India's Markets Will Be Among the First to Recover, Bhave Says

By Pratik Parija and Pooja Thakur

Nov. 22 (Bloomberg) -- India's markets will be among the first to recover from the stock rout caused by the financial crisis roiling the world's bourses, said C.B. Bhave, head of the nation's capital market regulator.

``This country will be among the first few that recover,'' said Bhave, chairman of the Securities & Exchange Board of India, at the Hindustan Times Leadership Summit in New Delhi today. ``When we do, our weight in the world will be more than what it was,'' putting more responsibility on India.

The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, has dropped 56 percent this year as global financial companies' losses and writedowns from the collapse of the U.S. subprime-mortgage market neared $1 trillion, eventually toppling Lehman Brothers Holdings Inc.

Overseas funds have sold a record $13.3 billion in Indian equities this year as of Nov. 20, the regulator said, compared with a record purchase of $17.2 billion of equities in 2007.

The overseas investors exiting the market are those that are ``over-leveraged,'' Bhave said. Longer-term overseas investors are entering the Indian market, he said.

The regulator said there was no evidence so far of market- wide wrongdoing surrounding the decline in stocks.

India was caught by surprise when the global credit crisis led to a liquidity freeze in the country in September, Bhave said. It took 15 to 20 days for India to realize how closely it was connected to the credit markets.

Surprised by Linkage

``We didn't know how closely linked we were until the Lehman'' collapse, Bhave said. The shocks were felt in the credit markets rather than the stock markets.

``The reason something similar didn't happen in the Indian equity markets was because they are organized much better,'' with the well-capitalized clearing entities taking on the counterparty risks on stock-market trades, Bhave said.

India has built a stock-clearing infrastructure in the last 10 years with big enough settlement guarantee funds, creating ``a system that hasn't failed despite the market having dropped by more than 50 percent,'' Bhave said.

The crisis is an opportunity to learn and review whether India has the institutional capacity to withstand the kind of financial crisis that has hit the U.S. and other developed countries, Bhave said.

The regulator said exchange-based trades provide the transparency that allows investors to know the value of assets versus the opaque nature of over-the-counter trades.

Financial Products

He called for bringing as many financial products as possible onto exchange-based trading platforms and that a small beginning had been made with currency futures.

Bhave called on institutions to keep a check on credit and for regulators to watch levels of leverage. Institutions that are critical to the functioning of the system, those that can't be allowed to fail, should not be allowed to take on too much leverage and should be warned when they do so, Bhave said.

``Every crisis is an opportunity,'' Bhave said. ``We have learnt a lot in October -- when the chips are down, we must build for the future.''

The regulator announced an easing of rules on stock lending and borrowing to facilitate short sales last month, extending the tenure to 30 days from seven.

To contact the reporters on this story: Pratik Parija in New Delhi at pparija@bloomberg.net; Pooja Thakur in Mumbai at pthakur@bloomberg.net.