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1. “As part of our ongoing initiative to share knowledge on the Indian financial services sector, Motilal Oswal Investor Relations presents its
article series – Fin Sight. In each issue, we discuss a topic impacting this sector. We draw upon the Group’s learning, experience and current
thinking to develop these insights. We look forward to your questions and feedback to help us provide you a better perspective of this sector…”
Sameer Kamath, Chief Financial Officer
Declining cash volumes in the Indian equity markets; Triggers that can effect a trend reversal
Our Business Verticals:
Structural shift in the equity market volume mix
 Broking & Distribution Indian equity volumes consist of the cash and derivatives segments – with cash comprising of
 Institutional Equities delivery and intraday, and derivatives made up of futures and options (F&O). Cash delivery, in
 Investment Banking which the investor invests for a longer horizon to gain from long-term price appreciation, earns
 Asset Management the highest yield while yield on options is the lowest. Despite intra-segment yields holding firm,
 Private Equity the blended yield of brokers has come under pressure. This is due to a structural shift in the
 Wealth Management volume mix – a move away from cash and towards F&O. Proportion of high-yield cash volumes,
comprising 30% of equity turnover in FY08, declined to a low of 10% this year (Fig 1).
Access Fin-Sight Articles: Why is this shift away from cash equities occurring?
 Please use this link to India has been amongst the worst performing markets of late, hit by persistent macro factors.
read Fin-Sight articles: High inflation and volatile commodity prices have put pressures on input and interest costs.
http://www.motilalosw Political paralysis has slowed down reforms and capital expenditure plans seem to be frozen
al.com/Presentation_an for now. This has clouded the visibility of forward earnings and led to an earnings downgrade.
d_Events/ The markets have largely moved sideways without any visible, sustained trend. Cash
participation has declined mirroring the declining market performance (Fig 2).
Retail participation within cash has not picked up. Public issues are a popular entry point for
Corporate Presentation: retail investors, as seen during FY08 and
FY10 which coincided with a growth in
 Please use this link to retail cash volumes (Fig 3). But the
read our latest
lackluster performance of most issues post-
corporate profile
listing dampened participation in future
http://www.motilalosw issues, leading to lower subscriptions since
al.com/Presentation_an FY10 (Fig 4). The only spurt in participation
d_Events/ in FY11 was during Oct-Nov with quality
PSU issues like Coal India, Power Grid.
Business Updates:  Macro pressures clouding Cost of trade, amongst the highest in India,
forward earnings potential also pinches during these volatile times.
 MOSt 10 Year Gilt Fund Taxes are maximum in cash delivery (Fig 5)
 Retail participation down
launched: India’s 1st creating an obvious bias towards options.
Fund giving access to 10
due to below-par
Discussions are on to abolish Securities
Year Benchmark performance of recent IPOs
Transaction Tax (STT) in order to incentivize
Government Securities  Cost of trade comparatively equity trading, but these are still in
 Awarded ‘Best Equity high – especially of STT preliminary stages.
Broking House’ at the
BSE IPF- D&B Equity
Comparison to global averages:
Broking Awards 2011
Historically, cash comprised ~40% of equity volumes in Americas, 30% in Europe and
 Motilal Oswal offers the 15-20% in Asia. Since Korea’s tops in F&O turnover which is significantly high,
option to invest via SIP removing it brings the adjusted cash proportion of Asia up to ~45%. In contrast, India
route in over 300 scrips,
has lagged at ~25-35% (Fig 6). Interestingly, cash proportion across all regions declined
880 MFs and MOSt ETFs
since 2008. This is largely attributed to the market volatility since 2008. While cash
investors have held back, options have the benefit of profiting irrespective of market
movements. According to TABB Group, a recent trend is of fund managers using
Email us on options for hedging. AMCs accounted for 20% of the options trading in USA in 2011.
investorrelations@motilaloswa
India has amongst the lowest cash trading velocities, as compared to US, UK, HK and
l.com or
Korea (Fig 7). Only ~0.3-0.5% of its market cap was traded in the cash market from
sourajit.aiyer@motilaloswal.co
2004 - 2010 on a daily basis, indicating the universe of regularly traded stocks is
m ; Call Sourajit Aiyer
comparatively lower in India. This needs to increase if India is to match the global
on +91 22 3982 5510 averages.

2. Our Latest Results:
Certain factors that aided higher cash proportions elsewhere:
 Please use this link to In USA, the institutionalization of retail Korea saw higher trading from insurance, China saw a surge in retail participation in
read our quarterly savings helped in equity mobilization. AMC and pensions from 2004-2010 (Fig 8). cash equities due to large IPOs from Govt
earnings releases Defined Contribution plans (DC) were key. Higher proportion of foreign investors from owned companies (Fig 10).
http://www.motilalosw DC assets have been ~40% of US mutual Japan/Others (52% in 2001 to 60% in 2010) ChiNext, Shenzhen’s SME platform, has
al.com/Reporting/Quar fund assets over the last decade (Fig 8). Wireless broadband growth, buoyed by flat attracted ~190 listings since 2009.
terly_Reporting/ DC investors are free to opt their asset rate data plans, boosted trading (Fig 9) Number of foreign listings in HK due to its
 Please use this link to allocation. In 2010, 32-38% of corpus was Online trading is the predominant mode proximity to Chinese investors.
read our quarterly invested into equities across all age groups, Zero Cap Gain tax and STT only on selling Online trading picked up. Ex: online
earnings releases indicating the incremental mobilization Installment equity funds and ‘wrap’ pooled trading rose from 2% of Hong Kong SE’s
http://www.motilalosw made by DC plans into US equity markets. accounts were key mobilizers into equities equity turnover in 2000 to 27% in 2010.
al.com/Reporting/
MOFS Stock (YTD):
 BLOOMBERG: MOFS IN
 NSE: MOTILALOFS
 BSE: 532892
Possible solutions that might trigger a reversal in this trend away from cash segment
An ease-out in the macro climate is essential. Monetary tightening has been largely unable to rein in inflation since supply side deficiencies
were not addressed. The government needs to put reforms into action, which should give the markets a clearer direction, a better estimate of
future profitability, enable better valuations, boost corporate expansion plans and induce investors to take up long term cash positions.
Address liquidity concerns by lowering STT to make cash equities competitive. STT collections have dropped due to decline in cash volumes.
Hence, reducing STT may actually spark off additional volumes which will be beneficial for the government’s collections
Participation is currently restricted to a few blue-chip stocks. WFE’s market concentration
data shows that the top 5% companies by trading value comprised 62% of trading on NSE  Lower STT to incentivize investors
in 2010. Expanding research coverage will enable transparency, information access, and  Expand research coverage
understanding on a larger universe of stocks, and help showcase companies with strong
 Enable pension funds into equities
business performance and corporate governance. This could, in turn, help retail investors
identify value-picks from amongst the mid and small cap universe. Margin funding is  Quality and fair priced IPO pipeline
Industry Factsheet: currently restricted to the top ~100 companies. Increasing research coverage will also  Use online/mobile platforms
Please click here to view help to participate in these mid and small cap companies with much greater conviction
the latest industry facts Role of domestic institutions is apparent, as seen from the global experience. According
and charts to BCG’s Global Asset Management Report 2011, pension funds globally comprised the
largest share of the institutional asset management AUM - ~55% in 2010. Global pension
fund assets grew by 9% in 2010, higher than the 7% growth seen in the overall
institutional AUM. India needs a mobilizing mechanism led by pension funds. Though
Meet our Management: EPFO is allowed to deploy 10% into equities and 5% via mutual funds, this failed to take
Please email us at off with asset erosion concerns due to volatility. As market depth improves, the volatility
investorrelations@motil in those stocks should reduce to some extent and help address the concerns. If EPFO’s
aloswal.com if you want 10%+5% allocation is deployed fully, say via mutual funds, it means an incremental
to schedule a meeting to mobilization of Rs 525 bn into equity funds (Fig 11).
discuss this sector, its
Higher mobilization by domestic institutions will have a spin-off effect in inducing more
long-term opportunity
direct participation. As more retail investors enter, the retail penetration will increase
and the company’s
from its current ~1.5%, which is lower than global averages. While it will take India some
strategy
time to reach there, but it does indicate the potential headroom for growth (Fig 12).
Public issues, especially from PSUs, are critical to kick start investor confidence and
increase cash participation, as seen from the Coal India experience. Pricing of public
issues is equally important. This will determine post-listing performance to some extent
and interest in further issues. Hong Kong’s experience with foreign listings shows there
Join our Investor are quality companies globally looking to raise money from Asia. IDRs are a route to list
Relations Mailing List: foreign companies in India, but this has seen limited success so far.
Please email us at Dividend policy of companies has also come under discussion in India, given the range- bound market movement which has largely failed to
investorrelations@motil reward minority investors via capital appreciation. Currently, Indian firms have amongst the lowest average dividend payout ratios globally. If
aloswal.com or minimum annual dividend payout is implemented, then the stocks which are backed by solid fundamentals, good business performance and
sourajit.aiyer@motilalos robust business models will look attractive enough for investors to hold cash positions in. Emerging market peers like Brazil have implemented
wal.com minimum dividend commitment of 50% for new listings. A similar policy for India will incentivize equity investors to hold cash positions for the
long-term, as they can garner regular returns through dividends even if the market performance remains flat. PSU companies like Coal India,
Oil India, NMDC etc are relatively cash rich, and the government can use this to initiate such a move.

3. India has a demographic advantage, and ability to service this young, income-growing generation via online and mobile trading will be
instrumental in facilitating higher participation. Equity participation is currently restricted to few cities, with Mumbai, Ahmedabad, Delhi and
Kolkata accounting ~80%+ of equity trading. The need is to focus on cities where large pools of wealth are available, but retail equity
participation has not yet picked up. As and when good public issues come in, institutionalization of retail savings picks up, cost of trade
becomes competitive and the economic outlook improves, the cash volumes will increase to match the global averages.
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