market, so they don’t see how the move will benefit them.
Traders in Hong Kong are interpreting the announcement as being directed mainly at non-resident Indians.
“How many offshore international retail investors are going to use this to pick local stocks, as opposed to investing through a mutual fund or an ETF?” wonders one sell-side equities head in Hong Kong. “There is a huge NRI population throughout Asia, but to the extent they’re interested in buying Indian stocks, they probably already do so via family members or other channels.”
However, foreigners may be missing the point. "The recent announcement is to allow foreign nationals to invest in to the Indian equity markets and is not directed toward NRIs," says Krishnan Ramachandran, CEO of Barjeel Geojit Securities in Dubai. "[The measure] is likely to bring in a large number of investors."
A major hurdle will be paperwork. The rules for international brokerages and fund managers to tap the market are burdensome. More clarity is expected when the Securities and Exchange Board of India announces additional rules on January 15 – but the consensus is that retail investors will face a degree of red tape.
Traders in Hong Kong believe the reform is a one-off, and not part of a broader push to liberalise Indian capital markets. They say it was borne from desperation, given the decline of the Indian stock markets, a fall in foreign direct investment, and the depreciation of the rupee last year.
Says one buy-side equities trader: “This was supposedly to widen the class of investors, attract more foreign funds and reduce market volatility. But you have to wonder why they had to wait for foreigners to net sell $380 million last year, instead of [implementing reform] the previous year, when foreigners were really more interested.”
Another head of research from a buy-side firm says: “All we’ve seen is a statement of three or four paragraphs. Our guys in India are running around like chickens with their heads cut off – but we need more detail.”
He also doubts this move will lead to a meaningful boost to liquidity. But not everyone is a sceptic. "We can see potential benefit in the longer term," says Vijay Advani, a senior vice president at Franklin Templeton, but the extent depends on how easy regulators make it for investors.
The extent to which sceptics can be proved wrong will depend on a number of factors still awaiting clarification from Sebi and the finance ministry.
Paperwork
Indian authorities have been strict about foreign institutional investors providing transparency about end clients accessing Indian stocks, in particular to prevent tax evasion. It’s a handful for big brokers, fund managers and their administrators. If the paperwork is anything similar for retail investors, it will pose a significant barrier.
Broking
Most NRIs or other foreign retail investors do not have a relationship with Indian-based brokers. Can they access Indian stocks via inter-broking relationships, ie, through a broker in their resident country, which may not have a seat on an Indian stock exchange, but can deal with one that does?
This also leads to the question of which brokers would be most interested in this sort of business. Big global firms such as Credit Suisse and Bank of America-Merrill Lynch have the requisite seats, but may not want to handle the extra paperwork for retail business. This could be an opportunity for Indian brokers with a presence in Hong Kong or Singapore, such as Religare and Edelweiss.
Flexibility
Can qualified foreign retail investors engage in day trading? Can they settle in their home currency, or does it have to be in rupees? And do they have to stick with the T+2 settlement period that is strictly enforced for institutional investors?