Being an exciting emerging market is all well and good, but how long can that status really apply before interest wanes? India is doing its best not to find out

Few emerging markets excite investors quite like India. With GDP growth of 7.6 percent in 2016, up from an average of 6.5 percent during the preceding three, according to the World Bank, it represents one of the biggest untapped opportunities around. But there is work to be done.

“India’s ambitions to accelerate GDP growth to double-digits will require a strong financial sector to allocate savings towards the most productive investment opportunities,” the World Bank added later in its India update. “A well-functioning financial sector boosts productivity growth, while guarding against volatility.”

Where India still has a way to go is securities lending. As the majority of securities lending in India takes place through the National Stock Exchange (NSE), its statistics paint the fullest picture of the market. The infographic overleaf indicates that the stock exchange’s subsidiary, the National Securities Clearing Corporation, cleared 77,730 trades in 2016, generating $9.23 million in lending fees. These trades had a notional turnover of $1.79 billion.

Compare these figures to IHS Markit data on Asia’s biggest market, Japan, which saw $305.41 million in revenue achieved last year from an available inventory of $547.09 billion, and it’s clear that India is still relatively minor.

More participation needed

Through approved intermediaries such as the National Securities Clearing Corporation, securities lending participants can conduct trades for terms of up to 12 months, with early recalls embedded in. A rollover facility of three months exists, and transactions are charged at a rate of 2.5 percent, payable to the NSE, on each lend, borrow and rollover.

In an effort to develop securities borrowing and lending market and increase local and foreign participation, the NSE has implemented multiple changes. A facility of preferred depository was made available, allowing borrowers and lenders to more easily specify which pool account they want pay outs to be directed. “This facility has helped members receiving pay-out in their preferred depository account. This has also reduced the operational risk involved in making cash market pay-ins, as the window between securities borrowing and lending pay-out and cash market pay-in is very small,” according to the NSE. In other developments, NIFTY 50 securities are now accepted as collateral, and participants can transfer collateral placed in the form of cash and fixed deposit receipt to or from other segments. The NSE explained: “This would help participants immensely in collateral management and reducing overall cost of funding collateral.”

Less hesitation desired

Despite these efforts, market participants, particularly foreign ones, remain unconvinced about the viability of India as a securities lending market in the near-term.

Martin Corrall, who is on the executive board of the Pan Asia Securities Lending Association (PASLA) and group lead of a sub-working group on India, sees foreign participation as a key concern. “It’s expensive for foreign borrowers in India,” Corrall explains. “Offshore entities are required to post cash as collateral with high interest rates and no rebate paid, which creates an unfair playing field, whereas domestic players are allowed to post securities. Concern on the Securities and Exchange Board of India’s (SEBI) view of overseas direct investment and limited supply due in part to the securities borrowing and lending infrastructure, has led to minimal offshore activity. Market access is concentrated on single stock futures.”

SEBI initiated feedback last year on concerns that foreign portfolio investors (FPIs) have issues accessing India’s capital markets. One of the three work streams was on securities borrowing and lending. A working group was formed consisting of market participants, of which PASLA was represented, and an extensive list of requirements was submitted and subsequently discussed. Corrall says: “We have yet to see any changes resulting from the feedback to SEBI. I can understand concerns around opening up the market to foreign institutions but at least they do recognise limitations to market access for FPIs.”

“India has the potential be a significant market. It’s probably second only to China in Asia in terms of opportunity. We anticipate in due course changes will materialise to move towards what we see in more developed capital markets.”

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