Why Focusing On These Paanch Pranas Can Lead To Capital Market Growth

This year, on Independence Day, the Hon. The Prime Minister appealed to Paanch Prana from the ramparts of the Red Fort and set a goal for the nation for the next 25 years. This prompted me to think about it from the perspective of the financial markets. In my previous article titled “Indian Capital Markets During Amrut Kaal”, I had talked about the expected growth of our capital markets during Amrut Kaal. Our capital market has the potential to approach twice our GDP over the next 25 years. According to various estimates, our GDP is expected to be around US$25 trillion by 2047. As a result, capital markets could touch around US$50 trillion.

Given the enormous potential for growth in our capital markets over the next 25 years, I would like to discuss five key areas to focus on to facilitate this growth. These are like Paanch Pranas for capital markets.

First Prana – growing financialization in the country
Modeled on the Jan Dhan yojana in which every Indian’s bank account was opened, we must deepen financial literacy and responsibly communicate capital market opportunities across the country. There is great potential to channel untapped reserves of financial capital invested in cash, bank deposits or gold into the capital markets. Currently, only 5.5% of our population, or approximately 7.7 million retail investors, participate in capital markets. This number can potentially reach almost 75 crores, which would represent about 45% of the country’s population in the next 25 years. Technology will need to be leveraged significantly to support such a massive inclusion campaign. Technology-driven distribution solutions, differentiated product strategy for different segments and ease of transaction including KYC standards will have to be the backbone of the market. Promoting the growth and distribution of mutual funds across the country could be one answer to this.

Second Prana – the growth of private capital
India recorded attractive returns in public and private markets. Over a period, our public markets developed very well. We have a strong primary and secondary market and the mutual fund industry is also growing. India’s public equity market has generated a return of around 14% over the past 10 years, while private market funds have generated a median net return of around 16%. Over the next 25 years, there is an opportunity and a need to establish a strong private market ecosystem. Private markets could include private capital (debt or equity), long-term project financing, private trading, and providing liquidity to founders or employees against their equity stakes. Again, technology and digital platforms can be used to connect private companies with institutional and accredited individual investors to reduce time to market.

Third Prana – capital markets as a viable alternative to banks
We need to build our capital market as a potential alternative to deploy a deeper pool of capital available in the form of savings and deposits to Indian households. In the United States, only 16% of personal financial assets are in the form of cash or savings accounts: in contrast, Indians still hold more than 60% of their wealth in the form of cash or accounts. savings. This is an opportunity for us to channel savings into the capital markets. We can achieve this by expanding the reach of financial markets, offering products in different asset classes, offering a wider variety of market-traded products, and conducting massive investor education programs.

Our companies remain heavily dependent on bank loans. In addition, the financing of M&A activities and leveraged buyouts are not permitted in the capital markets. Promoting financing for these companies through capital markets could lead to more competitive pricing in a regulated environment.

In addition, equity capital is also needed for small businesses that are currently unable to access capital markets. Our markets today have about 5,000 large and medium-sized companies. We believe there are about 10,000 other medium to small-sized companies that are entirely dependent on bank financing and founder capital. This number will only increase with a growing economy. These companies can be authorized to finance their growth through the capital markets within an appropriate regulatory framework.

Fourth Prana – digitization of most asset classes
Our goal should be to digitize all assets which can then be publicly listed/traded. Here, the first thing that comes to mind is gold. We should focus on digitizing physical gold which is owned by households and various other institutions. Several initiatives are already underway to monetize gold. Gold can also be monetized through a gold derivatives exchange backed by a robust infrastructure for the physical movement of gold. The other class of new assets that can be digitized is real estate, where the experience of SCPIs is already quite successful.

Fifth and last Prana – modernization and harmonization of regulation and supervision.

The regulatory framework is the backbone of any market. To capture the massive market growth and complexity expected over the next 25 years, we need two fundamental changes to our regulatory framework. First, we would need to harmonize various regulatory disciplines such as banking, insurance, pensions, company law, competition commission and capital markets. All these regulatory frameworks at certain levels are linked to each other. One option could be to have an apex regulator that takes care of all the regulatory framework related to financial markets. This will lead to a harmonization of the regulatory framework.

In addition, we should modernize our regulations, our governance and our oversight system. A regulatory framework integrated with technology would be the solution to manage the expected high volume.

In conclusion, we want our financial markets to be one of the largest in the world over the next 25 years and we have the ability and capacity to do so. The five pranas are the basic elements needed to make the foundation strong and help achieve the goal.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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