The Indian economy has been gradually upping the rate at which it is putting money into the pockets of its citizens. The flow has been especially strong since the reforms were instituted in the early nineties.
Invariably this has tended to drive household savings to new highs. However, this money is yet to enter the capital markets in India in any significant amounts. Less than 5 per cent of these are invested in the capital market, with just 2 crore direct/indirect equity investors opting for this option in a country of over 115 crore in population.
With high economic growth becoming an imperative in this ever-competitive world, this nation of savers has to be converted into a nation of investors. While the mind-set of the people of India is gradually turning to accept the change, yet what is required even more at this stage, to bring about a transformation, are fiscal and policy solutions. And the opportunity has presented itself in the form of the Budget “Collectively, these can bring about a paradigm change”, says Prithvi Haldea, Chairman Prime Database.
For an increasing number of Indian people to be converted into capital market adherents, the equity market needs to be brought back to its rightful role, especially as day traders have converted equity markets into a gambling den where day trading ensures 75 per cent of the trades get squared off at the end of the day. To stop this situation, day trading needs to be disincentivized and thus provide stability to the market.
Among the solutions, according to Haldea is that, “As a contrarian, I would like to recommend that Securities Transaction Tax (STT) should be levied only on 'sell' transactions and it should be at a very low rate for delivery-based transactions and at much higher rate for day trades. There is also a case for increasing short-term capital gains tax.”
The benefit to be derived from an increasing number of Indians joining the capital markets would include less dependency on foreign institutional investors (FIIs). It would also leave us less vulnerable to emergency FIIs redemptions as had happened in 2008 when they drove the Sensex down to almost half of what it was in January 2008. Domestic investors, on the other hand, take a long-term point of view and are in no hurry to book short-term profits.Yet another instance where the retail investor comes up second-best is against Participatory Notes. While investors in general in India have to go through the KYC norms, ensuring transparency of transactions, PNs, which is foreign money entering India without divulging its nature and whereabouts, don’t have to follow any rules at all.
Mutual funds are an investment option that are designed to fulfill the needs of retail investors the most, but that too has been hijacked by big business. While the primary purpose of MFs is to channelise household savings into the capital markets, yet over the years, this industry has lost its very purpose and has become over-dependent on corporate money. Worldwide, MFs are defined as a security that gives small investors an access to a well-diversified portfolio of capital market instruments, managed by professionals, protecting them from the hazards of direct uninformed investing.
The domination can be gauged from the fact that only 21 per cent of total AUM is retail money and only about 25 per cent is in equity. MFs, which are obsessed with assets under management (AUMs) for ranking purposes, expend disproportionately large energies on corporates, and that is to the detriment of small investors, who bear the brunt of expenses.
The solution may lie in creating tax disincentives to prevent corporate money from being invested in MFs, while at the same time incentives must be created for retail investors to use MFs.
A most handy tool to invite investors to capital markets is through the government’s disinvestment programme. The government should not only take to disinvestment in a big way, it should divest only to the retail investors, thereby pulling in millions of investors at one go into the markets. Also a wide investor base reduces post-listing selling pressure.
Another area to be harnessed to the retail investors’ bandwagon would be IPOs. These should be made at reasonable prices while FPOs should be offered at a discount to the market price. True price discovery post-listing would get government much larger gains than the small loss it may incur in pricing the IPOs low. This would also ensure that there are no post-listing embarrassments.
There is also a need to increase minimum public offers in IPOs. Would anyone believe that in the past 9 years, a meagre 3.5 per cent of the total capital was offered to the small investors in IPOs? This is because most companies are now allowed to offer only 10 per cent of their capital through an IPO and only 35 per cent of that is earmarked for the retail investors.
The final item on this agenda wants the government to launch a National Financial Literacy Mission, where a nationwide effort must be made to take financial literacy to the masses to make sure that individuals, who do not invest, learn the benefits to be derived from capital markets and those who invest incorrectly, can learn how not to go wrong.