This article throws light upon the six major weaknesses of stock exchange in India. The weaknesses are: 1. Lack of Professionalism 2. Domination of Financial Institutions 3. Poor Liquidity 4. Domination by Big Operators 5. Less Floating Stocks 6. Speculative Trading.
Weakness # 1. Lack of Professionalism:
The majority of stock brokers lack professionalism. They lack proper education, business skills, infra-structural facilities etc. which inhibits them to provide proper service to clients. They are not able to guide and counsel their clients in the manner expected of them.
Weakness # 2. Domination of Financial Institutions:
Indian stock markets are dominated by a few financial institutions. The U.T.I., LIC, GIC are the main players in Indian stock markets. The buying and selling by these institutions sets the tone in the market. The market goes bullish if financial institutions start buying shares; on the other hand, it becomes bearish on their selling spree.
After the liberalisation process set in motion since 1991 a number of foreign financial institutions have also entered the market but their role has so far been limited. Even though financial institutions deal in only selected scrips but the whole market sentiment is influenced by their dealings.
Under SEBI guidelines, a member of mutual funds have been registered but they are concentrating more on new issues (primary market) Financial institutions in development economics to enter stock markets but their number is large and few institutions cannot influence the whole market as is done in India by three main institutions.
Moreover, Indian financial institutions indulge more in buying and less in selling. With the entry of more and more Indian and foreign institutions, their influence in stock markets will gradually decline.
Weakness # 3. Poor Liquidity:
The Indian stock exchanges suffer from poor liquidity. A small number of scrips are regularly traded on stock exchanges. Out of over 3,000 scrips less than 500 scrips are generally traded and even out of these 90 percent volume of trade confines to between 200-250 scrips. This means that other scrips have very low liquidity.
A recent survey into frequency of trading showed that shares of 207 companies were traded every day, shares of 538 Companies were traded once a week, shares of 396 Companies were traded once of fortnight, shares of 954 Companies were traded once a month and shares of 959 companies were traded once a year.
These statistics show the poor liquidity of most of the shares. A seller has to wait for disposing off his holdings for a longtime. When an investor is not sure of selling his shares whenever he needs money then he will be discouraged to invest in shares.
There is huge backlog of pending deliveries also. This is due to the practice of short selling. The scrips are not delivered for longer periods which again creates liquidity problem. SEBI is trying to frame rules where this malpractice will be curtailed.
Weakness # 4. Domination by Big Operators:
Some big operators influence the sentiment of stock exchanges in India. In Bombay Stock Exchange 3-4 operators used to call the shots. The case of Harshad Mehta is well known in India. He created bullish conditions in Indian stock exchanges in the first quarter of 1992 and BSE sensex nearly doubled in a very short period.
This artificial increase in prices of shares adversely affected the investing public and people suffered huge losses. It is the weakness of stock exchange’s working that some operators can create the sentiment as per their liking.
Weakness # 5. Less Floating Stocks:
There is a scarcity of floating stock in Indian stock exchanges. The shares and debentures offered for sale are a small portion of total stocks. The financial institutions and joint stock companies which control over 75 percent of the scrips do not offer them for sale.
The U.T.I, G.I.C., L.I.C., etc. indulge more in purchasing than in selling. It creates scarcity of stocks for trading. The markets tend to be violative and amenable to manipulations in the absence of adequate floating stocks for trading.
Weakness # 6. Speculative Trading:
The trading in stock exchanges is mainly speculative in nature. The operators try to derive benefit out of short-term price fluctuations. At Bombay Stock Exchange upto 5 percent and at other exchanges upto 10 percent transactions are genuine investment deals. The brokers try to create a sentiment in the market which will be beneficial to them. The genuine investors try to keep away from such markets.