Who cares about the small investor? No one. Who claims to be concerned about this person? Everyone and his brother. The truth is that no one gives a damn.
Every now and then, at seminars and conferences, in discussions on television, radio and newspapers, politicians, bureaucrats, corporate captains and analysts pay lip service to the cause of the proverbial small investor. They wax eloquent about how the country's stock-markets would never become strong and about how sentiments would be driven by foreign institutional investors unless small investors entered the fray.
Recent developments have reinforced some of the worst apprehensions of ordinary investors about capital markets that are widely perceived as gambling casinos where greed and fear are the dominant motivating factors.
Place the situation in its proper perspective. Investments in equity shares and other financial instruments including mutual funds account for barely 8 per cent of the total household savings in the country. Statistics put out by the Reserve Bank of India indicate that this proportion has varied between 4 per cent and 8 per cent over the last few years. Various studies conducted to calculate the total number of investors in India show that this proportion has hovered around 4 per cent of the country's total population.
Why is there such a crisis of confidence? Why is it commonly believed that the stock-markets are manipulated by speculators? Four years ago, in February 2003, a study was conducted by Prime Database headed by Prithvi Haldea -- may he recover soon after his sudden ailment -- had pointed out that the small investor in India had been being grossly neglected, thanks largely to an unfriendly policy regime framed by apathetic officials.
The watchdog of the capital markets, 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. Haldea had argued that the limit should be specified in terms of a ceiling amount, say, Rs 25,000.
He pointed out that the minimum percentage of the capital issued that has to be offered to the public has been coming down steadily over the years, from 60 per cent to 40 per cent and 25 per cent. In certain cases, this level was reduced to only 10 per cent. According to Haldea, “the guidelines relating to book-building, reservations and allocations have increasingly favoured the large investor".
In the 10 per cent route specifically designed for big blue-chip companies, the allocation for small investors works out to a niggardly 2.5 per cent of the total issued capital. This is on account of the fact that of the company's total capital, 10 per cent is offered through the initial public offer (IPO), of which only 25 per cent is earmarked for small investors.
In the 1980s, it used to be said that the average taxi-driver or waitress in Singapore had parked a portion of his/her savings in the stock exchanges. In the 1990s, one would hear of paan-stall owners on Mumbai's Dalal Street playing the markets. Where is the small investor today?
Having burnt his/her fingers more than once, the individual investor belonging to the middle-class -he/she is not exactly poverty-stricken - is bound to become extremely cynical about parking his/her hard-earned savings in the stock-markets in general and equity issues in particular.
Take the case of the Reliance Power IPO. If the total offer amount is added up, the figure works out to more than one-sixth of India's gross domestic product (GDP). The issue was over-subscribed when markets were booming. By the time the shares were listed, markets had tanked. The 30-scrip sensitive index of the stock exchange at Mumbai had crashed 22 per cent between January 10 and February 11. Subscribers who had borrowed to invest in the IPO realized to their chagrin that far from doubling their money, they had ended up losers.
Thankfully, because the issue was heavily oversubscribed and each individual investor obtained only 15 shares, the losses on the first day were limited to Rs 700, Reliance Power officials have themselves acknowledged. But a few larger questions have been raised by the entire unseemly episode.
Promoters of companies are, at best, fair-weather friends. When the going is good, they will try and entice you with attractive claims. But when things go wrong, don't expect any sympathy, leave alone assistance. That the ordinary shareholder is seen as prey not as a partner does not augur well for the medium-term future of India's capital markets.
As for analysts, they are paid to be bullish. When did you last watch and hear a commentator on television saying bad times lie ahead? That question was rhetorical.
Paranjoy Guha Thakurta is Editor, Realpolitik, a teacher and a journalist with 30 years' experience in various media - print, radio, television, the internet and documentary film. This column appeared in the February 2008 Issue of Mutual Fund Insight.
This article was originally published on March 21, 2008.
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