Principal weaknesses of stock market of India

By Vipin Agnihotri

The stock market in India suffers from number of weaknesses. The principal ones are mentioned below:

Poor communication system-

In my opinion, the communication system of the stock market in India is rather poor. This is clear from the fact that brokers often do not report their transactions to the exchange authorities and clients do not know how much commission the brokers charge.

Lack of professionalism-

While there are brokers who are highly professional in their dealings, the majority of brokers seem to lack high professional standards. Many of them lack the professional expertise to guide and counsel their clients. Further, they resort to actions, which may hurt the interests of their clients. A senior member of the governing board of the BSE observed: “The lack of professionalism is our sore point and we do not have a proper mechanism to weed out the undesirables.”

Dominance of financial institutions-

The stock market in India is significantly influenced by the actions of financial institutions. Even though the operations of these institutions are confined to a small group of shares, there impact is often quite pervasive. Under the influence of institutional buying, the market turns buoyant; contrariwise, under the pressure of institutional selling, the market becomes depressed.

Poor liquidity-

The Indian stock exchanges suffer from poor liquidity. Barring a small proportion of scrips, which are actively traded and highly liquid, most are traded infrequently and, hence, lack liquidity.

Weak regulation-

Even though the Securities Contracts and Regulations Act vests the government with substantial powers, the regulation in practice tends to be somewhat ineffective. The stock exchange division of the Ministry of Finance, which is supposed to supervise and control the stock exchanges, appears to be grossly understaffed and overburdened. There appears to be a crying need to strengthen the regulatory machinery because of phenomenal growth in the volume of trading.

Price distortion-

Due to speculative influences and other irrationalities and imperfections, stock prices tend to get distorted. The market seems to function largely on a ‘hit or miss’ basis rather than on the basis of informed beliefs about the long-term prospects of individual enterprises.

Kerb trading-

Transaction between brokers who assemble outside the stock exchange after market hours are referred to as ‘kerb transactions’. Though considered a punishable offence, kerb trading flourishes and the issue whether it is legal or illegal is considered irrelevant by most brokers. In fact, brokers often report kerb transactions along with transactions done during official business hours.