Author: Gordon Platt


By Gordon Platt

India's equity market indices have gained more than 80% since early 2009, but the market lacks depth and breadth, with a high concentration of trading in a few top companies, according to a report from Celent, a Boston-based financial research and consulting firm. The top 5% of the companies account for 80% of the trading value, which clearly reduces the breadth of the market, giving rise to liquidity problems for many stocks, Celent says.

"India's advantage lies in its sound regulatory environment, which shielded the markets, to some extent, from a larger negative impact from the global financial crisis and helped them to regain their mark quickly afterward," says Arin Ray, analyst with Celent's Indian Financial Services Group. "Regulators have been cautious about expanding the market, and transparency and investor protection are always high on the agenda."

Retail investors account for about 55% of the trading, but there has been a sharp drop in their participation in the market. There were 18 million retail investors in 2003, and there are only about 8 million now, Celent says. The lackluster performance of most initial public offerings and the market's fall during the financial crisis discouraged many retail investors, the firm says.

Geographic breadth is another problem. Celent estimates that up to 90% of cash trading and 80% of mutual fund ownership come from the top 10 cities, even though trading systems are in place in many cities.