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Stock market does not reflect 'real economy' in India, says UTI director

Though financial-sector reforms have ushered in several sound market practices, the Indian stock market is still far from being an ideal capital market, Unit Trust of India Executive Director Dr Basudeb Sen said.

At the half-yearly ordinary general meeting of the Indian Merchants' Chambers in Bombay, Dr Sen said the market mechanism had failed to play its role properly as operators and participants still trade without owning either shares or cash.

"The ideal situation would be to leave the equity market to people who are interested in buying and selling shares on the backing of assets and creating a healthy derivatives market for people interested in leveraging," Sen said.

He suggested the introduction of a T2 system of rolling settlement so operators cannot trade unless backed by assets.

Dr Sen said the stock market is not a reflection of the real economy as 85 per cent of Indians don't invest in it.

On the banking sector, he said most of the reforms needed in this sphere are now complete except for regulating the non-banking financial companies.

For public-sector banks, the market mechanism is not relevant as the government continues to be the largest shareholder in these entities. But he anticipated that private banks would emerge as dominant players.

On the money market, Sen said the market itself, rather than the Reserve Bank of India or the government, should decide the level of reference rates. He felt that creeping acquisition and buyback of shares by companies would bring investors to the secondary market.

IMC president Y P Trivedi said development of real sectors of the economy has a significant bearing on reforms in the financial and legal sectors.

He said the introduction of prudential norms to strengthen banks and the financial sector over a two or three-year period is an obvious lesson from the south-east Asian currency crisis.

On opening the insurance sector, he said the capital market stands to gain directly from long-term investments by insurance companies in infrastructure and financially sound companies. "Insurance, pension, provident funds and superannuation funds should be allowed to invest 5-10 per cent of their accumulated resources in equities of infrastructure projects from at least 'AA' rated industrial groups," he said.

He suggested that the government should put in place a mechanism that will support bona-fide commercial decisions taken by bankers and insulate them from unnecessary harassment by law-enforcement officers. He added that venture capital funds should be given the same preferential tax treatment as international funds.

UNI

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