-By Preethi Pramanik
The capital market is poised for transformative change, driven by unprecedented growth, technological innovation, and shifting investor preferences. Global market capitalization has surged 50% since 2010, reaching a staggering $90 trillion. The COVID-19 pandemic accelerated digital adoption, with online trading volumes skyrocketing 300%. Environmental, Social, and Governance (ESG) investing accounts for $35 trillion in assets, while retail investors drive 50% of US trading volumes. The rise of fintech and blockchain is reshaping market infrastructure. Recent IPOs like Airbnb and DoorDash have raised record-breaking funds ($255 billion in 2021). As the capital market continues to evolve, understanding the forces shaping its future has never been more critical. The next era of growth will be defined by innovative solutions, regulatory agility, and investor sophistication.
1. IPO Boom: Opportunities and Concerns
The Indian IPO market has been flying high in the last three years. This has been between the period of 2020 and 2023 where Indian companies raised about ₹1.3 lakh crore or $15.7 billion through their IPOs. It has been seen that an unsurpassed amount was raised. In FY 2021-22, IPOs worth ₹1.2 lakh crore were raised, which was seen in the cases of companies such as Zomato, Paytm, and Nykaa. On the other hand, post-listing performance has been somewhat mixed. While Zomato's shares skyrocketed by 66% on its listing day, Paytm's stock declined more than 27% shortly after it debuted. Today, only 45% of the companies listed in 2021 and 2022 are trading above their IPO prices; this is a cause for concern related to overvaluing and the volatility of IPOs as an investment.
SEBI has already started to squeeze the IPO disclosure norms to ensure that they make for better governance. The pricing mechanism is likely to be tighter in the future, and rules that protect the lock-in period of pre-IPO investors are going to get more stringent while regulators address the frenzy for IPOs with adequate investor protection mechanisms.
2. Small-Cap Boom: High Return, High Risk
Small-cap companies have experienced never-before growth over the past several years. The BSE Small-Cap Index has seen more than 100% appreciation over 2021 and 2023, bringing investors handsome returns during the period. The BSE Small-Cap Index rose from nearly around 20,000 in 2020 to more than 40,000 in March 2023, stating the growth of such smaller-sized companies.
Small-cap stocks have been really attractive for retail investors mainly because of their high growth prospects. During FY 2022-23, net inflows to small-cap funds rose by 60% to ₹10,000 crore from ₹6,000 crore in the previous fiscal year.
High volatility, perhaps, is the greatest hallmark of small-cap stocks. Of course, returns have been spectacular, but risks also have been high in commensurate measure. While corrections remain clashing during market downturns, most small-cap stocks tend to be more sensitive to corrections at large. In such terms, SEBI is strengthening the guidelines of corporate governance and disclosure standards for smaller corporations to minimize the risk factors associated with small-cap stocks. At the same time, investors also need to diversify their portfolios to get over the over-exposure risks of the volatile segment.
3. Regulatory Reforms: Enhancing Market Efficiency
SEBI, the capital market regulator of India, has been a strong advocate of reforms to market efficiency and investor confidence. It recently shifted its focus toward the regulation of digital trading, including high-frequency trading. To curb market manipulation through digital trading, SEBI has capped various order-to-trade ratios and penalized market players.
During 2022, SEBI further tightened the margin norms both for retail and institutional investors as a way to reduce risks involved in speculative trading. Such steps are tooled towards curbing humongous leverage and market volatility. SEBI has also attempted to strengthen corporate governance standards by tightening rules on related-party transactions and making listed companies increasingly accountable.
Moving forward, one of the critical regulatory changes expected is around environmental, social, and governance (ESG) investing. Global investors are increasingly prioritizing companies that stick to ESG norms. In FY 2022-23, ESG funds in India saw net inflows of over ₹2,500 crores, signaling a growing trend.
4. Issues surrounding taxation: Simplifying the Taxation Complexities
Taxation of capital markets in India is still complex, especially for retail investors. LTCG tax has been a controversy since FY 2022-23, where LTCG on equity investments above ₹1 lakh attracts a 10% tax rate without indexation and incurs a tax rate of 15% for STCG.
The government collected around ₹35,000 crore through LTCG and STCG taxes in FY 2022-23, indicating that more and more are now investing in the capital markets. But, for investors, this dual taxation structure- capital gains tax and dividend puts the Indian market at a disadvantage, especially when benchmarked against nations such as the U.S., where long-term capital gains have better rates.
Going ahead, the complications do not end here. The dividend tax replaced the DDT based on the income slab of the hands of investors. This made the rates of taxation touch a level of 30% in the case of dividend payouts in FY 2021-22 when people just could not afford to spend from that pocket.
5. Insider Trading: Addressing Market Manipulation
After all these years, The traders are willing to become the BIG BULL. Insider trading is still one of the biggest problems for Indian capital markets. Increasing penalties and monitoring trades with advanced technologies such as data analytics and machine learning have been SEBI's strategies to curb insider trading. For the financial year 2021-22, SEBI levied penalties over ₹50 crores under insider trading - a message that SEBI is serious about the issue.
Still, insider trading incidence appears to be more prevalent among smaller, relatively less-regulated companies with lower governance standards. SEBI is likely to continue strengthening the norms about insider trading, especially about earlier detection and enforcement actions.
Going forward, the issue of insider trading will require greater degrees of corporate transparency and whistleblower protection.
6. Digital Finance: New Routes of Investments
Due to the digital revolution in all sectors, every working professional has this question, ‘will this transformation slowly hijack our jobs?’. Digital finance and the fintech market have opened the floodgates to India's capital markets. Between 2020 and 2023, half a billion users have flooded the fintech platforms, including Zerodha, Groww, and Upstox, with as many as 50 million Demat accounts already opened. In India, Zerodha is still the largest stockbroker by the number of active clients and over 11 million as of 2023.
Retail investors, who form a majority of first-time users, are increasingly using digital platforms to invest in equities, mutual funds, and other financial products. For example, the retail investment on the National Stock Exchange has increased from 35% of the daily trading volume in FY2020-21 to around 40% in FY2022-23.
In India cyber incidents in the financial sector increased by 30 percent during 2023, said CERT-In, Indian Computer Emergency Response Team. For the regulators, that indicates a key focus on cybersecurity.
Another probable future challenge to the regulatory environment is the emergence of DeFi and blockchain-based trading. Outcomes are likely over time where proper regulations and keeping pace with financial technology innovations become issues.
Conclusion
The Indian capital market is on a promising path, energized by a robust IPO market, the growth in the emergence of small-cap companies, and growing participation from retail investors. To ensure long-term stability and sustainability, the issues and challenges need to be addressed. Key issues such as regulatory reforms, taxation, insider trading, and digital finance risks remain critical areas of concern. The future success can be determined by the market's ability to navigate the challenges and issues; futuristic planning will help the most for this issue.
Regulators, market participants, and investors must work together to balance innovation with effective risk management. Moreover, embracing technological advancements and fostering financial literacy among retail investors will be crucial in driving sustainable growth. By addressing these challenges and leveraging opportunities, the Indian capital market can continue to thrive and contribute significantly to the country's economic development.
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