It is not the first time that the authorities have expressed concern over the apparently low levels of retail investment in the Indian capital market. For as long as one remembers, retail investors, loosely but not always correctly identified with small investors, have been encouraged to invest in stock market instruments.
Mobilising retail investment through the market will boost capital formation. Companies derive several advantages by floating their shares in the stock markets. Their dependence on the banking system can then be reduced.
A diversified list of shareholders comprising numerous investors is likely to check volatility in any company's stock. Such a company is, in a theoretical sense at least, better equipped to thwart a hostile takeover: the company mounting a takeover has to induce a large number of shareholders to accept its offer.
Despite the all round awareness of the benefits from wide retail investment in the capital market, policy initiatives taken so far in India have not been sufficient to attract small investors. That failure is obviously part of a larger problem — the relatively low share of household savings that have flowed into capital market instruments. Less than 3 per cent of household savings is invested in capital markets.
India has a long, well established stock market tradition. However, recent statistics continue to reveal a very low level of penetration of capital market instruments. Less than one per cent of the population — roughly less than 11 million — invest in equities. In developed countries the percentage of capital market investors to total population is higher. According to reliable estimates, it can vary between 50 and 55 per cent.
Moreover, the distribution of shareholders across the country is skewed. More shareholders reside in big towns and cities than in small towns and villages. Although the spread of technology has made it possible for people even in remote places to deal in stocks markets, more than 90 per cent of transactions through the stock exchanges is confined to just 10 cities and about 100 companies.
The skewed pattern of shareholder distribution is not new, however. A survey conducted by a leading bank in the 1970s showed that western India accounted for nearly 70 of the total equity investments in the country. Very likely, the pattern has not changed over the years despite the fact that investors from anywhere in the country now have access to the BSE and the NSE.
An issue of perception
Of the many causes for such low levels of stock market investment, especially by households, perhaps the most important has to do with perceptions rather than hard facts.
One perception arises out of the belief that despite the growing sophistication of regulation, stock markets remain susceptible to fraud. In other words, the integrity of the markets is called into question. The periodic occurrence of high profile scams and, more importantly, the failure to identify and punish the perpetrators are said to reinforce the feeling.
Also, more basically, stock investment in India is all about equities and it is not for nothing that equity capital is called risk capital. Small investors are not exposed to financial education, at least to the desired extent.
Probably the best advice given to smaller investors is to invest in the stock markets through mutual funds but even those who followed that advice have not benefited entirely. Many fund managers are still going through the learning curve.
A few who launched portfolio management schemes (PMS) in addition to their regular schemes have very little to show by way of professionalism.
Investing in the PMS of one leading mutual fund proved disastrous. Not only did the corpus shrink by two thirds, the fund was closed abruptly leaving its investors in the lurch.
There has been abject failure to develop other instruments that are based on debt or a combination of debt and equity. A case in point is the slow start to the corporate bond market. For very many reasons a well developed corporate bond market is essential for the proper intermediation of long term savings.
For many small investors a market debt instrument such as a corporate bond would be an attractive alternative to bank fixed deposits, now the most popular of all financial instruments.
Public policy, though ostensibly well meaning, has not really made a difference for small investors. Technology was supposed to make the process of investing in shares easier and more transparent. But along with new technology-based processes have come cumbersome rules and regulations.
The dematerialisation of shares has been an extremely important step in improving the quality of stock market investment. But opening a demat account has become a complex and time consuming procedure.
It is in the issue market (IPOs) that retail investors are particularly missed. Here again, policy initiatives meant to encourage them have been counterproductive to small investors.
