Mumbai: Indian equity markets have surged to record highs after the decisive victory of Narendra Modi-led Bharatiya Janata Party (BJP) in the general election sparked hopes that the new government would be able to get the economy back on track.

Foreign institutional investors (FIIs), the key drivers of Indian markets, have bought equities worth over $8 billion (around 48,000 crore today) since the year began, while domestic institutional investors remained net sellers, selling equities worth more than 26,000 crore during the period.

Still, the BSE Sensex and the National Stock Exchange’s Nifty have gained more than 17% each so far this year, making them the best performers among Asian markets.

While the index values reflect optimism, markets remain shallow in terms of participation, particularly from retail investors. To be sure, market-wide turnover did pick up after the election. In the fortnight after 16 May when election results were announced, market-wide turnover jumped 130% compared with the previous fortnight. However, seen over a longer period of time, average daily turnover remains well below historical averages.

As per data from the Securities and Exchange Board of India, average daily turnover, which was above 20,000 crore in 2009-10, remained below 15,000 crore in 2011-12 and 2012-13. This was also reflected in a fall in the number of sub-brokers in the market, which fell from 83,952 in 2010-11 to 70,178 in 2012-13.

The market remains heavily dependent on foreign investors, said Gautam Trivedi, managing director and head of equities (India) at Religare Capital Markets Ltd, adding that bringing back retail investors is critical.

“The most important and immediate step is to get retail investors back. They have been away for around three years now. Limited protection is available to them, and the market cannot depend so heavily on FIIs," said Trivedi.

One way to do this would be to review tax structures. High transaction taxes and non-uniform stamp duties have put off genuine investors, said market experts.

At present, the securities transaction tax (STT) on intra-day equity transactions is 2,500 and 10,000 on delivery-based equity transactions for every 1 crore traded. For trading in equity futures and options, STT is 1,000 for every 1 crore of trade.

In its wish list sent to the Union finance ministry, BSE has proposed a sharp cut in STT on the cash segment in equities, saying this will promote investment rather than speculation. The exchange also suggested a uniform transaction tax across all futures markets to create a “level playing field".

“A new transaction tax structure needs to be in place to ensure there is no tax arbitrage across asset classes," BSE said in a 32-page letter to the finance ministry reviewed by Mint.

“The cost of transaction is high in India vis-à-vis other markets. When STT was introduced, it was presented as a tax in lieu of short-term capital gains tax, but now, both taxes exist together. The STT as a cost is ultimately borne by the investor, and so is a deterrent. Its current structure is such that it punishes serious long-term investors and encourages short-term speculation. There is an urgent need to drastically reduce STT," said Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services Ltd.

The primary markets, where initial public offerings (IPOs) have virtually dried up, are also in need of attention.

In 2013-14, companies raised 1,204 crore via 38 IPOs against 6,497 crore via 33 issues the previous year, according to data by Prime Database, a Delhi-based market research firm.

While stability in the secondary market will be key to a revival in the primary market, stock market intermediaries are also calling for other changes, which will make it easier for promoters to list their enterprises, and for retail investors to access IPO markets.

A 4 June report by India Ratings and Research Pvt. Ltd and the Confederation of Indian Industry, an industry lobby, calls for a relook at the minimum amount a promoter must dilute in an IPO. At present, an issuer must offer at least 25% of the post-issue equity capital if its market capitalization (at the IPO price) is below 4,000 crore.

“It is recommended to revisit the provision and do away with the condition for smaller companies, taking into account the smaller promoter-owned companies and their fund requirements," the report said, adding that removing the minimum limit will encourage small and medium enterprises to go public.

The industry has also proposed making IPOs more readily available to retail investors, by allowing e-IPOs and reducing the duration of the whole process.

“The gap between application for IPOs and their listing should be reduced. Gradually, allotment and listing should happen the same day," said Vaibhav Sanghavi, managing director at Ambit Investment Advisors Pvt. Ltd.

Exchange managements are also pitching for an increase in the foreign shareholding limit in bourses to at least 15% from the current 5%.

“Without the potential for a meaningful investment stake of at least 15% (or preferably even 26-49%), potential foreign partners are reluctant to engage fully because there is inadequate ‘skin in the game’. Allowing Indian exchanges the flexibility to form deeper partnerships with leading global exchanges, by allowing larger stakes when desirable, will enhance the global competitiveness of Indian exchanges," said BSE in its letter to the government.

Ashish Rukhaiyar contributed to this story.

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