Spotlight on India: Factors driving the markets

India’s recognition as the world’s fastest-growing major economy is being strengthened by optimism that expanding access and improving corporate governance will attract more investors and companies to its capital markets.

Digital technology is, on one hand, enabling millions of new investors to trade shares for the first time on their mobile phones, and allowing them to receive cash for the stock they sold as early as the same day. At the same time, a push to protect investors by ensuring companies play by the rules is creating an environment of trust.

These were some of the key takeaways from a panel discussion at the HSBC Global Investment Summit on the factors driving India’s growth story, with special attention paid to the potential of the Gift City special economic zone.

India’s stock markets boast infrastructure that allows them to process enormous amounts of orders, which can number in the billions in a single trading session. On some days, the NSE’s orders account for half of the trading in all stock exchanges around the world, said Ashish Chauhan, CEO of National Stock Exchange of India (NSE). Some of those trades are as small as 1,000 rupees (around US$12) and made by low-income workers keen to participate in companies’ growth.

Indian stock markets are currently also ahead of most competitors elsewhere in terms of time taken to settle trades. Last year, the NSE and Bombay Stock Exchange (BSE) adopted the so-called T+1 settlement system, allowing investors to receive the stocks they purchased, or payment for shares they sold, the next day.

They went a step further in March 2024 by ushering in T+0 settlement, where transactions are settled the same day, for a select number of stocks. T+0 will be widened to cover the rest of the market over the next few months.

Despite the technological progress of the NSE, which was established in 1994 as the world’s first stock exchange with a fully automated order-matching system, credit for the achievement must also be shared with the wider society, said Mr. Chauhan. That includes India’s 90 million unique investors¹, their brokers, bank networks, and other service providers.

“What we have done as a country is to create that trust,” he said.

The panel also discussed how the special economic zone, GIFT City – short for Gujarat International Financial Tec-City – is enabling capital flows between India and the rest of the world.

Located in Gandhinagar, GIFT City has been growing since it first commenced business in 2015. It now offers some tax exemptions to businesses operating from the enclave, and allows unrestricted two-way fund flows, including in US dollars and euros. HSBC is one of the foreign banks registered there.

GIFT City aims to provide a landing pad for businesses that may not otherwise locate to India, said K. Rajaraman, Chairperson of International Financial Services Centres Authority (IFSCA).

The IFSCA has been established as a unified regulator with the power to act in favour of promoting businesses in international financial services centres, such as GIFT City.

GIFT City expects to play a very important role in the Indian government’s plans to become a developed country by 2047. “It is going to be challenging – daunting, but definitely doable,” said Mr. Rajaraman.

He highlighted some of the items that are on GIFT City’s agenda. It will facilitate direct listing by startups and other unlisted companies that want to raise foreign capital at the international stock exchange in GIFT City. It will also allow companies to raise debt and list their bonds. US$54 billion of bonds have been listed so far in GIFT City; this includes US$14 billion of green, sustainable, or sustainable-linked bonds, which shows how the zone is helping India reach its green finance goals.

More broadly, GIFT City will serve the large Indian diaspora around the world to invest, get insurance, and receive pensions in US dollars or Euros.

The growth in India’s market access and trading activity has come alongside gradual and concurrent improvements in corporate governance.

Amit Tandon, Founder, Institutional Investor Advisory Services India Limited, highlighted limits on the tenure of independent directors and auditors, and the push for gender diversity on company boards, among examples.

The term limits are intended to avoid a risk that independent directors and auditors do not become too close to the management, and remain loyal to the interests of shareholders.

“I am not saying that it is all perfect. All I am saying is that it actually comes back to the difference that [improving governance] is a journey, not a destination,” he said.

While a majority of listed Indian companies continue to be owned and run by the founders’ families, an increasing number are becoming professionally managed and institutionally owned, Mr. Tandon said.

“There are a lot of things in which the regulators themselves have pushed, and we are kind of seeing that play out in what the companies are doing, or in terms of what the governance parameters are,” he said. “And eventually, some of it is translating into better-run businesses.”