Boost capital formation by digitising new asset classes! 🚀😎

Crypto Reader’s Guide to Capital Formation in the Next Decade

At a recent seminar organized by SEBI and NISM, regulators took the lead by asking panelists about out-of-the-box ideas for capital formation over the next 5 to 10 years. This forward-thinking approach is heartening to see, as it indicates that regulators are considering long-term strategies for capital formation. One important aspect of capital formation is increasing the supply of diverse assets in the capital markets. To achieve this, there are three key elements to focus on: digitization, corporatization, and rationalization.

The Role of Digitization in Capital Formation

Digitization plays a pivotal role in capital formation, as we have already witnessed its impact in our capital markets. In the early 1990s, the average daily trading volume on the Indian Stock Exchange was just 10,000 trades. Today, that number has grown to more than 25 crore trades per day. This exponential growth has been made possible by digitizing trading, delivery, and payment processes.

SEBI also paved the way for digital monetization of real estate through REITs (Real Estate Investment Trusts) in 2014. The market cap of digitized real estate in the form of REITs now exceeds Rs. 1 lakh crore. This significant capital formation in a sector previously reliant on unsecured private financing demonstrates how digitization can unlock underlying value and increase participation and investment churn.

Digitizing other locked-up and unproductive assets, such as gold, can create new asset classes and generate more value. Studies suggest that around US$1.4 trillion worth of gold (approximately 25,000 MT) is lying unproductive in storage. Digitalizing this gold could create a larger market and contribute to further capital formation. The growing number of gold ETF folios, which have increased from 3.1 lakhs to 46.7 lakhs between September 2018 and November 2022, reflects investor interest in this asset class.

In addition to gold, other asset classes like agricultural products, corporate bonds, and municipal bonds could also be considered for digitization. By converting existing assets into digital form, we can create enough capital through the multiplier effect of increased participation without relying on artificial assets like cryptocurrencies.

The Significance of Corporatization in Capital Formation

Corporatization is another crucial initiative for raising capital and encouraging larger participation in businesses. The listings of Coal India and LIC (Life Insurance Corporation) serve as examples of how corporatization can drive capital formation. By corporatizing enterprises such as railways, postal services, local corporations, and utilities, we can potentially witness significant capital appreciation.

Singapore provides a prime example of successful corporatization. The country created two major holding companies—Temasek with an AUM (Assets Under Management) exceeding US$300 billion and GIC with an AUM of approximately US$370 billion—to professionally manage state corporations. Saudi Arabia also recently corporatized and listed Saudi Aramco, which became the fourth-largest company by market cap worldwide, reaching US$2.1 trillion.

Corporatization not only attracts more capital participation but also enhances governance, transparency, and wealth distribution. Startups funded by venture capital have demonstrated the positive impact of better corporate structures on capital formation. Similarly, private equity and buyout funds have established professionally managed companies that contribute significantly to capital formation.

Rationalizing the Regulatory Structure for Enhanced Capital Formation

Rationalizing the regulatory structure is another strategy that can facilitate capital formation. Adopting a framework with specialized regulators for specific sectors can streamline processes and save time, ultimately adding value. Currently, there are several regulators for financial services alone, including the central bank, SEBI, IRDA, PFRDA, Competition Commission, and NCLT in some cases. Consolidating these regulators would expedite approvals and reduce the time spent on multiple compliances.

Another suggestion is to create an economic green corridor similar to income tax or customs procedures. This approach would involve pre-approving transactions and conducting subsequent sample scrutiny to maintain a balance between efficiency and regulatory compliance. Deviations from the approved transactions could be addressed through strict regulatory actions. This self-regulation-based approach would accelerate transaction execution and foster greater responsibility among market participants.

In conclusion, to drive capital formation in the next decade, it is essential to focus on digitizing new asset classes, corporatizing enterprises, and enhancing the efficiency of the regulatory framework. These strategies will contribute to the growth of capital markets and enable investors like you to explore diverse investment opportunities.

🔥 Hot Take: Unlocking Capital Formation Potential 🔥

As a crypto reader interested in capital formation, it’s crucial to recognize the potential of digitization, corporatization, and rationalization in driving capital growth over the next decade. By embracing these strategies:

Digitization

You can participate in the digitization of various asset classes, including gold, agricultural products, corporate bonds, and municipal bonds.
This digitization will unlock underlying value and create new investment opportunities.
It eliminates the need for artificial assets like cryptocurrencies by leveraging existing assets.

Corporatization

You can benefit from larger capital participation and enhanced governance by investing in corporatized enterprises.
Corporatization of sectors like railways, postal services, local corporations, and utilities can lead to significant capital appreciation.
Professionally managed companies funded by venture capital or private equity have proven to be successful drivers of capital formation.

Rationalization of Regulatory Structure

You can enjoy a more efficient and streamlined investment process through rationalization of the regulatory structure.
Specialized regulators for specific sectors would expedite approvals and reduce compliance burdens.
The creation of an economic green corridor would accelerate transaction execution and promote market responsibility.

By understanding and leveraging these strategies, you can actively participate in capital formation and unlock the full potential of the evolving financial landscape. So, get ready to seize the opportunities that lie ahead!