As 2023 draws to a close, the Indian stock market has demonstrated remarkable resilience and growth, culminating in an impressive 8.8% increase in its benchmark index, the Nifty 50. This marks the ninth consecutive year of gains for the Indian markets, a feat that is particularly significant considering the volatility often experienced in global financial marketsWhen viewed through a broader lens since 2010, the Nifty 50's performance skyrockets to a staggering 355% increase, placing it at the forefront of major global stock indices.

But how exactly has the Indian stock market managed to sustain such a long bullish trajectory? A report from Guosen Securities analyst Wang Kai sheds light on the fundamental reasons behind this sustained growthCentral to India's long bull market is the robust structure and thoughtful regulation of its stock marketThis combination of a diverse and competitive market structure, simplified initial public offering (IPO) processes, strict delisting rules, flexible trading systems characterized by a T+1 settlement cycle, and a strong culture of buybacks and dividends have all contributed significantly to the phenomenon.

The Indian stock market operates under the auspices of the Securities and Exchange Board of India (SEBI) and is characterized by a competitive structure dominated by two main exchanges: the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). This ‘multiple governance’ model facilitates efficient policy enforcement, thus enhancing market efficacy

Within this framework, competitive yet hierarchical elements ensure operational efficiencyGuosen Securities highlights that the mutual competition between the NSE and BSE has fostered independent yet interconnected systemsFor instance, the NSE established its own clearing corporation and depository for its trades, while the BSE created similar entities, ensuring that while they operate independently, they stimulate competition, thereby improving the operational efficiency of the Indian securities market.

India boasts six stock exchanges, which comprise three major stock exchanges and three commodity exchangesTo prevent "common listing" that could trigger intraday arbitrage, the cash settlement system in India takes inter-exchange trading into accountWhile there may be price differences for the same stock listed on multiple exchanges, the varying timing for cash settlement minimizes the risk of arbitrage; for instance, shares purchased will settle in the buyer’s demat account the evening after the trade while those sold are redeemed in the morning of the next trading day.

The booming IPO market in 2024 promises to be vibrant, with the BSE IPO index showcasing a remarkable 34.83% uptick

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Notable is the surge of IPOs in the technology and consumer sectors, leading to an influx of new companies entering the marketThe Indian IPO framework plays a pivotal role in facilitating the entry of companies into the stock market, employing a simplified and stringent disclosure process that lowers market capitalization requirements, allowing companies to simultaneously list across different exchangesFor instance, the NSE mandates a minimum market capitalization of 250 million rupees (approximately USD 2.1 million), making it easier for smaller firms to access the public market.

Another noteworthy feature of the Indian stock market is its flexible trading system, which balances the vulnerabilities of a developing financial system with the vibrancy needed in a flourishing financial marketThe primary T+1 settlement cycle, augmented by experimental T+0 trading periods and simplified after-hours trading options, provides crucial liquidity while keeping margin requirements relatively low

Comprehensive evaluations by Guosen Securities reveal that this framework does not arbitrarily stray from standard developing nation practices—such as limited trading durations and T+1 settlements—but rather cleverly promotes liquidity with measures such as simple post-trade transactions and adaptable daily price limits.

On March 21, 2024, SEBI announced the introduction of a beta version for the T+0 settlement cycle, marking a substantial transition from T+5 to T+0 over 23 yearsThis allows investors to react swiftly to market information, facilitating capital turnover and thereby enhancing market liquidityFurthermore, low margin requirements—for instance, approximately 15% for low-risk weighted stocks—enable elevated leverage while also incorporating measures against market risks through differentiated and peak margin policies.

The oversight mechanism in India is characterized by a preemptive approach, with SEBI and exchanges engaging in regular monitoring and investigation into non-compliance among listed companies

Guosen Securities notes that during regulatory processes, SEBI and stock exchanges employ multi-tiered regulatory measures to flag errant companies and impose sanctions through constraints on daily price limits, mandatory auction-based trading, and T2T settlement protocolsMore critically, adherence to legal frameworks is deemed paramount for deterring malpractices in the stock marketActions such as financial fraud and public deception are penalized with imprisonment of up to ten years and fines that can reach 200 million rupees, ensuring investor protection through strict punitive measures.

Delisting from stock exchanges is regarded as a crucial final barrier within the securities marketAccording to Guosen Securities, the Indian delisting framework is notably clear and pragmatic, alleviating disruptions within capital markets during episodes of poor corporate performanceThe delisting system distinguishes between mandatory and voluntary withdrawal, with the former primarily targeting companies that violate listing rules or regulations and enforced by a specific committee, while the latter provides companies the flexibility to exit the market based on strategic needs, such as privatization or mergers

Mandatory delisted firms face prolonged reentry periods, frozen stocks, and stringent disclosures, acting as both a corrective and deterrent measure for listed companies.

The prevalence of a healthy buyback culture in India is marked by adherence to regulatory measures that stipulated against ‘fake buybacks.’ Though SEBI does not enforce dividend payouts, it mandates that the top 1,000 listed companies establish and follow dividend policiesData indicates that Indian firms have historically rebounded through buybacks and dividends, totaling over the initial capital raised in IPOs.

India's merger and acquisition strategies benefit immensely from reforms promoting a dematerialized securities framework, expedited approvals, and clear mechanisms for rumor clarificationsThis robust regulatory environment has emerged as a key avenue for attracting foreign investment and fostering enhancements in domestic productivity.

Not to be overlooked is the important role played by mutual funds within the Indian economic landscape

In a low-cost environment, the scale of mutual funds has rapidly expanded in recent years, becoming a pertinent driver of market performanceAs of September 30, 2023, equity mutual funds in India totaled approximately 67.09 trillion rupees, accounting for 14.12% of the total market capitalization, which surpasses even that of several developed nationsThis influx of continual capital into the stock markets contributes significantly to reducing volatility and bolstering stability, ultimately fostering conditions conducive to sustained growth in the Indian stock market.

SEBI has imposed various limits on mutual fund fee structures, with the overarching goal of regulating mutual fund behaviors effectivelyIn practical terms, SEBI caps overall fee rates for different categories of mutual funds, ensuring that equity funds typically command a higher ceiling compared to other typesFurthermore, it employs a tiered fee regulation model for open-ended funds, establishing distinct maximum fees for various asset ranges, thereby promoting the development of smaller mutual funds.

Lastly, the participation of strategic funds—or those finances managed by government-backed investment entities—has been cautious yet influential