Indian Stock Markets Are Booming And There Is One Silent Beneficiary—The Government

The Indian markets have been on an upward trajectory since the last year. With low rates on bank deposits, investors have been rushing to IPOs (Initial Product Offering) in expectations of earning higher returns on their money.

While the markets don’t guarantee profits, one entity has been making money in the stock markets boom without risking its capital — the Government of India.

Rising Volumes aid STT Collection

The Securities Transaction Tax (STT) collection has touched Rs. 9,000 crore for the first four months of fiscal 2022.

To put this in perspective, the entire collection for the financial year 2016 (FY16) stood at Rs. 6,530 crore. For FY17-FY21, the annual figures stood at around Rs. 10,000-12,000 crore.

The government expects the figure to reach around Rs. 20,000 crore for FY22 — quite possible if the volumes continue rising. This is a far cry from 2013, a year before the bull run started when annual STT collections were lower than Rs 500 crore due to a weak market.

Despite the pandemic, the market has been attracting retail investors. Rising volumes and market turnover have aided the rise in STT collections.

Data from the depositories clearly shows the optimism surrounding the markets. The Central Depository Services Limited (CDSL) had 2 crore unique accounts in January 2020, which have doubled to 4 crore accounts in July 2021. In contrast, the doubling from 1 crore accounts to 2 crore accounts took almost five years from 2015 to 2020.

While one person can have multiple demat accounts, the acceleration in account additions does indicate investor enthusiasm.

Retail Investors Focus on Cash Segment

According to data provided by the National Stock Exchange’s Market Pulse, retail investors have been focusing more on the equity trading segment. The share of retail investors has jumped from 39 per cent in FY20 to 46 per cent in FY21.

“A sharp market crash in the March quarter, coupled with lockdown restrictions, lured retail investors into trading in equity markets, with a strong market rebound thereafter, further strengthening their sentiments. This is reflected in an increase in retail ownership in the NSE-listed universe in the first nine months of 2020. This increased buying is also reflected in a sharp rise in new investor accounts added in 2020 and increase in retail share in the cash market turnover,” said NSE in the report.

While the share of retail investors in the cash markets has grown suddenly, the share of derivative markets has remained flat at around 30 per cent.

The equity delivery (cash markets) have higher STT charges compared to equity derivatives. Therefore, retail investors are certainly aiding the growth in STT.

High Profile IPOs drive investor addition

Back in 2007, the stock markets saw new customer additions as investors wanted to buy into Reliance Power and other major IPOs.

Recently, Zomato was listed on the stock exchange and listed at a premium of 53 per cent. Several other IPOs have seen such strong listing gains and oversubscription from both institutional and retail investors.

Usually, institutional subscription is higher as they have easy access to leverage for IPOs, unlike retail investors. Retail investors also want to buy into internet start-ups like Paytm, PolicyBazaar, Nykaa and others, as shares of these internet start-ups have been relatively inaccessible except in the grey markets.

Divestment in Buoyant Markets

But the government’s gains aren’t limited to taxes. It has been using the opportunity to divest its stakes in several public sector enterprises (PSUs) to unlock its value.

It has been offloading its PSU stakes through the markets. The Central Public Sector Enterprises exchange-traded fund (CPSE ETF) had seven issues that generated good investor interest.

Nippon Life had been mandated to manage several of these ETFs. The Bharat 22 ETF was also used by the government to divest its stake in the PSUs.

Several PSUs like Indian Railway Finance Corporation (IRFC), Ircon International, Indian Railway Catering and Tourism Corporation (IRCTC) and Rail India Technical and Economic Service Limited (RITES) had their IPOs within the last few years.

The IRCTC IPO was oversubscribed by 111 times, led by institutions. In just two years, the stock has almost quadrupled, breaking the PSU stereotype, and the government has conducted another stake sale through an OFS.

The stock market boom has certainly aided the government in meeting a part of its fiscal targets.

If liquidity continues lifting the markets, the government can use this opportunity to divest its stake in several businesses.

So far, the divestment plans have been moving at a snail’s pace. While investors have been making high returns, they should also exercise caution as the markets are richly valued.