More 'Free-Float' stocks are needed to improve market depth as well as enhance liquidity in the Indian equity indices, opined a top official of the National Stock Exchange.
In market parlance, free-float stock levels indicate the overall public ownership of a listed company.
Historically, stock of a listed firm with large free-float size tends to be more stable, whereas, the ones with smaller public exposure have traditionally been volatile.
"An increase in free-float stock would go a long way in improving market depth and enhancing liquidity, resulting in better price discovery and lower volatility," said NSE's Chief Executive and MD Vikram Limaye.
"Lower free-float often results in higher volatility and distorted price discovery which does not bodes well for minority shareholders."
Lately, some stocks have suffered from panic selling due to social media rumours, thereby flaring volatility and eroding market value.
Industry data showed that key Indian equity markets have comparably lower levels of free-float stocks than their global counterparts.
Furthermore, Limaye elaborated that besides increasing market depth, free-float stocks can aid in attracting more foreign funds.
"The long-term positive implications of higher free-float in terms of wider ownership, greater market depth and better governance standards significantly outweigh the near-term headwinds," he said.
"This is an important aspect for developing Indian equity markets, which is crucial given the role markets play in providing the much-needed capital to fund growth and investments."
At present, Nifty 50 index represents about 66-67 percent of the free-float market capitalisation of the stocks listed on NSE.
On recent penalties imposed on listed companies by NSE, Limaye said the move is in line with regulator SEBI's directive on standard operating procedure to check non-compliance with provisions of 'Listing obligations Disclosure Requirement' regulations.
"It is key to develop an ecosystem where the investors feel safe," he said.
In terms of enhancing market access of Small and Medium Enterprises, Limaye pointed out that NSE has been able to build a "strong pipeline" of potential IPOs from SMEs including start-ups to meet their fundraising needs.
"SMEs are crucial not only for economic growth, but also for employment and inclusive growth. NSE works across SME clusters to spread awareness amongst entrepreneurs about the platform and helps them navigate the entire process by working with them at every step," he said.
"So far, with the help of 'NSE EMERGE' platform, 200 companies have listed and fuelled their growth plans and nearly 22 companies have migrated to the main board of NSE."
Additionally, he noted an increase in numbers of retail investors from tier-2 and tier-3 cities which reflected a rising interest trend amongst all socioeconomic strata in equities.
"During FY19, Mumbai, Delhi, Kolkata and Bengaluru were the main drivers of new registrations, with the financial capital accounting for the lion's share. However, the next 10 cities are not too far behind, with hitherto less involved Rajkot, Vadodara, Lucknow and Nagpur recording a high volume of new investor registrations," he said.
"Cities ranked beyond 10 accounted for around 68 percent of new investor registrations in FY19. Cities ranked beyond 100 accounted for about 43 percent of new investor registration in FY19."
Presently, NSE offers a number of services such as exchange listings, trading services, clearing and settlement, indices, market data feeds, technology solutions and financial education offerings.