SEBI's Ananth Narayan Flags Demand-Supply Mismatch Causing Asset Price Inflation In Equities
The market needs fresh issuers to step up and raise risk capital from willing investors ready to deploy, he said.
The Indian equity market is facing a mismatch between the demand and supply of securities, leading to inflated asset prices and raising valuation concerns, according to SEBI's Ananth Narayan.
"We must consider mismatches in the demand for and supply of securities. Demand brought in by mutual funds exceeds the annual primary market issuances, including IPOs, FPOs, QIPs, and OFS," said Ananth Narayan, a whole-time member of the Securities and Exchange Board of India, while speaking at the Annual Capital Markets Conference by the Federation of Indian Chambers of Commerce and Industry.
"Such mismatch leaves with asset price inflation rather than capital formation," he said.
As a result, mid- and small-cap company valuations have tripled over the last few years, Narayan said. The market needs fresh issuers to step up and raise risk capital from willing investors ready to deploy, he said.
SEBI's recent moves to curb excessive trading in the futures and option markets are because it views derivatives as a positive for price discovery, market depth, and hedging, according to Narayan. But the regulator is also cognisant of the hyper-volatility present in a few spaces, he said.
"A healthy derivative market aids capital formation. While cash market turnover doubled, index options turnover on a premium basis rose by over 12 times from fiscal 2020 to financial year 2024. Notably, index futures turnover did not change that much during the period," the official said.
The reason behind the options boom is due to the proliferation of weekly expiries of index option contracts to a stage where every day of the week has an expiry, he said. "Over 90% of the trading volume occurs on expiry day, with a significant concentration in the last hour of trading."
In the July 30 consultation paper, SEBI has proposed to limit the number of expiries, increase margins around expiry day, remove the benefits of calendar spreads on expiry day, monitor intraday positions, and rationalise option strikes.
