Vijay Kumar Gaba

In past couple of years the securities’ market regulator the Securities and Exchange Board of India (SEBI) has amended many rules and implemented some new ones to bring the functioning of Indian securities markets further closer to the international standards. Being a signatory of the International Organization of Securities Commissions (IOSCO), a global body of securities market regulators, SEBI is mandated to implement global standards of market regulations in India, especially in the area of investor protection, systemic safety, and prohibition of unethical and fraudulent market practices.

Some of the more discussed and criticized latest standards introduced by SEBI are –

(a)   Segregation of financial intermediation and advisory functions. In line with the best global practices, to avoid potential conflict of interest and bring objectivity in advice, Investment Advisors have been prohibited from offering financial intermediation (MF distribution, brokerage etc.)

(b)   Tightening of norms relating to margining of leveraged trades and financing of such trades. This has been apparently done to minimize the systemic risk of markets; improve financial stability and minimize the cases of risk taking beyond capacity by traders and brokers.

It is important to note that in past 25years, in times of crisis, Indian securities market functioning has been commendably stable.

To put this discussion in context, few readers have asked about my views on the recent listings of couple of financial intermediaries. While as usual I would refrain from commenting on individual stocks. However, I have some strong views on this sector, which I would like to share with my readers:

1.    The financial intermediation sector is set to transform in next five years. The changes that started a decade ago will accelerate at dramatic speed.

We shall see accelerated elimination of marginal and smaller players and consolidation of mid-sized and larger intermediaries, as Technology begins to overwhelm the manual execution and even advisory function.

2.    The experience of telecom sector will be replicated in securities’ market. The execution services will become “free”, just like voice calls, and come as part of bundle of services. The primary service will be “advisory” and “access” to global markets and products.

3.    Debt market will become bigger than equity market with most of the development and innovation happening in that segment.

So far the skills for debt trading are limited mostly to the primary dealers, their associated entities and a handful of intermediaries specializing in mobilization of corporate debt. The biggest opportunity for intermediaries perhaps lies in this segment.

4.    Financialization of agri produce trade would be another large opportunity that will unfold on next decade.

5.    Mutual Fund Industry shall be dominated by low cost passive investing (ETFs). Index making and management services will become prominent and dominant (ala MSCI).