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2. DEMOCRATISATION OF CAPITAL MARKET IN MOTION
For the Indian capital markets, dismantling of the Controller of Capital Issues (CCI) in 1991 market
marked the first step towards freedom. Till then, it was this government agency that decided the price
at which companies could come out with initial public offerings.
Yet this new system was prone to misuse. Following the stock market scam of 1992, the government
set up the Securities and Exchange Board of India (Sebi). The objective was to ensure the orderly
functioning of the capital markets and thereby restore confidence among retail investors who were
badly shaken by the scam. One could say that the democratisation of capital markets was set into
motion with the birth of Sebi.
The opening up of the Indian equity market to foreign institutional investors was a landmark event.
The stock market in those days was very illiquid, and largely controlled by a cartel of influential
brokers. Such was the brokers’ stranglehold on the market that the Bombay Stock Exchange (BSE)
was uncharitably nicknamed the Brokers’ Stock Exchange. Increased presence of institutional
investors improved liquidity and also broke the iron grip of the brokers’ lobby on the market.
But trading still conducted on the floor of the BSE, freedom for retail investors from the dubious
practices of their brokers was yet far. Broking fee in the early 90s was as high as Rs 2 on every Rs 100
worth of transactions – nearly 20 times the fee today. Also, these investors were routinely fleeced by
brokers, who would not confirm trades during the day and then mark up buy trades to the highest price
of the day and mark down sell trades to the lowest for the day. The advent of screen-based trading by
the NSE changed this. With competition, brokerage rates went on a downward spiral, and it still
continues. The monopoly of the BSE was finally broken.
The image of the stock broking industry in general and stock brokers in particular, has improved in a
big way over the years. Till the mid-90s, the broking industry was a backwater business, understood
by few people, and controlled by a handful of players. But it is a much better democratic set up now.
The other major landmark was the introduction of dematerialisation of shares in 1997 with the setting
up of the National Securities Depository Ltd (NSDL). This spelt freedom for investors from perils of
‘bad delivery’ in the form of fake or tainted share certificates.
Earlier, a few reckless brokers going bust could spell trouble for the system as whole. This was
rectified when exchanges introduced a stringent margin system that put restrictions on positions
individual players could take up without creating a potential crisis situation. The exchange put in place
guarantee funds (Trade Guarantee Fund by the NSE), which ensured that investors would not be
deprived of their dues if the brokers with whom they were dealing, went bust. The guarantee funds
also ensured that the settlement process went through smoothly even if some broker were broke.
The arrival of mutual funds (MF) provided an alternative avenue of investments for retail investors
wanting a capital market exposure.
Morgan Stanley mopped up Rs 1,000 crore in the maiden equity fund – a close ended fund with a 15-
year lock-in period. Investors literally queued up to subscribe the fund, but without being aware of the
difference between a mutual fund unit and a share, leave alone the distinction between a close-ended
fund and an open-ended one. For them the Morgan Stanley scheme was just like any other IPO, which
would list at a premium to the face value of Rs 10. By the time Morgan Stanley had begun deploying

3. its funds; stock prices had begun to flail. Investors who had enthusiastically bought the fund were
shocked to find the net asset value (Rs 9.40) below par on the day of listing.
During that time there was another open ended fund that was operating silently by the name of
Kothari Pioneer, which was later taken over by Franklin Templeton. The prima fund gave return of
100% within eight month of its operations. It was an open ended fund and investors loved it.
Mutual funds have come a long way after 1994. Now we have sector funds, index funds, balanced
funds and MIPs. Yet the bulk of the customer for mutual funds is through corporates which invest in
the fixed income or liquid funds of MFs. Experts believe that the still stunted retail investors
participation will improve.
In 2000 when the futures market became active, there was confusion initially and a feeling that
investors in India will find it troublesome to get hooked to equity derivatives, which were very
popular in global markets. But stock futures on Indian bourses today, stand at the forefront in the
evolution of tradable financial products in the country. Nowhere in the world do stock futures see the
kind of volumes the way they see in India. Across the world, Index futures are more popular while
stock futures play second fiddle. India is one of the few countries where index-related products are not
as popular as stocks. Stock futures have a lot in common with the Badla trade that was prevalent on
BSE for a long time. Investors who used to carry forward their stocks by paying an interest charge
were hooked on to futures very easily as these two products had a lot in common.
While the stock futures market is very liquid, the same cannot be said about the options market. There
is virtually no option market in India, feel fund managers and thus for hedging they prefer futures to
options. Index options are getting more popular than the options on stocks.
The range of investment products on offer widened in 2000 with the launch of the country’s first
exchange traded fund (ETF), managed by Benchmark MF. The Nifty bees as it is called invest in the
Nifty Fifty stocks and are traded on the exchange like a stock. The ETFs started getting attention only
about a year ago when institutional investors realised the potential of these products in terms of costs
and liquidity. Now many funds have their ETFs and they are getting good responses from investors –
retail as well as institutional.
The latest ETF that is gaining popularity in the country is the gold ETF and this fund gives investors
the option to hold gold in paper form. Since the NAV of the gold ETF is linked to the London price
and liquidity is increasing, the gold ETF is seeing a lot of retail participation as compared to stock
ETFs.
The evolution from closed ended mutual funds and equity to derivatives and ETFs is a small step
when compared to the developed world. But what matters is that it is in the right direction. The rest
will be taken care of by time.