India At 75: Raamdeo Agrawal Says Vibrant Capital Markets Essential For Sustained Growth
Tax laws should be eased even for private investments so that people invest in private markets, Raamdeo Agrawal says.
It is the capital market that will determine and dictate how India performs in the near to medium term, according to Motilal Oswal Financial Services’ Raamdeo Agrawal.
In a capitalist economy, capital markets are extremely important because this is “where the biggest game is being played and will happen”, Agrawal, the chairman and co-founder of Motilal Oswal Financial Services Ltd., told BQ Prime's Niraj Shah. “You have to lose or win here rather than anywhere else, because this is where all the savings get pulled in one way or the other.”
While India may be a poor country per capita of GDP, in terms of the market infrastructure advancement, it is way ahead, he said.
“(In) Many things, we are probably world number one–single stock futures, the pace of settlement, the payment mechanisms... A lot of those things are absolutely world class. Digital infrastructure is world class. So, this is now emerging as a competitive advantage for our nation."
Agrawal highlights the role played by capital markets in offering a push to entrepreneurs. “How do you help the new guys coming with new ideas? How do you convert them into entrepreneurs; and the guy who's an entrepreneur, how do we help them become a bigger entrepreneur? How do you help a very successful, large entrepreneur to become a global corporation? These are all the doings of capital markets,” he said.
According to him, while India has done well in terms of capital markets, it can do better and make them a source of competitive advantage for businesses and the economy.
All forms of capital market activities, be it private or public, need to be encouraged, he said.
Consistency in tax laws is often highlighted in public markets, but Agrawal suggests that tax laws should be eased, even for private investments, so that people invest in private markets.
Startup funding and the ecosystem should be given incentives to nurture the wave of entrepreneurship.
"It is the biggest national activity. It is better than even donation, believe me. If I am giving Rs 10 crore donation, that is of far less value than giving Rs 10 crore to 10 guys to start 10 businesses,” he said.
View the full interview here:
Edited excerpts from the interview:
If I were to ask you to look back, not 75 years as capital market history may not be as long, but are there some tell-tale features on the capital market side which would make you believe that we have done a lot of things right in order to help businesses and the economy?
Raamdeo Agrawal: You are reminding me of what we have gone through. I started my career in this market. My entire career is spent here. So, I started dabbling in the market in 1980. So, since then, 40-42 years I have seen.
Markets were primitive in the ‘80s and there was no technology, no telecom, no computing power, no research, no distribution of information… Research Infrastructure was zero. So, it was a very primitive market.
And it was T+15 settlement and actually, it used to be T+21 settlement. And so, from there, we have reached to fully demat kind of infrastructure, T+1 settlement. We are trading one of the largest number of trades in the world and it is one of the most vibrant and safe markets.
When the SEBI came in 1991-92, they made the market very safe. It was not safe for the investor because ultimately, this is a place where people are bringing their hard-earned savings to be invested in the markets, into perpetuity actually. So, it has to be a very safe place. That was not safe at that point of time. Now, it has become very safe, and fast and reliable. T+1 settlements, it can't get any better.
You are trading six, seven or eight hours from 9.30 am to 3.30 pm. Earlier, it used to be 12 noon to 2 pm, and on many days, it used to be a holiday.
So, this has completely changed. If there is one place which has changed dramatically, it is the capital markets, for good.
The cost of transactions have come down. So, it has been a revolution kind of thing, in the last 40 years right in front of me.
It has come to a stage where it has kind of become a competitive advantage for the nation.
Why do you say that?
Raamdeo Agrawal: Everybody is not provided with the kind of vibrant market India has. India is a poor country. Let's recognise that, a very large but literally poor country. $2,200-2,300 per capita for a large mass of 1.4 billion people, and the world average is $12,000-13,000. So, we are poor.
But then market infrastructure advancement is way ahead. I mean in many things we are probably world number one–single stock futures, the pace of settlement, the payment mechanisms and a lot of those things are absolutely world class. Digital infrastructure is world class. So, this is now emerging as a competitive advantage for our nation.
In a capitalist economy, when you are pursuing a capitalist, market-based economy, the importance of capital markets is extremely high because this is where the biggest game is being played and will happen, because you have to lose or win here rather than anywhere else.
So, the importance of capital market cannot be undermined because this is where all the savings, they get pulled in one way or other.
How do you help your entrepreneurs? How do you help your new guys coming with new ideas? How do you convert them into entrepreneurs; and the guy who's an entrepreneur, how do we help him become a bigger entrepreneur? How do you help a very successful, large entrepreneur to become a global corporation? These are all the doings of capital markets. This all happens here.
So, that's why we have done wonderfully well in the last 30-32 years of SEBI. It has done very well. But we can do even better and make it a really shining source of competitive advantage for all the businesses and the economy of this country.
Can I divide this into private markets and public markets, starting off with the public markets. We have seen a spate of reforms and it has become a very safe place as well, as you said. Consistently, there is this lament–some of it due to regulation, some of it due to the economic problems that the country has, that global investors would face when they look at India.
For the longest time, it's being spoken that India by its size should have become an individual market unto itself, but is still bucketed as part of a clutch of companies into which flows come in.
Do you reckon that there are some quick fixes or regulatory changes that need to be done–either at the government level or at the regulator level–for speeding up this process of the capital-hungry world which is filled with billions of dollars of savings to allocate more money to the country?
Raamdeo Agrawal: Actually, there is a massive savings glut world over. Just before Covid-19, the world was going into negative interest rate. There was a huge deflationary problem all over the world…
Now, the new business models of all the digital companies, they are just net cash companies. Everything is on the spot. So, there is no inventory, there are no debtors. Basically, they are cash machines. So, there is a lot more corporate cash or savings in the world, which needs to be disposed of. So, there is opportunity to attract global capital…
So, there's no dearth of capital in the world and this is a changed situation, this was not the situation 20 years back. Today that is the situation. So, it's a very opportune time. On the one side, there is literally the largest country in the world in terms of population and we are amongst the poorest also, and outside, there is a savings glut. Can I create an environment here so that it can attract that money this side?
We have to see that the savers are being rewarded, because they are not going to come for just charity. They are going to come for a reward. So, how do I make this capital market a very rewarding place for domestic savings as well as for foreign savings?
Once that happens, then there's no dearth of money, and this pit (space) has already done well. Can we raise the stakes and it will make it even better?
We have had significant FII flows for multiple years before, let's say the last 12 months. Do you reckon that what stops even more money coming into India is a factor of reforms needed in the capital markets? Is it stability in the tax regime or is it because India is a country with twin deficits, and therefore, a foreign investor would think that at the first sign of trouble, this currency will depreciate? Do you think there is a larger issue that impacts the foreign investor’s mind?
Raamdeo Agrawal: No, right now, what is happening, what we are going through in the last 12 months is nothing. There is nothing specific. It's a global macro. In general, you can always do better.
What stops us: Is it capital market reforms or something else?
Raamdeo Agrawal: I would say everything is a reform, in the sense that whatever rules of the game you change in a positive way for the player, a few more guys will come.
Say, in the last Budget or before that, they made a tax holiday for sovereign wealth funds participating in this country. It will go a long way. In a short while, you will not see much, but as we go forward, it is going to go a long way in terms of attracting funds. So, clearly every single state will have a cumulative effect.
The current problems of exits we have seen, which is unprecedented in the sense that I don't know $50-$60 billion have gone relentlessly in the last 10-12 months. That is more because of global macro. It is not a very India-specific issue.
Actually, to some extent it is an India-specific issue because Indian retail, at the same time, participated much more vigorously in Indian markets. That allowed the market to outperform to the rest of the pack. And that was taken as a signal that since this is outperforming and it is more expensive compared to other emerging markets, let's get out of here.
The liquidated product was also fantastic, so the foreigners found it easy to sell here and get out and balance their portfolios between the developed market and the emerging markets.
What was a good thing for India actually is domestic locals coming in, that actually provided buffer, liquidity, buffer valuation–everything to the foreigners. So, it's a quirk kind of thing I would say which has happened.
But having gone, I don't think it's going to be that easy for them to re-enter the market. The cost of entering back will be far higher.
Is it simply because the valuations haven't buckled down too much?
Raamdeo Agrawal: There is a guy who's continuously putting in–the domestic guy. The domestic flow is far more structural. They are there permanently 24/7, they don't have any option. The markets are attractive, the returns have been good and the return on the fixed income side has been not so attractive.
Then you have the campaign going on, that mutual funds sahi hai, so a lot of these factors are there.
Finally, the onboarding of domestic investors. Since Jan. 20, the digital onboarding has simply exploded the number of participants. Earlier, there were 40 million demat accounts. Now, there are 100 million demat accounts. Every month, we are getting two to three million accounts, even in the depressed market.
So, this particular revolution; actually, it’s not short of a revolution what is going on. Right now, from 40 million we have come to 100 million, and I am reasonably sure in the next three to four years, it will become 200 million and then we are headed for 300 million.
So, it opens up a large amount of the savings pool, equity savings pool for the markets, for the entrepreneurs. That is why the valuations are somewhat higher than other parts of the world.
Eventually, people realise that this is a superiority of Indian market system than many other market systems.
Right now, there are red signals all over the world. But at some point in time, in six months, one year's time, when the dust settles and the world comes to post-Covid settlement, and then they will realise that this is a place where we want to come.
They have already started coming for the last 15-20 days. But, as they start coming in, they want to bring back that 50-60 billion and they are not going to bring in 50-60 billion, they will bring in 100-200 billion.
At that point of time, markets are going to go where it has to go. So, what I am saying is that this game is going to become bigger. Why it is going to become bigger? Because we have provided them a very honourable exit. So, that has increased their confidence to go back with bigger bets next time. They have the confidence that this market system works. So, we have to make it better as we go forward.
What will encourage this 100-200 billion to become even higher, or for this flow of retail money that is coming in, at the rate of about a billion and a half dollars to become even larger?
Raamdeo Agrawal: Actually, it's an ongoing issue. There's no pending issues which need to be taken care of.
Our capital markets, at a government level, need to realise that this is very important, and even politically also.
Earlier, only 40 million guys were having a demat account. Who cares about 40 million in this country of 1,400 million? Now, it becomes 200-300 million and their households multipled by five. So, you are talking about very large, like 20-30% of the population being part of this game. So, politically also, it becomes very important.
What I am saying is that at the government level, there should be a clear thinking that this is our very precious asset.
From there what happens is the listening starts. What are the problems and how we can do it better? Do you want to do it like Britain, the U.S., like China or Singapore, Hong Kong. There are various models for all the problems.
The issue is, is there listening, is there a quick disposal of the problems and are we looking forward to making it bigger and better for every level of investor–from a single investor, small investor into the private, unlisted space, and in listed space?
The listed spaces have been very well taken care of so far. But private space, where actually the germination of new enterprises happens, that's where the game has to become big because for one successful enterprise, you need hundreds of unsuccessful ones. So, who's going to take care of that?
How do you propose that be done?
Raamdeo Agrawal: I don't have any specific suggestion about what should be done, but it should be encouraged. Like it is said that mutual funds sahi hai. Similarly, private equity investment sahi hai. Unlisted space mein investing sahi hai… This kind of thought process must come through.
The amount might be small, but giving a nudge through tax proposals. How if I invest something in a startup, then what happens? How am I being treated? I should not be looked down upon when I incur losses. Most of the time people are going to incur losses.
This is my personal experience because if I invest in 10 unlisted companies, seven or eight are going to be zero. So, how do I treat my losses? What kind of facility do I have for treating my losses? And the one or two which are successful, how am I encouraged to nurture that one or two successes?
I should not be treated at a disadvantage. The moment you are unlisted, you have to pay a lot more taxes than in the listed space. The amount involved is very small right now. So, it is not about impact on the exchequer or anything like that.
But it’s giving a signal that starting a company, I am helping you at that point of time to start that business. It is the biggest national activity. It is better than even donation, believe me. If I am giving Rs 10 crore donation, that is of far less value than giving Rs 10 crore to 10 guys to start 10 businesses.
So, that is the level of treatment required from a government's point of view. How do you encourage people? Everything starts with an idea. But the guy who has an idea may not be having money; most likely, he will not have money, and this is a poor country.
The idea can come from Kerala, from Kashmir, from anywhere. But is there a culture of helping that guy with an idea–to be helped by banks, individuals, the relatives?
How does the government see it? Does the government encourage? I am not saying they are discouraging or anything. Nobody is discouraging, but are we encouraging? These are two different things.
You are essentially saying this from the perspective of the smaller entrepreneur because we have seen, for example, even larger companies being able to attract larger global capital, and that is coming into the country.
Raamdeo Agrawal: At every level, there will be issues. I will not be able to speak for everybody. But at every level of growth and development, there will be challenges.
Say, if you want to take over a company, you want to go from 10 million tonne to 20 million tonne and you acquire something. Banks will not come to fund you. It is not allowed by the Indian banking system. It is considered a sensitive sector.
Something happened in 1992 and after that, our regulators decided that it was a sensitive sector, a very fluctuating sector and hence, it is not given the kind of status given to many other more volatile industries.
But this is what creates other industries. So, you cannot wash that away. You can't say that I will not be responsible for whatever these guys are doing, because they look a little more riskier.
So, at every level, the flow of capital to the people who have the idea–whether idea is at an initial stage or in the growth stage or at a very large stage where they are growing global. Everywhere, the government and their agency should be standing by because somebody is employing a lakh guys, he can employ another lakh. Somebody is starting from zero, he can employ five guys. It is all about employment and better employment.
How constructive are you on the startup space or the bedrock of reforms that have already been done in the larger listed spaces? How optimistic are you of the journey which is being crafted by Indian entrepreneurs and the opportunity that is provided by virtue of the tilting global landscape ushering in higher growth, both for GDP as well as for the profitability of Indian entrepreneurs?
Raamdeo Agrawal: I am very hopeful, because there's a capital glut as I said.
You are normally bullish. Are you bullish right now or are you hopeful?
Raamdeo Agrawal: No, I am very bullish. As far as the longer-term prospect for Indian entrepreneurs and Indian economy is concerned, I am very bullish.
That's why 100% of my savings, whatever I earned, everything is put behind one entrepreneur or the other or my own enterprise. I don’t sit on cash or anything like that. So, clearly, I am bullish because I have seen where we are coming from in the last 40 years. So, the next 40 years is going to be golden.
The kind of situation India has reached, and I hope this other geopolitical tension which is happening right now, we come out of it fundamentally. After that, I see India has a unique position. We have terrific, stable leadership. We have everything going for us actually.
In that context, I am saying that if you improve the situation, in terms of helping an entrepreneur–starting from a would-be entrepreneur to a global entrepreneur. We got to be helping them. We have done wonderfully well.
Let's not take away what the government has done or what agencies have done or what SEBI has done. So, 100 out of 100 marks.
Can we do more, a lot more, because this is becoming a competitive advantage for India? There are not many countries with India’s kind of market systems.
You have a lot of large global corporations or fund managers who want to park money into India. They would be telling you about a few things that they believe are niggles or issues, which if sorted would only raise their confidence. Is there something like that–be it for the startup world or the listed world, which hopefully should be done sooner rather than later? This could be the view of people who talk to you.
Raamdeo Agrawal: You want the permissions which come through; you want predictability. If that is coming in 60 days, it’s not a problem, but it should come in 60 days. Then after that, it should not be 90 days or 100. So, nothing is dated, none of the permissions are dated.
Permissions for starting a business?
Raamdeo Agrawal: Anything. You want to start a fund; you want to have some permission here and there. So, they all come through. But you are not sure when it will come, so it's not dated. You need more certainty. I am just talking about improving the system.
Second is the constant dispute about the tax liability. We are also going through that.
After 5-10 years, you distribute the money and then the notice comes that the tax statement could have been different. It's for the entire industry, not for one guy so these kinds of litigation and how we can avoid.
I don’t have any suggestions, but it can definitely be avoided. Why can't we have a much more definitive tax regime? Ultimately, I have invested in the future and I need definitive tax laws.
If I am earning a million, I am going to give 10% or 20% to you, and 70-80% is for sure it is there.
So why can't we have some kind of advance ruling or some way our tax laws are not backward-looking, but much more forward-looking and no changes are made, which will be effective for say, not next year, but maybe three or four years henceforth types.
So that whatever I have done today is for sure, it is going to get taxed like this, like grandfathering of everything, so that there is no concern in the mind of the investor that what he's seeing is what he's getting. That is very important.
It's not that tax laws in other parts of the world are not treacherous or challenging. But I think here we have a chance to prove that we are at least on this count sorted.
I took a view from somebody in the business fraternity about what can be done. I was wondering if you have a view here. The belief was that there is a bit of risk appetite. Probably, we need a lot more of this risk appetite for credit as well as the PE space. Perhaps, a better way to get credit appetite is to allow AIFs to do credit with tax wrap-up mutual funds, or PEs could be made equivalent to public equity through the AIF structure. Do you have any thoughts here? Are these easy-to- do reforms? Can these usher in more capital?
Raamdeo Agrawal: Any reform if done in a positive way will definitely expand our opportunity.
There is a lot of innovation in the capital markets world over. So, we have to imbibe all the innovations as early as possible.
A few things that you are talking about, there must be many more things. One leads to another, the complexity keeps increasing. As your number of instruments increase, the number of participants will increase, the size of the markets will increase, and the complexity will also increase.
One has to be ready for it because if it is a $3 trillion market, the complexity level 0-10 would be say 6. The moment you become a $10 trillion market, it will become complex, go to 8, 8.5, 9. If you are a $25 trillion market, then complexity is 10 out of 10. So, we have to be ready, geared up to handle complexity and scale.
Our digital guys have done wonderfully well, but the regulatory side and tax authorities and all, they have to also come up with the same level of changes, the pace at which the digital guys are changing.
So, you do believe that a period of prosperity is up and about. The only thing is can we move from lever one to lever three with a few reforms being done.
Raamdeo Agrawal: It's already a source of competitive advantage for India. The sophisticated and deep pool of capital we have is clearly a source of competitive advantage. Can we make it even deeper; can we strengthen it further?