Retail Investors: India Announces Game Changing Measures to Boost Capital Market Participation

Mumbai, Jan 10, 2013 (Washington Bangla Radio / PIB India) Global uncertainties in the financial markets continue to have an impact on our economy.  The recent spate of reforms and clarity emerging from government policies, larger FIIs inflows have boosted the Capital markets. However the depth and breadth of the market continues to be challenging, with retail investors still shying away despite a resurgent Sensex.

While financial sector has become very important in India, the participation in it still remains skewed. It is noticed that apart from banking to a large extent and insurance to some extent, no other financial service has penetrated deep and been accepted widely.

Saving and Investment in India

A survey conducted by the National Council of Applied Economic Research in 2011 indicated that among all the households in India, less than 11 percent are investment household and the rest are savers household which have nil exposure to equities, derivatives, mutual funds, debentures, government bonds and corporate bonds.

While developed countries like Australia and Malaysia have nearly 40 percent of the population participating in the capital markets, countries like Germany, United Kingdom and even Hungary run much ahead of India when it comes to retail participation.  China, has more than 10 percent of population investing in the capital markets. The corresponding figure for India is 1.3 per cent, which clearly shows that it has a lot to catch up on.

Savings and investment behaviour, to a large extent are guided by the attitude towards risk and Indians in general are risk averse when it comes to savings and investment of their savings. Most Indians in general are inclined to keep the principal safe and thus are willing to accept low returns or no returns resulting in a low participation in the products offering variable returns  like equity shares.

Those shying away from capital markets, have been investing their money in gold and real estate, which are considered as the natural hedgers of inflation. As a result, Indian companies are forced to primarily depend upon Foreign Institutional Investors for cash inflow. But this tendency can have a negative effect on wealth creation in the country.

This scenario can be changed with the help of increasing domestic retail investor participation in the equity and debt markets, which in turn will ensure continuous supply of funds to the industrial sector. While attitude towards risk cannot be changed over-night, what can be changed are the all other factors like spreading financial literacy among masses and improving systems and processes to instill confidence among the retail investors and so on.

Steps to Boost Retail Investors Participation

Strengthening Regulatory Mechanism

Investor protection tops the agenda of India’s capital market regulator – SEBI (Securities & Exchange Board of India). SEBI Chairman U K Sinha says greedy pricing of IPOs (Initial Public Offers) by promoters have pushed away small investors from markets. His views are backed by the fact that two-thirds of the public issues made during the last three years have been trading continuously below their issue price, even after adjusting for general decline in market. “There is a concern that Indian market is a casino and you can do anything and get away with it” said Mr. Sinha, while speaking at a National Conference on Capital Markets in Mumbai on January 9.

SEBI now plans to go ahead with a modified version of its safety net mechanism for IPO investors. The  proposed safety net mechanism would be triggered in case of those IPOs whose price falls below 20 per cent of the issue price.

The move to have a safety net, however, has drawn a strong response for and against. Economic puritans argue that since equity is a risk capital, which promises unlimited returns when going gets good, how can anybody be asked to give guarantee of return. They say, it is against the very fundamental principle of equity investment. The regulator, on the other hand says that public issue pricing is an issue in India, and the market needs to be purged of manipulations in IPO pricing by investment bankers.

SEBI has also set up a sophisticated surveillance system mechanism, which is now receiving more than 100 alerts a day, relating to investor grievances. SEBI has also introduced the Investor Helpline, which is presently available in 13 languages. Another initiative set up by SEBI for redressal of investor grievance is the SCORES – SEBI Complaints Redress System, where investors can lodge and follow-up their complaints online on the website.

No Frills Demat Accounts

To trade in the market, it is necessary to have a Demat account, where shares and other securities can be held in dematerialized or electronic format. To encourage more and more people to invest in capital markets, no-frills demat accounts have been introduced. Investors can hold securities worth up to Rs.2 lakh in such no-frills accounts.  If the value of holding in such accounts exceed Rs. 2 lakh limit, the applicable charges would apply.

Rajiv Gandhi Equity Saving Scheme

The government introduced the Rajiv Gandhi Equity Savings Scheme (RGESS), 2012, to encourage retail participation in the capital market. Under the scheme, new investors with annual income up to Rs.10 lakh can invest up to Rs.50,000 to be eligible for a tax break . SEBI has asked stock exchanges and assets management companies to list the eligible stocks, exchange-traded funds and schemes on their website.

Fixed Income Instruments

Putting all your money in an equity class can be highly vulnerable to risk. To offset this risk, diversification of portfolio is needed. Fixed Income securities cater this need effectively.  Presently, the Indian Debt market is dominated by Government securities, which are safe but offer poor returns. On the other hand the Indian Bond Market is still in a premature stage, when compared to other developed countries of the world. Experts at the Capital Market Symposium in Mumbai therefore highlighted the need for Government support for widening the bond market by incentivizing and offering tax concessions. Suggestions were also made for introduction of inflation indexed bonds, which can provide a good hedging options to investors.

Investor Education and Awareness

Educating investors about the risks associated with markets is never-ending. SEBI has been implementing financial literacy programmes through National Institute of Securities Market. It has also been making use of audio-visual and print media to spread investor awareness through radio spots, TV commercials, short documentaries and print advertisements. SEBI is also in talks with the Central Board of Secondary Education to include a course on financial literacy at school level. However, keeping in mind India’s large population and dense rural areas, investor education still has a long way to go.  Better collaboration between the regulators, educators, exchanges, and financial companies along with online connectivity will hold the key to success.

Financial Inclusion

The government has laid greater stress on financial inclusion, which, besides widening access to banking facilities, will in the long run create a platform for spreading financial literacy. Increased participation of retail investors can be reached only with the help of an efficient and wide reach of banking services in the country.

PIB Mumbai Feature based on proceedings of the National Symposium on ‘Capital Markets: Confidence building measures for retail investors’ organized by ASSOCHAM in Mumbai on      January 9, 2012.