Ravi Narain, MD of the National Stock Exchange, believes that the bourse under his control is not hollow, shallow or illiquid. But his ‘explanation’ only raises more questions

A few days ago, Moneylife quoted from answers provided by the minister of state for finance, Namo Narain Meena, which showed how hollow, shallow and illiquid was the Indian capital market (see: http://www.moneylife.in/article/72/8312.html and http://www.moneylife.in/article/72/8347.html).

We had pointed out that large chunks of trading is concentrated in the hands of a few hundred people - a fact that is completely hidden by the stupendous trading volumes of Rs12,000 crore plus (in the cash market) and Rs100,000 crore (or so, in the derivatives market).

Ravi Narain, managing director & CEO of the National Stock Exchange (NSE) has now dashed off letters to various people in government and the planning commission alleging that some "misleading news reports/articles have selectively quoted data from the above submission to try and denigrate the growth and development of the capital market in India."

We don't know who Mr Narain has referred to, but Moneylife has certainly quoted and reproduced the ENTIRE data in the answers by Mr Meena on 10th August in response to questions by two members of Parliament. Please see link to Parliament questions here: (http://164.100.47.4/newrsquestion/ShowQn.aspx).

Mr Narain then goes on to quote a host of numbers and figures (which we will present below) to try and mitigate the shock and surprise caused by Mr Meena's revelations in response to a question in Parliament.

However, before going into those, it is important to understand why Mr Meena's revelations in Parliament were so startling. The NSE, although it is a near monopoly (96% market share) and a first line regulator, has consistently fought the applicability of the Right to Information Act (RTI) to its activities. It filed a lawsuit in the Delhi High Court against the Chief Information Commissioner's order that the RTI Act was applicable to it. On losing the case, it has filed an appeal before the divisional bench. It is not open to media queries either, unless it wishes to respond. Even its annual report is not easily available in the public domain.

Here is what Mr Narain's letter says in summary:

•  The NSE has set up more than two lakh terminals in the country, of which over half are in Tier II and Tier III towns. Terminals are present in over 1,500 towns across India.
   
•  NSE waives transaction charges on trades emanating from terminals in rural and semi-urban areas by setting them off against infrastructure costs such as leased lines or VSAT charges. Internet-based trading allows retail investors to participate in the market from anywhere in the country.

•  In India 3.3 crore people paid income tax in 2008-09 of which 1.2 crore invest through the NSE. This shows that "NSE has covered significant ground". It may also be noted that large number of retail investors choose to participate in the capital market indirectly through Mutual Fund/ Insurance Schemes.
   
• LIC is a big investor through the NSE and has 3.25 crore new individuals who have bought insurance schemes in 2008-09.
   
• Similarly 4.3 crore mutual fund investor accounts benefit through investments made on the capital markets. (Moneylife: Consider how selective this is, when it does not focus on unique folios and the fact that CMIE data puts mutual fund owning 'households' at only two million).
   
•  Average trade size on NSE has gone down 80% from Rs 1,12,000 in 1996-97 to Rs23,000 in the first quarter of 2009-10 is evidence of increased retail participation. (Moneylife: It is not clear in what way bigger trade size shows greater retail participation). 

• NSE has held 750 seminars/workshops in the last financial year for investor education, spends money on advertisements and investor alerts etc. (Moneylife: This only buys it media support. Also NSE ensures that no advertisements are given to publications such as ours which are not uncritical supporters of its views and actions).

Referring to our articles (without naming Moneylife), Mr Narain writes, "some of the news reports/ articles mentioned above stated that the Indian Capital Market growth was skewed, based on the contribution of a top few clients in the total trading activity. As you are no doubt aware, in any capital market, it is natural for large institutional investors to be the major contributors to the total volumes. When we consider that money invested by these institutional investors is made up of contributions from a large retail investor population, it becomes clear that the client base is by no means modest".

This claim is mere fudging of facts as we will show later.
Lastly it says that the top 10 brokerage firms on the NSE contribute to 24% of total trading activity, while on the New York Stock Exchange they contribute to 38% of trading, in Malaysia to 66% of trading etc. This shows that the Indian market is more widespread than in some mature and developing markets.

Now let us go back to what Mr Meena said in Parliament. His answer revealed that just 537 investors account for 70% of trading, 223 investors accounted for 60% of trading, of which over half were proprietary brokerage firms. And a massive 50% of NSE's derivatives trading turnover, the main pillar of the Indian stock market system, comes from just 106 investors of which 58 are proprietary traders!  Mr Narain completely ignores the "proprietary trading" aspect, because it would expose that these are by no means an aggregation of the funds of retail investors.

In point 10, Mr Narain is making a new revelation by slicing the data to show the trading volumes of the top 10 brokers. In fact the minister only gave out information about the top 25 brokerage firms on the NSE, who he said accounted for 42% and 43% of the cash equity and equity stock futures and options turnover in the April-June 2010 period.

Will NSE be willing to go public with the names of these 25 brokerages first and give us a split of their proprietary trades and those done for their clients? That will probably require another question in Parliament. In fact, every answer given by the NSE chief only exposes how it is clutching at straws to justify its monopoly existence. For instance, what is the point of two lakh trading terminals when 90% of the cash market volume is generated by only 192,200 investors in an entire quarter, at Rs12,000 crore a day and 90% of derivatives trading comes from a mere 18,035 investors in an entire quarter, at a phenomenal Rs100,000 crore a day.

Frankly, if the NSE's selective statistics about other markets are to be believed, it must put out a like-to-like comparison based on the exact answers that Mr Meena provided in Parliament. But that will require the secretive bourse to reveal far more than it has ever done in the history of its 15-year existence.