Will retail investors return?

Unless greater efforts are made to increase financial literacy, raise the retail portion of IPOs and convince investors that stock markets are not scam-ridden, it is difficult to see this happening.

PRITHVI HALDEA
Chairman & Managing Director, Prime Database

The retail share of IPOs is small, PSU share-sale policies don’t help them, the procedures remain tedious — I don’t see small investors returning

Why was this question not raised when the Sensex was at the 8,000 level last year? Why does everyone, including the retail investor, ask this only when the market is in a bull, or a near-bull, phase? Is it possible that the big guys remember the small investors only at such times to create takers for their offloading or to sell new shares? It is a hard truth that most want to make money of the retail investor and not for him. It is, of course, little surprise that retail investors too catch the bait, and often miss the gains of a rising market.

Will retail investors come back in large numbers now to the equity market? My sense is otherwise.

The biggest issue continues to be lack of confidence. In the last two decades, too many scamsters, most of whom are yet to be prosecuted, have left the investor very nervous. In India, to unearth a fraud by itself is rare and tedious. To punish the scamsters, and punish them adequately and swiftly, is even rarer. But to the investor, what is even more important than the punishment is the compensation to him. The recent disgorgement of undue profits from the IPO scam, and compensation to the wronged investors, is a watershed event in the history of the Indian capital market. Only more and speedy indictments and several such disgorgement/compensation cases could see more confidence returning to the small investor.

The second constraint is with regard to the policies. Though most reforms are done in the name of the small investor, he has rarely been the true beneficiary. Many policies, in fact, have worked against him. As an example, the allocation to the retail in most IPOs has been reduced to only 3.5 per cent of the company’s capital. Or for that matter, while the government keeps harping on enlarging the investor base, its pricing of PSU offerings works totally against this objective.

The processes too are cumbersome and daunting. The number of documentation, and detailed ones at that, which an investor has to navigate through would put even the most savvy to discomfort. As an example, an investor has to sign around 80 times on a KYC form! Finally, lack of financial education has worked as the main reason why most citizens continue to be comfortable in parking their savings in low-earning fixed deposits than in the equity market.

Courtesy the above factors, the retail investing population in the country just refuses to grow and, in fact, their number has actually been falling. Less than 1 per cent of our population invests directly in the equity market. Worse, less than 3 per cent of the household savings gets invested in the capital market.

Though a series of laudable measures have emerged from the regulator in the recent past, including the revolutionary ASBA (application supported by blocked amount) process, a lot of ground still has to be covered. There is, for example, a need to re-look at the offer document which has become too voluminous and unreadable, and Sebi’s disclaimer “accuracy and adequacy of contents is not guaranteed by Sebi” does not help either. There is also a need to review some instruments like risk factors, IPO grading and independent directors which are only giving a false sense of security to the small investor.

If the bull run continues, it is likely that some retail investors would start committing more money to equities. Regrettably, most such investors typically, but unfortunately, chase price and not value, and hence get into penny stocks. “Value” of a stock is something even the most savvy of institutional investors are unable to accurately arrive at. For a man on the street without the skills, time and resources to do so is thus unimaginable. Hence, retail investors should be encouraged to invest through the mutual fund (MF) route. For this to happen, the MF industry itself needs to be regulated and incentivised to work for the retail investor.

Regrettably, one may also see more “gamblers”. Though equity is the best asset class over the long term, technology and market structure have reduced the horizon to days, and, in fact, to hours. Nearly 80 per cent of the turnover on the exchanges comes from day-trading, almost akin to gambling. If the stock market has indeed been reduced to a casino, retail should realise that the casino never loses. Nine out of 10 small investors that I have met in my lifetime, and I have met thousands of them, have lost money in the equity market.

The only ray of hope for the retail is if the government finally acts on its election promise: “Every household should own PSU shares.”

JOSEPH MASSEY
MD & CEO, MCX Stock Exchange

The onset of new- generation stock exchanges will expand the investor base to 100 million by 2015 — it is less than 15 million now

Retail investors should and will come back to the market only if we promote development of an investment cult which is beyond day-trading and delta- trading. A special focus on “financial literacy” will ensure development of a literate investor base for multiple asset classes beyond just equity. This vision of developing an investment cult and a focus on “financial literacy”, along with widening the distribution network through the involvement of other banks and financial institutions, will attract the retail investor to the capital market.

In the early 1990s, the government’s liberalisation policy and its move to “let the supplies be freed” in industries like telecom, banking and aviation proved to be a magic mantra for these industries. The heightened competition not only augured well for corporate houses by expanding their consumer base, but the customers, in turn, also benefited by getting better and customised services at optimal costs.

The policy thrust of these reforms was primarily focussed on increasing the choices for customers. The end of monopoly in insurance and the dilution of equity in public sector banks along with new private sector banks led to delivery of better consumer service and cost optimisation. As a result, we have over 100 banks, 22 insurance firms and 14 telecom companies servicing a whopping 500 million customers.

Thanks to the vision of regulators and policy-makers, Indian financial markets are now set to witness a growth phase similar to what was seen during the IT boom from 1990 to 2000 and in the telecom industry during 2000 to 2010.

The period between 2010 and 2015 will be an era of Indian financial markets with retail investors actually taking part in India’s long-term growth story.

The nature of Indian markets currently is unique with a large retail investor population that saves money worth over $300 billion but allocates less than 5 per cent to financial market instruments other than bank deposits. In spite of a long history and maturity of Indian stock markets, the penetration level remains abysmally low. More than 90 per cent of exchange trade is largely confined to 10 cities and 100 companies, over 70 per cent of volumes is in equities and F&O and 25 brokers do 45 per cent of total volumes.

Internationally, stock markets have been a popular source of capital-raising and investment, and 50-60 per cent of the populace of a developed country participates in capital markets. In India, less than 15 million people invest in equity markets, which is less than 1 per cent of our population.

Therefore, for true financial inclusion, it is essential to make available investment products across multi-asset classes, which will lead to an increase in penetration of the capital market from a mere 1,500 cities and towns at the moment to at least 5,000 destinations.

The renewed vigour on the part of regulators and policy-makers to drive equitable growth in India’s financial markets is a move in the right direction. The onset of new-generation stock exchanges will not only drive India’s next generation of growth but also lead to an expansion of its investor base to 100 million by 2015.

The extensive efforts on the part of these exchanges on investor education, product innovation and use of technology to bridge the urban-rural divide will drive inclusive growth. The thrust on “financial literacy” will widen and deepen the investment cult and create a literate investor base that is willing to invest beyond just equity as an asset class, and has the prowess to decipher the fineprint of a risk-reward ratio.

Product innovation in multiple asset classes such as bonds, interest rate futures, equity and SME will truly bring about the much-needed multifold capital formation and huge employment generation in India. It will also lead to uniform wealth distribution as there would be a huge repository of capital to provide cost-effective credit and proffer the best and the safest investment opportunity to the investor.

A larger participation in the exchange sector will benefit the economy by bringing in vast savings and resources from all over India, including small towns, to fuel the growth of Indian industry. After all, there are over 13 million SMEs that need more risk capital and not merely debt, and these companies need visibility in the market to tap risk capital.