Weaknesses of Indian Stock Markets
The following are the weak areas in Indian stock markets:
1. Unethical practices: Many unethical practices are rampant in Indian stock markets. Prices of shares are artificially increased before rights issues by circular trading. Gullible members of public who buy such shares find the prices of such shares dropping greatly and lose their money.
2. Misinformation: Funds are raised from investors promising investment in projects yielding high returns. But some promoters divert the money to speculative activities and other personal purposes. Investors who invest their money in such companies ultimately lose their money.
3. Absence of Genuine Investors: A very small proportion of purchases and sales effected in a stock exchange are by genuine investors. Speculators constitute a major portion of the market. Many of the transactions are carried out by speculators who plan to derive profits from short term fluctuations in prices of securities. This is evident from the fact that majority of the transactions are of the carry-forward type.
4. Fake shares: Frauds involving forged share certificates are quite common. Investors who buy shares unfortunately may get such fake certificates. They would not be able to trace the seller and their entire investment in such fake shares would be a loss.
5. Insider trading: Insider trading is a common occurrence in many stock exchanges. Insiders who come to know privileged information use it either to buy or sell shares and make a quick profit at the expense of common shareholders. Though many rules and regulations have been formulated to curb insider trading, it is a continuing phenomenon.
6. Unofficial transactions: Unofficial markets exist along with the regular stock exchange. Trading takes place in these unofficial stock exchanges after trading hours of the regular stock exchange. Unofficial buying and selling transactions are entered into in these unofficial stock exchanges (kerb trading and dabba trading) even before an issue opens up for subscription. Though trading in such unofficial stock exchanges are illegal, they continue to exist.
7. Prevalence of Price Rigging: Price rigging is a common evil plaguing the stock markets in India. Companies which plan to issue securities artificially try to increase the share prices, to make their issue attractive as well as enable them to price their issue at a high premium. Promoters enter into a secret agreement with the brokers.
8. Thin trading: Though many companies are listed in stock exchange, many are not traded. Trading is confined to only around 25% of the shares listed on a stock exchange. Therefore the investors have restricted choice and many shares lack liquidity.
9. Excessive Speculation: There is excessive speculation in some shares which artificially results in increasing or decreasing the prices. Increase or fall in prices do not have any relationship with the fundamental strengths or weakness of the company. Many small investors are unaware of this fact. They buy shares based on price movements and ultimately suffer losses.
10. Underdeveloped debt market: The debt market in India has not been developed to the required extent. There is very little liquidity in the debt markets.
11. Payment crisis: Market players indulge in excessive speculation and trading to profit from the increase and decrease in prices. When movement (increase/decrease) in the security prices is contrary to their expectations they are not able to settle the transaction (pay cash for securities bought).
12. Poor liquidity: The main objective of listing shares in a stock exchange is to provide liquidity. But in India, out of over 6,400 companies which are listed, 90 percent of trading is restricted to only 200 to 250 actively traded scrips. There is high volatility (fluctuations) in case of actively traded scrips and low liquidity in the others.
13. Inadequate instruments: The markets are dominated by equity. Convertible debenture issues are very rare. Preference shares which would be preferred by fixed return seeking investors are almost nonexistent.
14. Influence of Financial Institutions: The equity markets are dominated by large players such as mutual funds. pension funds and insurance companies. Any purchase of sale by them significantly influences the market prices as they buy and sell in bulk quantities. The share prices, therefore do not reflect the fundamentals.
15. Domination of FII’s: Foreign institutional investors have come to play a major role in the Indian markets. They have pumped in billions of dollars and buy and sell in large quantities. Any entry (purchase) by FII’s in a particular stock significantly pushes up its prices and any exit (sales) results in a steep fall in prices. FII’s invest and take out their money based on global developments. Any large scale exit by FII’s would trigger a collapse in the Indian markets.
16. Odd lots: Odd lots suffer from poor liquidity. The number of odd lot dealers is very less and odd lots have to be sold at a lower price.
17. Delay in admitting securities: There is high delay in admitting securities for trading. Sometimes it goes beyond 60 or even 70 days. Therefore, liquidity of investments is affected.
18. Poor services: The number of brokers is less and many brokers provide very poor service to investors, There are more than 50,000 sub-brokers and they are totally unregulated. There are many instances of sub brokers committing fraudulent acts and investors losing money.
19. Broker defaults: Due to excess speculation in specific shares, broker defaults occur. Such defaults destabilize stock exchanges and results in payment crisis.