Longer trading hours, better norms for IPOs among Assocham’s recommendations for equity markets

• Retail investor participation in India’s equity markets has increased sharply after the pandemic, with demat accounts increasing from 41 million in March 2020 to 110 million in January 2023.
  
• This rapid rise has necessitated spreading financial literacy, according to industry body ASSOCHAM.
  
• Earlier, a report by the Securities and Exchange Board of India (SEBI) outlined that 90% of individual investors have incurred losses in the futures and options segment.
  
• The industry body is also batting for longer trading hours, making listing cost-effective for smaller players and gearing up to counter cybersecurity threats.
  

Retail investor participation in India’s equity markets has increased substantially in the post-pandemic world, with the number of demat accounts rising from 41 million in March 2020 to 110 million in January 2023 as investors looked for avenues for investment.

The hunt for investment options, an increase in internet availability, easier know your customer (KYC) norms, access to smartphones and availability of low/no-cost brokerage platforms are other factors which played a role in increasing the participation of retail investors in the Indian equity markets.

While this improved liquidity in the markets, it also added to the volatility, says a report by industry body ASSOCHAM.

“Retail investors are highly sentiment driven and tend to engage in more speculative trading rather than in long-run buy-and-hold investment strategies,” ASSOCHAM said in a report.

The industry body has several recommendations for the market regulator Securities and Exchange Board of India (SEBI) to consider, ranging from investor protection to making listing companies cost-effective for the smaller players.

Investor protection by improving financial literacy

India’s benchmark index Nifty50 delivered double-digit returns in 2020 and 2021, growing by 14.5% and 23.8% respectively.

Although the growth tempered by a great deal in 2022 to just 4.3%, retail investors continued to flock to the markets lured by the high returns in the previous years – demat accounts increased from 84 million in January 2022 to 110 million as of January 2023.

The rapid influx of retail investors necessitates improving financial literacy, according to the industry body – it says this will improve the quality of retail participation in the markets.

“There is also a need for timely refinement of the investor protection framework by the regulators to cater the evolving investor complaints,” it said.

Earlier in January, SEBI released a report outlining that 90% of individual traders dealing in futures and options have incurred losses, which further underlines the importance of financial literacy.

Making listing cost-effective for smaller players

Listing on the stock markets involves a lot of direct and indirect costs like fees and compliance requirements. The industry body says that while this is not an issue for large companies, smaller players struggle. This, it says, needs to change and SEBI needs to make it cost-effective.

To drive home the point, the report says that while there are nearly 1.5 million active companies, less than 1% of them are listed on the stock exchanges.

Reducing IPO application size for small and medium enterprises

The industry body also wants SEBI to reduce the minimum IPO application and lot size for small and medium enterprises (SME) IPOs to widen investor participation.

Currently, the minimum application size for an SME IPO is ₹1 lakh. This is significantly higher than mainboard IPOs where the application size for the retail segment is between ₹10,000 to ₹15,000.

A reduction in SME IPO application and lot size will widen investor participation, the industry body said.

Extending market hours for trading

ASSOCHAM also sought an extension in market hours for trading from the existing 9:15 am to 3:30 pm.

“A larger window for trading ensures better liquidity and better price-discovery by factoring in developments in other markets on a real time basis,” it said.

As of now, the National Stock Exchange’s (NSE) currency derivatives market is open from 9 am to 5 pm, while commodity markets are open till 11:55 pm.

In February this year, NSE announced the extension of interest rate derivatives market till 5 pm, and the exchange’s MD and CEO Ashish Chauhan said NSE is in talks with SEBI to extend the timings for equity trading as well to 5 pm.

Lastly, the ASSOCHAM report underlines the need for guarding the equity markets against cybersecurity threats.

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