Retail investors in the stock market, also loosely referred them as small investors, have been deserting the capital market for valid reasons. The booming Sensex and the Nifty seem to have little attraction for them. Anyway, few of them are participating in the rally.

Just as important, very few small investors are enabled to participate.

IPO market in doldrums

The IPO (initial public offering) market is in doldrums despite the phenomenal rise of the benchmark stock indices. In more normal times this would be seen as a major aberration. A buoyant secondary market should pull up the primary (new issues) market and, in the current context, entice many issuers of capital to raise resources through IPOs.

And the government, tempted by the high valuations, should have rushed through with its disinvestment programme, which should at least bridge the gap between the expected revenues and expenditure. But it shows no signs of reviving. The upshot of all these is that small investors have been shut out of the capital market. A revival in the IPO market and an acceleration in the divestment programme should theoretically benefit small investors by giving them more opportunities.

It is easy to see why a secondary market so comprehensively dominated by one class of investors — the foreign institutional investors (FIIs) — will hold very little attraction for practically every one of the other usual class of investors. The Sensex and the Nifty are skewed: very few shares within the indices have caught the fancy of the FIIs. Analysts discourage other investors, including institutions, from investing in such market conditions.

Erosion in mutual funds

Even mutual funds, the recommended investment avenue for small investors, have not lived up to their expectations. Many mutual funds are reporting erosion in the levels of funds under management.

Official policy towards small investors has varied. During the early years of the Securities and Exchange Board of India (SEBI) and even before, investor interests were sought to be ensured through reservations in the public issues. That was no big deal. The share market had very few attractions for the large body of investors. Besides, and this is often forgotten, policy was more concerned with the levels of promoters’ shareholding. Originally, no promoter could hold more than 40 per cent of the capital. The relative shares of promoters and the public varied with the times. Today, they can hold a commanding 75 per cent of the paid-up capital in a listed company.

The point is on almost all occasions, policymakers paid lip service to small investors even when tom-tomming seeminglyinvestment-friendly but patently dud schemes such as the Rajiv Gandhi Equity Savings Scheme (RGESS).

Officially launched in September, 2012, the RGESS scheme promised tax advantages for first time equity investors up to Rs.50,000, subject to certain conditions. More than a year later, there is hardly anything to justify the government’s initial enthusiasm. Collections have been meagre. It is seen to be too complicated.

Problems under safety net

Earlier, credit rating to guide equity investors in IPOs was introduced. This and the much touted scheme, calling upon promoters to provide a safety net to IPO investors, were again well meaning but impractical even to begin with. Risk capital, which is what equity investment is, is seldom rated. As for safety net — promoters undertake to buy back shares if their price falls below the issue price after a stipulated period — there have been many practical problems. Notably, a very significantly large number of IPOs have flopped, meaning that they sank below the issue price. A safety net under such conditions will be extremely costly for the promoters and often defeats the purpose of raising capital.

Two recent schemes to raise capital, the offer for sale through stock exchanges and the institutional placement programme were designed specifically to aid the government’s disinvestment programme. What is significant is that they have no pretension whatsoever of addressing the small investors’ concerns. It is in this context, the SEBI’s proposal to popularise convertible debentures along with equity shares in an IPO assumes significance.

Although much will depend on the details, it does appear to benefit small investors as they can choose the debt route initially before they develop confidence to invest in equity.

narasimhan.crl@thehindu.co.in

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