Overbearing secondary market

The capital market in India has been booming for quite some time now.

- AJAY TYAGI

The swift recovery following the steep downturn of 2020 and the growth thereafter have been remarkable. Retail investors have flooded the market, with the number of demat accounts increasing by over 300 per cent in the past four years. A significant proportion of these investors are not well-versed in the market and have been lured by the prospect of making quick money.

This has created its own challenges. The Securities and Exchange Board of India (Sebi) has been cautioning investors to be careful while investing. Of late, the increased investor participation in the futures and options (F&O) market has been under its scanner. Sebi has repeatedly shared findings from various studies, highlighting how unsuspecting retail investors have incurred losses in the F&O market.

This column is not about the debate over the cash market versus F&O market. It focuses on how the secondary market dominates capital market discourse and highlights the need to increase investor awareness on issues related to the primary market.

It is well established that a deep, liquid, and well-regulated secondary market is essential to instill confidence in investors to participate in the securities market. Investments would come only if investors are confident in the rules of the game, the ease of entering and exiting the market, the objectivity of price discovery, and market efficiency. However, no one would disagree that the primary purpose of developing capital markets is to facilitate fund raising by corporations. That's why fundraising is classified as a "primary market" activity, while trading in securities is considered "secondary".