India trails emerging peers in share turnover velocity

Mumbai: When it comes to global fund flows, India easily ranks among the top destinations for global equity investors , who have pumped in a record net $ 29 billion so far in 2010. But India lags its peers by a wide measure when it comes to share turnover velocity (STV) — an indicator of the breadth and depth of a market.

STV is the ratio of traded turnover to market capitalisation and a high ratio signifies better liquidity. Globally, investors are attracted to markets with a high STV, as it means a lower impact cost. Again, impact cost is the deviation from the ideal price that an investor would have otherwise paid for buying or selling a stock. This happens when the ‘buy’ or ‘sell’ order is large compared with the trading volume in the stock.

Experts attribute factors like concentration of trading in a few companies, high-promoter holding and low retail participation in India to this trend. STV for the NSE and BSE stood at around 60% and 20%, respectively , this year, compared with over 100% for stocks in Australia , Korea, Shanghai, Shenzhen, Taiwan and Tokyo, among others , according to data by World Federation of Exchanges (WFE).

European exchanges, like Deutsche, Spain, Budapest and London, had an STV of 100-200 %. The figure for Nasdaq OMX was more than 300% for most part of the year.

“India is still in many ways in the first wave of entrepreneurship due to which promoter holding is very high. Also, large number of fresh issuances is leading to increase in market cap but low turnover,” says Susmit Patodia, Senior VP – Institutional Equities, Motilal Oswal Securities. And there are tax related issues too.

“The impact of STT and low arbitrage opportunities has kept the high volume creators and arbitrageurs away from the market and unavailability of single tick-data does not allow for high frequency trading,” he said. Promoter shareholding in India is over 50% in the Indian market, compared with 10-15 % in countries like the US.

In India, retail ownership usually ranges anywhere between 10-12 % compared with Korea and Taiwan, where retail shareholders contribute about 70% of the trading turnover. In Taiwan, almost 40% of listed shares are owned by domestic individuals against 12-14 % by FIIs.

Sujan Hajra, Chief Economist, Anand Rathi Financial Services, has a different view. “High velocity does not necessarily mean greater liquidity. Pakistan has higher velocity than the US, Saudi Arabia has higher velocity than the UK and China has more than Europe and Japan. So, countries with relatively low market cap can often have high STV than countries with higher market cap. Also, where investors follow buy-and-hold strategy, STV is likely to be lower than where investors aim at short-term trading profit.”

He says that STV for India should not be calculated separately for NSE and BSE as most of the scrips are listed simultaneously in both bourses such a calculation would result in double counting of market cap of dual listed companies but capture turnover in a fragmented manner for individual exchanges. “The turnover ratio in India (2004-09 average) is around 100%, which is reasonable,” Hajra says.

Prakash Diwan, Head, Institutional Sales and Strategy, Networth Stock Broking says that while there is plenty of foreign money waiting to enter Indian markets, there are not enough trading volumes to absorb such massive flows.

“There is a need for more stringent listing norms that may cut the long tail of thinly-traded scrips and improve the skew. Non-adherence to the cap on promoter holding, especially in large PSUs, results in limited floating stock to add to the liquidity in a counter,” he says.