Lessons from market cycles – Chapter 2

The Over the Counter Exchange of India (OTCEI) was set up by public financial institutions in 1990, and started operations in 1992. It was India's first stock exchange with fully computer-based electronic trading – beating even the NSE, which began in 1994.

OTCEI was inspired by America's NASDAQ. Its main goal was to help small, tech-focused entrepreneurs – especially those building new products – raise money easily and cheaply.

Back then, listing on the Bombay Stock Exchange (BSE) needed at least ₹10 crore in paid-up capital (other regional exchanges asked for ₹3 crore). OTCEI? Just ₹30 lakh. That low bar was meant to open doors for tiny, promising companies.

The listing process was different and more transparent:

·         A company placed its shares with a "sponsor member" (like a guide or underwriter). 

·         At least two market makers were appointed to always be ready to buy or sell shares. 

·         The sponsor sold shares to investors through dealers. 

·         After that, investors could trade freely.

It looked modern, fair, and low-cost – the same system that worked well in the US.

At its peak, OTCEI had 30 sponsor members, 118 active brokers, and over 1,000 dealers nationwide. Around 115 companies – mostly small ones started by first-time entrepreneurs – raised money on OTCEI.

Yet this pioneering, fully automated exchange turned out to be a big failure. It collapsed in under five years, though it wasn't officially shut down until SEBI de-recognized it in 2015, and the company went into liquidation in 2017.Almost every company listed on OTCEI ran into serious trouble; most eventually shut down or got liquidated.

Why did it fail so badly? The biggest reason was inexperience everywhere:

·         The exchange managers had never run a stock exchange before.

·         Brokers and members weren't used to transparent, regulated, tech-driven trading – and they didn't have good research skills.

·         The promoters listing their companies were mostly first-generation entrepreneurs with limited money, poor financial know-how, and untested products or technology.

·         Investors were newcomers too; they didn't really understand these new-age businesses or the huge risks.

Everyone treated OTCEI like a casino – chasing quick jackpots. In the end, nobody won. Investors lost money, companies struggled, brokers earned little, and even the exchange itself made almost nothing.

The same story has come back, this time through the BSE SME platform (launched 2012) and NSE Emerge (also 2012). Since then, over 1,400 small and medium companies have done IPOs on these platforms.

Some have done well – more than 500 grew big enough to "graduate" to the main BSE or NSE boards. But a large chunk – around 60% in many recent analyses (with figures like 57-65% in 2024-2025 data) – are now trading below their IPO price. That means heavy losses (often 25-80%) for investors who bought at the offer.

Clearly, regulators, exchanges, brokers, and investment bankers haven't fully learned from the OTCEI disaster. Valuations get pushed too high, issues get oversold to clients, warnings about SME risks stay too mild, and investors keep hunting for that one big winner.

The lesson hits hard: The more things change, the more they stay the same. This time around, it's really no different.

Higher STT on Derivatives – Will it Curb Speculation

In the Union Budget for FY27, presented on February 1, the finance minister announced a significant hike in Securities Transaction Tax (STT) on futures and options (F&O) trades on recognized stock exchanges. Specifically, the STT on options was increased from 0.10% to 0.15%, and on futures from 0.02% to 0.05%. As per the Minister and senior officials, this move aims to curb excessive speculation in the markets and safeguard retail investors from potential losses.

While the intent appears well-meaning on the surface, a closer examination raises questions about its effectiveness and underlying rationale. In my view, this could be a case where policymakers are either overlooking key dynamics of securities markets or using a public-good narrative to justify a straightforward revenue booster. Below, I critically assess the proposal, drawing on market realities, and offer an enhanced perspective on its implications.

Understanding Derivative Trading Objectives

Derivative trading serves multiple legitimate purposes beyond mere speculation. Broadly, participants engage for one or more of the following reasons:

Hedging: Institutional investors, high-net-worth individuals (HNIs), and family offices often use derivatives to protect their portfolios against adverse price movements. This might involve taking short positions in futures or buying put options as insurance, without needing to liquidate underlying securities due to tax, legal, or regulatory constraints.

Speculation: Traders, including HNIs, brokers with proprietary books, and Alternative Investment Funds (AIFs), act on informed predictions about future events that could impact security prices. These positions—long or short—are typically backed by research, data, or experience, and they contribute to market efficiency by incorporating new information.

Arbitrage: Professional traders exploit temporary price discrepancies between spot and derivative markets through offsetting positions. This activity is crucial, as it enhances liquidity and ensures price alignment across markets.

Gambling: A smaller but vocal segment involves retail traders placing instinctive bets with little analytical basis. SEBI studies indicate that over 90% of such participants incur losses, and the volume of these trades has been rising despite the risks. It's important not to conflate these "gamblers" with genuine investors or traders, as doing so can distort regulatory approaches.

Hedgers, speculators (in the informed sense), and arbitrageurs are vital for providing depth and liquidity to both spot and derivative markets. Imposing higher costs on them to address losses among gamblers seems counterproductive—it's like penalizing all drivers for the recklessness of a few.

Critical Assessment: Accuracy and Effectiveness

The government's framing of the STT hike as a tool to "protect retail investors" assumes that speculation is inherently harmful and that higher transaction costs will deter it without collateral damage. However, this overlooks the nuanced roles outlined above. Empirical data from SEBI underscores the losses in retail F&O trading, but punishing the entire ecosystem may not address the root issue.

On the claim that higher costs won't curb gambling instincts: History shows that in aspirational societies like India's, the desire for quick wealth persists, often manifesting in gambling, smuggling, or other risky pursuits. With most traditional gambling avenues restricted or banned in India, regulated derivatives markets offer a safer, monitored alternative. Elevating STT could indeed push participants toward unregulated, opaque platforms—like illegal betting apps or offshore brokers—increasing risks rather than reducing them.

The STT hike might moderately discourage casual gambling but could disproportionately burden legitimate traders, potentially reducing overall market liquidity.

Grammar and flow in public discourse on this topic often suffer from oversimplification; for example, lumping all "speculation" as negative ignores its role in price discovery. Professionally, the budget's communication could be more transparent about revenue projections from this hike, estimated to add several thousand crores to the exchequer, rather than solely emphasizing investor protection.

We need a balanced approach

While I appreciate the budget's shift toward pragmatism in other areas (see here), this STT measure feels like a blunt instrument. Instead of broad tax increases, the government could, for example:

·         Target education and awareness campaigns for retail investors, perhaps mandating risk disclosures or demo trading before live F&O access .

·         Differentiate taxes based on holding periods or trade volumes to spare hedgers and arbitrageurs.

·         Monitor and regulate unregulated alternatives more aggressively to prevent migration.

Ultimately, markets thrive on balance—curbing excesses without stifling innovation. If the goal is sustainable growth, rewarding long-term investing (as the budget does elsewhere with capital gains tweaks) is positive, but let's ensure short-term tools don't undermine it.

Understanding the IPO debate beyond headlines

The recent discussion triggered by a viral video featuring Sanjeev Prasad, Co-Head – Institutional Equities at Kotak Institutional Equities, has reignited scrutiny of India’s IPO markets. Prasad highlighted that over the past five years, roughly 40% of IPO proceeds have gone to promoters and early investors, while only around 15% has been deployed toward capital expenditure—suggesting limited contribution to real economic asset creation. His statement resonated widely, reflecting growing investor unease over whether public equity markets are increasingly serving as exit avenues rather than engines of new growth.

While the concern is valid and deserves examination, the broader picture is more nuanced than a headline statistic reveals.

The Concern: Is the IPO market becoming exit driven?

The disproportionate share of Offer for Sale (OFS) raises legitimate questions:

·         Are IPOs being priced and marketed primarily to facilitate stakeholder exits?

·         Are retail and long-term investors bearing valuation risks while insiders cash out?

·         Does the low share of capex funding indicate weak real investment demand or excessive optimism?

Examples of post-listing corrections in some high-profile IPOs reinforce the perception that public markets may at times be absorbing expensive liquidity events, not necessarily funding productive expansion.

These are structural questions worth debate—not merely sensationalism.

Understanding Primary Market Activity

Why IPO Activity Matters

The number and size of IPOs indicate important structural shifts and themes, including:

·         Formalization of the economy

·         Promoters opting for greater transparency, accountability, and governance discipline in exchange for growth capital

·         Expansion of the ecosystem of capital markets—bankers, brokers, exchanges, depositories, and intermediaries

IPO vs OFS – A historical perspective

The dominance of Offer for Sale (OFS) is not new. Over the past two decades, OFS has consistently exceeded IPO-based fresh issuance—comprising 75–85% of capital raised between 2017–2020.

Several economic and regulatory drivers explain this trend:

·         Government disinvestment in PSEs for fiscal correction and accountability (e.g., LIC’s ₹20,557 crore OFS—second-largest in recent years)

·         Mandatory minimum public shareholding requirements

·         Corporate deleveraging during the NPA cycle and post-Covid environment

·         Private equity and venture capital exits in high-growth sectors—ecommerce, healthcare, fintech, hospitality (e.g., PayTM, Zomato, Lenskart, Swiggy, Star Health, Nykaa)

·         Foreign multinationals monetizing mature India operations, enabling capital repatriation (Hyundai, LG, etc.)

·         Global consolidation moves post-GFC leading to India portfolio exits via OFS or M&A

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Purpose of fund raising – More nuanced than headline numbers

The observation that only 15% of capital raised went into capex is incomplete without considering industry composition and balance sheet conditions.

Key realities:

·         Persistent high real interest rates and banks’ post-NPA caution made equity cheaper than debt

·         20 of the 25 largest IPOs in the last five years came from asset-light services and technology businesses, where investment is largely in:

Ø  Customer acquisition

Ø  Intellectual property and software

Ø  Talent and brand development

Ø  Scaling up the operations

Hence, expecting deployment into plant and machinery is outdated thinking.

A shift in ownership mindset

Indian entrepreneurship has evolved. Unlike earlier business families who believed in perpetual ownership, today’s founders are open to value-based exits. Many businesses operate in:

·         Low-entry-barrier markets without regulatory protection

·         Rapidly evolving technology spaces with high disruption risk

In such sectors, early dilution or exit is rational risk management, not opportunism.

​

​Conclusion

It would be wrong to say that OFS-linked liquidity is inherently harmful. To the contrary, it signals maturation of risk capital markets and improves:

·         Ownership broad-basing

·         Market transparency

·         Capital recycling for new innovation cycles

The shift in entrepreneurial mindset—from legacy ownership to agile value monetization—is consistent with global Silicon Valley-style models, not a structural flaw.

The concern about market froth and investor protection is legitimate. An IPO boom that disproportionately benefits exiting shareholders risks eroding confidence.

The context that capital formation today looks different from earlier manufacturing-centric cycles is equally valid.

The critical question for investors is not whether OFS is good or bad, but Does each IPO create enduring shareholder value, regardless of where the proceeds flow?

Sustained market health will depend on (i) Transparent pricing and governance; (ii) Improved disclosure on use of proceeds and return outcomes; (iii) Balanced participation of institutional and retail investors and (iv) Regulatory safeguards against excesses.

The real takeaway

The IPO market is neither a reckless exit carnival nor a flawless growth engine. It is evolving. The responsibility lies with investors to look beyond noise, viral clips, and simplistic narratives—and assess businesses on fundamentals, sustainability, and alignment of interest between promoters and new shareholders.

Informed analysis, not amplified soundbites, should drive investment decisions.

Smart people learn from history or those who learn from history are smart

In recent weeks, a lot of market participants and commentators have expressed concern about the rising household (retail) investors’ interest in the SME segment of the Indian stock market. It has been highlighted that most of the businesses being listed on this platform may not be genuine and/or sustainable. The regulators have also expressed apprehensions about the widespread manipulation in the prices of several SME stocks. A 400x oversubscription to the recent Rs120mn IPO of a motorcycle dealership in Delhi has provided further impetus to the discussions on this topic.

There are demands that the criteria for listing on SME segments must be tightened and there should be deeper scrutiny of the companies proposing to list on this segment. The regulator, SEBI, is considering these demands and intends to prescribe stricter rules for the SME listings.

In this context it is pertinent to note the following points.

1.    As part of the broader capital market reforms, which included abolition of capital controls and establishment of an autonomous market regulator (SEBI), the Over-the-Counter Exchange of India (OTCEI) was established in 1990. OTCEI was modeled after the NASDAQ trading platform of the US and meant to provide small and medium sized enterprises (SME) a fully automated national platform for raising risk capital.

A number of SME promoters used this platform to raise money in the 1990s. However, the experiment was considered a failure as the listing process lacked adequate scrutiny and ingenious promoters were able to raise money at unsustainable valuations. A majority of the companies that raised money on OTCEI vanished, inflicting substantial losses to the investors.

2.    In the mid-1990s there were 29 recognized stock exchanges in India. The 28 regional stock exchanges (RSEs) helped the local companies to raise risk capital. All these RSEs had floor base trading and physical settlement of securities. A majority of investors in these local companies were also from the same state or region. For example, a company listed only on the Madras Stock Exchange was more likely to have investors from Tamil Nadu as its shareholders, because investors from other regions usually did not have access to the Madras Stock Exchange.

With the advent of the National Stock Exchange (NSE) as a computer based national trading platform, things started to change from 1995 onwards. In a couple of years the Bombay Stock Exchange (BSE) also transformed itself into a computer based national trading platform. Over the next decade and a half, all the RSEs faded into oblivion. Most relevant companies migrated from these RSEs to these two national stock exchanges. But many smaller local companies, listed only on these RSEs, also perished along with them. Not all of those companies were fraudulent. Many of them were just not big enough to qualify for trading on national stock exchanges. Investors in those companies also suffered for a long period; until they made offers to buy back their shares.

The point to ponder over is “did the market participants – regulators, stock exchanges, brokers, investment bankers, investors, etc., - learn any lesson from the OTCEI and RSEs episodes?” To me, prima facie, it appears that the same drama is being played all over again at SME platform; and only the unscrupulous promoters and intermediaries have learnt their lessons from the past failures, and become even more smart.

A visit to the street

Ravi Bhatt, a brilliant student, completed his senior school education in 2018; went to a prestigious college in the US; completed his post-graduation in 2023. Worked some odd jobs in the interim and also interned with a top consulting firm. After finishing college, Ravi searched for a suitable job, but could not find any for more than six months. Finally, he returned to India in the autumn of 2023 and unsuccessfully tried for a decent job in India for a few months. Earlier this year he borrowed five million rupees from his father, a successful surgeon, and started trading in stocks and derivatives. Being a brilliant student, good in mathematics and data analytics, he soon developed a trading model of his own. He is now a full-time stock trader; making decent money; perhaps more than what he could have earned, working long hours for a consulting firm.

Mitesh Gupta, an average student, passed senior school in 2021. He failed to pass the admission test for graduate school. He joined a distance learning course in 2022 but did not like it. His father retired from a mid-level government job in early 2023. He convinced his father to give him Rs two million from his retirement corpus and started trading stocks and derivatives. He learned a few things from YouTube videos, blogs, and social media posts. He has lost more than half of his initial capital in the past year but is hopeful to recover all lost money and make a decent living out of this occupation.

Arvind Agarwal runs a small packaging material manufacturing unit. His business had not been growing for the past few years, especially after the implementation of GST. He advised his 29-year-old son Anuj, a commerce graduate, to learn and start trading stocks as a side business. Anuj is learning stock trading from his friends, social media, and blog posts. He has also taken some online classes for technical analysis, and option strategies, etc. Anuj now remains glued to his laptop from 9 AM to 3:30 PM. In the past three years, he has been able to earn 18% CAGR on the capital employed in stock trading.

Neha Arora, a software developer, works as a mid-level manager with a top IT Services company in India. Her salary has grown at a CAGR of 8% over the past five years, much less than her household expenses. She started trading stocks during the Covid-19 lock-down while working from home. So far, she has been able to supplement her salary with the trading income. Neha plans to increase the capital deployed for trading and make it her full-time profession in the next three to four years.

Evidently, in the past four years, stock and derivative trading has become a full-time profession of choice for a variety of individuals. Incidentally, it is not an India-specific phenomenon. Similar trends are being reported from countries (developed and developing) across the world.

We have already reached a situation where a handful of people are innovating, creating businesses, and building wealth; whereas an exponentially higher number of people are just piling on their success, and trading their ideas, success, failures, business cycles, and performance with little or no sense of commitment to their business. Cynically speaking, a part of society is becoming like the plot of the much-acclaimed 2019 South Korean movie ‘Parasite’.

The question is “Is stock trading as a full-time profession" sustainable if a much larger number of individuals make it their profession of choice?”

I shall try to find an answer to this inquisition over the next few months. There are strong arguments on both sides. For example, —

·         Many traders quote the traditional market saying, “Owners of businesses make more money than the managers of the business”. This implies that passive shareholders of a company shall earn more than the people who are managing the business. The problem in this argument however is that not many traders are interested in becoming owners of businesses. They are happy buying and selling stocks for immediate 3-5% gains.

·         There is an argument that stock trading is a perennial business. It continues even during wars, natural calamities, and pandemics. There is no business like this. This argument comes mostly from young traders in their 20s and early 30s. They have not seen a three-decade stagnation in the Japanese market; over a decade of stagnation in the US and the UK markets, and frequent disruptions and stagnation in the Indian markets during the 1990s.

·         The strongest argument in favor of stock trading is that in this profession anyone can get significant leverage easily. Thus, the opportunity to multiply the capital is the best in this activity. The easy leverage part is true. But it works as a double-edged sword. The probability of losing the entire capital rather swiftly is also the highest in this profession.

·         The ability to earn above normal return depends on a combination of capital base, risk appetite, and skill set of the trader. This could be different for all traders. Traders with a small capital base, poor risk appetite and/or inadequate skill set are most likely to underperform the others, just like any other business or profession.

·         The sustainability of stock trading as a regular profession would depend on a continuous supply of quality businesses that employ new ideas (product, process, or service) and innovative techniques. If new quality businesses are not continuously added to the existing inventory of stocks available for trading, a serious demand-supply mismatch may occur in the market – driving the stock prices into the realm of irrational and exorbitant. That would make the entire stock market prone to sudden crashes, imperiling the overall economic growth of the country. So, to sustain so many new traders in the stock markets, we would need a matching number of entrepreneurs successfully seeding & cultivating new ideas, and providing adequate inventory for traders to pursue their activities.

·         If stock trading becomes a medium of livelihood for millions of youth, the entire regulatory framework may need to be overhauled. A massive paradigm shift may be needed to redefine the way stock trading is presently perceived by policymakers, regulators, and society in general. For example, RBI considers it an undesirable activity and imposes a plethora of restrictions for credit to stock traders. This activity is taxed heavily, instead of getting the usual “job-oriented” activity incentives. SEBI and Finance ministers have openly spoken against the popularity of option trading as a regular activity. The regulations do not provide any protection to regular traders.

Do not fight markets

The financial market regulators (RBI and SEBI) have repeatedly cautioned investors and intermediaries in the past few months. However, regulators’ cautions mostly went unheeded as both intermediaries and investors continued to ignore fundamentals, moved with the momentum, and exceeded their limits – regulatory and financial. Consequently, the regulators have begun affirmative action. Following some preventive and corrective actions the regulators took, there is palpable panic amongst the market participants.

There are a lot of queries, especially from small investors, who are usually gullible and easily get misled by the manipulative tactics used by the devious operators and end up buying junk stocks at high prices. The queries usually include – “should I buy more to average my cost?”; “it’s already down 40% from high, how much more could it fall?”; “The stock is falling daily, should I sell it now and buy lower?”

I do not have any specific answers to these queries. However, from my experience of over three decades, and having seen multiple instances of such manipulative euphoria and subsequent meltdown, I would say as follows:

Cost Averaging

Cost averaging in an individual stock is not a prudent idea, especially for small investors with limited resources. Investors need to aim to earn a return on their total investment. To maximize their return, they need to decide at the time of investing, which investment has the best return potential. If it is one of the stocks they are already holding, they should add to that holding. If it is some other investment option, they should invest in such a better option. Buying more of an underperforming stock if there are better options available would be a bad strategy. It might result in the dissipation of scarce resources (money), compounding of losses, and missing good opportunities.

Catching a falling knife

Not long ago, Future Retail Limited (FRL) was a famous company. The promoter of the company was considered a genius. He pioneered the organized retail business in India. Learning from global retail majors like Walmart (USA) and Asda (UK), he built a strong business in India. However, failure to manage growth and excessive debt created problems for FRL and several other group companies, eventually leading to insolvency. The problems for the group had started after the global financial crisis, but it survived for a few years through selling of assets and business restructuring. Covid-19 hit the company hard and it could never recover from that shock.

Post restructuring of the group in 2016, FRL hit a high of ~Rs634 in November 2017 and has been on a steady decline since then. At the time of Covid-19 breakout (February 2020) the stock of FRL was trading close to Rs350.

Tracking the stock movement from the high of 2017, we get this.

·         The Stock price fell 22% (635-493) in one year from November 2017 to November 2018.

·         If one got tempted to buy it in November 2018, it was down another 33% in the next year (November 2018-November 2019) from 493 to 330.

·         If one averaged it in 2019, it was down another 79% in the next year, from Rs 330 to Rs68.

·         In November 2020, if you thought that the stock is down 90 from its 2017 highs, and how much more it could fall, it was down another 29% in the next year to Rs48.

·         If one believed that it is now available at a dirt-cheap price and bought it, he would have lost 92% of his investment in the next year as the stock touched Rs4 on November 22.

·         If in November 2022, you thought there is not much to lose in this, the investments made in November 2022 are down by 50% as the current stock price is ~Rs2.

·         The investment made at this “lottery” price can still potentially lose 50% to 100%.

FRL is only one example. There are hundreds of stocks that were very popular at one point in time, fell 90-99.9% from their euphoric highs, and never recovered.

 

Therefore, before cost averaging, investors must understand that a stock down 90% from its high, is a stock that has fallen 25% from its immediate previous price eight consecutive times (100-75-56-42-32-24-18-13-10). If at any point of this journey, you thought that it has already fallen so much, how much more this can fall – the answer is it can still fall another 90-100%.

Selling to buy lower

An investor needs to understand his/her limitations. Most investors do not possess the skills required to be a successful trader in the market. So, it is better to avoid trying these kinds of adventures. If you are comfortable with the fundamentals of the company, ignore day-to-day price movements and stay put. If you are not comfortable with the fundamentals of the company, ignore day to day price movements and exit at once.

LIC – No insurance for shareholders

The government is making an offer for sale (OFS) for 3.5% stake in the Life Insurance Corporation of India (LIC). At Rs 902, the lower point of the price band fixed for OFS, the LIC will be valued at Rs 5.7 trn. At this valuation it will be the fifth largest publicly listed Indian entity. The OFS will yield Rs199.7bn to the government, about 30.6% of the total disinvestment target of Rs650bn fixed for FY23. The government has apparently cut the offer size from 5% announced in February 2022 to 3.5%, considering the jittery market conditions. We shall therefore see multiple follow-on offers from the government in the coming years.

10% of the shares offered for sale are reserved for the policyholders of LIC; and 0.7% shares on offer are reserved for employees of LIC. 31.25% of the offer is reserved for household (retail) investors. Applicants from these categories will get a discount of Rs45 (Rs. 60 for policyholders) on the actual offer price. For all these categories the maximum application is restricted to a maximum of Rs2 lac; implying 230 odd shares at lower price band after discount.

LIC is an important national institution. In fact till the year 2000, it was the only life insurer in the country. Even after 22 years of the entry of private players in the business, LIC still enjoys over 60% market share in the life insurance business. On the basis of gross premium underwritten, LIC is the fifth largest life insurer in the world. Over 1.3million individuals work as agent for LIC, making it one of the largest employment providers in the country. LIC manages over Rs40trn in financial assets, which is more than the combined AUM of the entire asset management industry of India. LIC owns (on the behalf of its stakeholders) about 4% of NSE market capitalization. Besides SBI, LIC is perhaps the only truly pan India financial services brand. In fact LIC is used as a generic term for life insurance in the country. No surprise that LIC has been widely recognized as one of the most trusted Indian brands.

Considering the magnitude of the proposition, the decision to invest in LIC looks pretty simple and straightforward. Numerous reports have been published highlighting the large size, financial details, relatively cheaper valuations, and growth prospects of the LIC. I would not like to delve into these details. In my view, the LIC OFS needs to be evaluated from the following three viewpoints:

1.    Life Insurance Corporation is a statutory corporation established under the Life Insurance Corporation Act, 1956. Besides the nationalized banks, it will be the first non-company to be listed on Indian stock exchanges. The financial market regulators RBI and SEBI have limited jurisdiction over LIC. It is also outside the purview of registrar of companies and NCLT. The affairs of LIC may not be as transparent as other financial services companies. Besides, the accounting methods followed by LIC may or may not be fully compliant with the generally accepted accounting principles (GAAPs).

2.    Like all other public sector enterprises, LIC may also be subject to government intervention in routine affairs like appointment of key managerial personnel, investments, introduction and/or withdrawal of products, pricing of products, etc.

3.    Since 2000, when the private insurers were first allowed in the country, LIC has been consistently losing market share. With the popularity of digital sales channels and expansion of bank branch networks of SBI, HDFC, ICICI, it is likely that this trend may continue for many more years.

I would therefore recount my experiences of investment in Coal India (Coal mining monopoly), ONGC (Oil & Gas exploration and production monopoly) and NTPC (Power generation monopoly) at the time of listing; and also UTI (asset management monopoly) which went bankrupt due to government invention in investments process and pricing of products.

I shall not get influenced by the “cheaper valuation offered” argument; because LIC deserves to be valued cheaply than professionally managed, well regulated & transparent insurers; just like public sector enterprises (including banks).

I will not regret if LIC gets listed at a significant premium to the OFS price, since many institutional investors will be compelled to include it in their portfolios due to sheer size of the corporation and likelihood of inclusion in benchmark indices.

Why share of DHFL still trading?

The principle and overriding function of the securities market regulator, The Securities and Exchange Board of India (SEBI) is to protect the interests of the investors in the securities market. The other functions, viz., orderly development and regulation of securities markets are secondary, in my view. However, there is overwhelming anecdotal evidence to indicate that the regulators have given precedence to market development and regulation over the principle objective of investor protection. There are many instances in past 3-4years alone to indicate this. In the episodes of IL&FS, Franklin Templeton, Yes Bank, Jet Airways, Karvy etc., the interests of the investors in these entities were compromised. Moreover, little efforts were made to ensure that prospective investors are given full disclosures about the risk and reward of investing in the securities of these entities.

Recently, we have seen repeat of this tendency. On Monday, the 7^th June 2021, evening, DHFL informed stock exchanges about the resolution plan approved by the Mumbai bench of NCLT. It was clear from the resolution plan that in the successful bid of Piramal Group “No value was attributable to the equity shares as per the liquidation value of the Company estimated by registered valuers”. Besides it was also made clear in the communication to the exchanges that equity shares of DHFL shall be delisted upon completion of the resolution.

Clearly, the resolution plan envisaged zero value for the shares of DHFL Limited. Despite this the stock was allowed to be traded on Tuesday, the 8^th June 2021. To make the matter worse, it was allowed to rise 10% (the maximum permitted as per the applicable price band). Over 14cr shares were traded on NSE alone and investors took delivery of over 9crore shares valued close to Rs200cr. All this money will be lost. No broker warned the investors on Tuesday. The exchanges did not advised the brokers to caution their clients. SEBI did not asked the exchanges to suspend the trading. To compound the mistake, the stocks continues to be traded on both the exchanges despite the company formally informing the exchanges that the worth of equity shares is Zero. About 5 million shares were traded on Wednesday also. To be fair, many brokers did advise their clients on Wednesday.

Many “knowledgeable” investors in DHFL have been allowed to unfairly transfer their risk to unsuspecting gullible investors in past two days.

In this context it is pertinent to note that the model bye laws prescribed for the exchanges require that—

“The Exchange shall provide adequate and effective surveillance and monitoring mechanism for the purpose of initiating timely and pro-active measures to facilitate checking and detecting suspected or alleged market manipulation, price rigging or insider trading to ensure the market integrity and fairness in trading. For this purpose, the Exchange may, from time to time, apply, adopt, determine and implement various measures, mechanisms and requirements, as may be provided in the relevant Regulations and as may be decided by the Relevant Authority from time to time.”

It is therefore also the duty of the exchanges to act proactively to ensure fairness in trading. In this case the exchanges could have easily anticipated that some people have advantage of knowing the details of the resolution plan. An analysis of trading data for Tuesday will clearly show that the trading in DHFL was not fair. Not suspending the trading this stock is even more unfair to “unaware” investors and traders.

Trends in financial intermediation

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).

Mind the Gap

“Generation gap” has perhaps been a subject of study, discussion and debate ever since beginning of civilization. The new generations have been adopting new ways and methods of living, and the older generations have been rejecting these ways and methods as degeneration. The human civilization has evolved, regardless of this persistent conflict between experience and experiment.

It could be matter of debate whether experience is good as a guide or driver. But in my view, there is no doubt that the innovation (experiment) of new ways and methods of living and doing things has been the primary driver of the human civilization so far.

With the advancement in science and technology, the life span of people has increased materially in post WWII era especially. This expansion in life span has material impact on the dimensions of “generation gap”. The gap which was historically visible mostly between grandfather and grandsons is now sometime visible even in siblings born 5-6yrs apart.

In Indian context, the people who grew up in the socialist ear of 1970s had a very different mindset from the Maruti generation of 1980s. The star war generation of satellite television era of 1990s abandoned the 80s mindset; was soon rejected as outdated by the Google generation of 2000s. The people growing up in post global financial crisis era skeptical about the idea of globalization and free markets, but are free from the constrained mindset of thinking in local terms. They are at ease with creating global corporations and thinking in terms of billion dollars. The generation that will grow up in post COVID-19 era, may have a very different outlook towards life and work.

In this context it is interesting to note the results recent study conducted by Bank of America (BofA) Securities’ Global Research. The key highlights of the study could be listed as follows:

·         The Zillennials or ‘Gen Z’ (as BofA refers to the current generation) have never known a life without Google, 40% prefer hanging out with friends virtually than in real life, they will spend six years of their life on social media and they won’t use credit cards. They’re the ‘clicktivists’: flourishing in a decade of social rights movements, with 4 in 10 in our proprietary BofA seeing themselves as ‘citizens of the world'. The Gen Z revolution is starting, as the first generation born into an online world is now entering the workforce and compelling other generations to adapt to them, not vice versa. Thus, about to become most disruptive to economies, markets and social systems.

·         Gen Z’s economic power is the fastest-growing across all cohorts. This generation’s income will increase c.5x by 2030 to $33tn as they enter the workplace today, reaching 27% of global income and surpassing Millennials the year after. The growing consumer power of Zillennials will be even more powerful taking into account the ‘Great Wealth Transfer’ down the generations. The Baby Boomer and Silent generation US households alone are sitting on $78tn of wealth today.

·         Gen Z could be EM’s secret weapon. APAC income already accounts for over a third of Gen Z’s income and will exceed North American and European combined income by 2035. ‘Peak youth’ milestones are being reached across the developed markets – Europe is the first continent to have more over-65s than under-15s, a club North America will join in 2022. In contrast, India stands out as the Gen Z country, accounting for 20% of the global generation, with improved youth literacy rates, urbanisation, and rapid expansion of technological infrastructure. Mexico, the Philippines and Thailand are just a few of the EM countries that we think have what it takes to capitalize on the Gen Z revolution.

·         Gen Z is the online generation: nearly half are online ‘almost constantly’ and a quarter of them will spend 10+ hours a day on their phone. In our survey, over a quarter of Gen Z’s top payment choice was the phone, while credit cards weren’t even in their top 3. This generation is the least likely to pick experiences over goods, and values sustainable luxury – choosing quality over price as their top purchase factor.

·         Only half of US teens can drive, while our survey finds that less than half of Gen Z drink alcohol, and more than half have some kind of meat restriction. A third of them would trust a robot to make their financial decisions. Gen Z’s activist focus filters into their interactions with business, too – 80% factor ESG investing into their financial decisions, and they have also driven consumer-facing sustainability campaigns, such as single-use plastics. Harmful consumer sectors, such as fast fashion, may be the next focus.

SEBI relaxes cash segment margin norms for non F&O stocks

SEBI has increased the margining requirement for the non F&O stocks traded in cash segment, vide circular dated 20 March 2020. SEBI had also tightened the rule regarding market wide limits for individual stocks available for trading in F&O segment. The objective of increasing the margin requirements and tightening the exposure limits was to control the volatility, ensure market stability and orderly conduct of the market in view of the COVID-19 related concerns.

With effect from today, the enhanced margining norms for non F&O stocks traded in cash segment stands withdrawn. The restrictions on exposure to F&O stocks have also been relaxed. This implies that the market regulator now see lesser risk of market disruption due to COVID-19 related events and news.

The move has generally been received as positive for a rally in mid and small cap stocks. In past couple of weeks, many brokerages have published report favoring investment in mid and small cap stocks. For example, Edelweiss recently revised its outlook for small and mid cap stocks. A note from brokerage stated:

“The Q2FY21 earnings as well as the outlook beat expectations for most Small- & Mid-caps (SMIDs). Importantly, this led to 5–20% earnings upgrades for FY22 for nearly 63% of our coverage SMIDs; another 10% of SMIDs wallowed in 20%+ earnings upgrades. We like category leaders and—so far—this has helped our model portfolio outperform SMID indices by ~4% (over the past 12–15 months). We now include more recovery plays as sequential improvement plays through, having a bearing on stock performance.”