The lack of confidence among small investors stems from the fact that the systems that are in place in the country are heavily loaded in favor of FIIs and other large investors
India’s stock-markets have been rather volatile of late. While this volatility is to a great extent a consequence of developments that have taken place outside the country, notably the rise in international prices of crude oil and the slowdown in the US economy, the section of people that has suffered the most is small investors.
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| Paranjoy Guha Thakurta |
A typical small investor, also known as a retail investor, belongs to the middle class. She or he is not a ‘day trader’ who speculates on sudden movements in share prices in the hope of earning easy and quick profits. A person who chooses to sell shares when stock prices are expected to fall or who buys shares when prices are likely to rise, is not a speculator. Such an investor is a rational human being doing what is normally expected. A speculator, on the other hand, is someone with, say, Rs 100, but strikes a deal to buy shares worth Rs 1,000.
In many countries, it is common to find all people, and not just those belonging to the middle class, investing a part of their savings in equity shares, debentures and other financial instruments. In the 1980s, it was observed in Singapore that even a typical cab-driver or a waitress in a restaurant had parked a portion of his/her savings in the stock market.
In India, the so-called equity cult started during the 1990s. Reliance Industries Limited, in particular, actively wooed the middle-class – salaried professionals, small businesspersons and traders, and well-off farmers – to subscribe to the company’s shares issue. Many did and were handsomely rewarded. One heard stories of paan-stall owners on Mumbai’s Dalal Street playing the markets.
But where is the small investor today? This person has burnt his/her fingers more than once. The first occasion was during the Harshad Mehta scam that was unearthed in 1992. Nine years later, the story was repeated; this time round, the kingpin was Ketan Parekh. Then, there were sundry scandals such as the one involving the ‘disappearance’ of dozens of companies that had floated shares.
The short point is that the retail investor has become extremely wary and cynical about entering the stock-market, where greed and fear seem to be the dominant emotions. Unfortunately, many small investors with hard-earned savings have shunned mutual funds, which are universally believed to be the preferred investment route for individuals as risks are spread and investors do not need to understand specialized financial information.
One development that reinforced some of the worst apprehensions of ordinary investors about capital markets was the fate of the Reliance Power initial public offer. If the total offer amount in the IPO is totted up, it adds up to an incredible one-sixth of India’s gross domestic product (GDP). The issue opened when share prices were going through the roof. By the time the shares were listed, the markets had collapsed. The 30-scrip sensitive index of the stock exchange at Mumbai crashed 22 per cent between January 10 and February 11. Subscribers who had borrowed to invest in the IPO were shocked to learn that instead of doubling the value of their investments, they had ended up with losses.
Because the issue was heavily oversubscribed and each individual investor obtained only 15 shares, the losses incurred on the first day were limited to Rs 700. Thereafter, the company offered sops in the form of bonus shares and called for an investigation into the actions of a clutch of Mauritius-based foreign institutional investors (FIIs), who had allegedly hammered the stock. But the damage had been done.
The absence of confidence among small investors essentially stems from the fact that the systems that are in place in the country at present are heavily loaded in favor of FIIs and other large investors. The Securities and Exchange Board of India (SEBI) defines a small investor as an individual who applies for up to 1,000 equity shares in a public issue without specifying the face value of the share. The minimum percentage of the capital issued that has to be offered to the public has come down steadily over the years, from 60 per cent to 40 per cent, further down to 25 per cent and even 10 per cent in certain cases. Prithvi Haldea of Prime Database believes that SEBI’s “guidelines relating to book-building, reservations and allocations have increasingly favored the large investor”.
It is not surprising then that stock-market investments, including investments in mutual funds, account for barely 8 per cent of the total household savings in the country. Moreover, studies on the total number of investors in India show that this proportion has hovered at around only 4 per cent of the country’s total population. Yet the media gives disproportionately high coverage to what is happening in the capital markets.
The author is an educator, an economic analyst and a journalist with over 30 years of experience in various media—print, radio, television, Internet and documentary cinema.
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written by Rumana Akter, August 12, 2010
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