Manifesto for retail investors and senior citizens
March 17, 2011
Policymakers are missing key issues that affect two sections of the society—retail investors and senior citizens. The retail investor population is dwindling. Senior citizens are living longer, but are getting a raw deal even when they have money to spare. What needs to be done? Pathbreaking research, surveys and analysis by Sucheta Dalal, Nita Mukherjee, Shukti Sarma, Sanket Dhanorkar and Moneylife Foundation team show the way forward.
Moneylife Digital Team
In mid-August last year, Union minister of state for finance, Namo Narain Meena, made a startling revelation in Parliament that exposed the reality of the Indian ‘equity cult’. The data on trading activity on the National Stock Exchange (NSE), considered the pillar of the Indian stock market, revealed how narrow, shallow and illiquid the Indian equity market is and how concentrated it is in the hands of a few individuals in a few centres. Sample this: 50% of the cash market transactions on the NSE (during April-June 2010) came from a shockingly low 451 investors, of whom 156 were proprietary traders while 50% of the trading in NSE’s derivatives segment came from just 106 investors of whom 58 were proprietary traders.
Only 6% of client accounts contributed to 90% of trading in the cash segment. The participation in the derivatives segment is even more skewed—only 3% of clients accounted for 90% of the trading!
There is clearly a party going on, but only a select few seem to be having fun. India has emerged as one of the favoured investment destinations for foreign investors. The domestic equity markets, as a result, are abuzz with activity—and yet, small domestic investors are an insignificant part of this story.
In India, retail participation as a percentage of population is just 1.3%, whereas in the US, China and Australia, it is 27.7%, 10.5% and 41%, respectively. Retail investors here continue to shun the equity markets and, in doing so, they risk losing out on the opportunity to build substantial wealth for the future.
However, various issues are plaguing small investors—these need to be addressed quickly. Moneylife Foundation decided to dig deep and find out what is ailing the system and why retail investors are opting out of a sound investment opportunity. We commissioned a comprehensive survey (through Synovate India) that provides an insight into the concerns, problems and needs of investors as well as non-investors. The findings of the survey were surprising and clearly outline the need to address key concerns of retail individual investors.
Moneylife Foundation also worked closely with leading experts from the financial services industry to identify problems and find solutions to various issues that burden the investor today. The outcome was a “Position Paper on Issues faced by Retail Investors” which has been presented to the government for consideration. Here are some issues that we have highlighted in the Paper:
Primary market Entrepreneurial success, so vital for a growing economy, requires a vibrant and active primary market that allows investors to share the fruits of the risk borne by the entrepreneur. The Indian primary market has come a long way over the years; yet, it is far from being a well-oiled machine—a characteristic feature of markets in most developed economies. What is troubling our primary market?
IPO quality, pricing and grading: Remember the Reliance Power IPO (initial public offering) debacle in 2008? The stock opened at a 22% premium over its issue price on listing day but is now trading down 56%. Despite zero visibility on earnings for the foreseeable future, the issue was assigned a grade of ‘4/5’ and the issue price was jacked up unreasonably. Yet, this was a high-profile public issue which generated a lot of interest. But, even today, we can find countless instances of shoddy IPOs of companies flooding the market and demanding ridiculous valuations from investors. Naturally, small investors are not biting.
Overpricing of IPOs appears to be the single biggest factor causing investor apathy towards the primary market. In Moneylife Foundation’s survey, a whopping 88% of respondents said that pricing of IPOs is unfair. Investors also have little confidence about the performance of the issue, post-listing. A total 61% of respondents admitted that they invest in IPOs purely to sell, once the shares are listed—to take advantage of the price pop on listing. The IPO grading system introduced by the Securities and Exchange Board of India (SEBI) has become quite popular among investors. As many as 66% of our respondents admitted to referring to the grade assigned to the company while considering the offer. And yet, SEBI is considering withdrawal of IPO grading. Some believe that the grading system does not serve much purpose. Clearly, this is not the case.
ASBA Are you among the ones using the Application Supported by Blocked Amount (ASBA) mechanism while applying to IPOs? If yes, you are part of a small but growing lot of investors. This route has not yet become popular among retail investors—institutional investors are more active in this space; more than 80% of their IPO applications come through this route. The figure for retail investors is lower, between 25% and 35%. In the case of the high-profile Coal India IPO, for instance, only 28% of retail investors took the ASBA route. Of the respondents surveyed by Moneylife Foundation, 48% said that they do not take the ASBA route while investing in IPOs. The problem is that not every bank is enlisted as a Self Certified Syndicate Bank (SCSB) today. But in order to make use of this offer, an investor should have an account with an SCSB. Also, even if a bank is listed as an SCSB, only a few of its branches may have the ability to process IPO applications with the ASBA payment option. The low reach of SCSBs that are allowed to offer ASBA services has also restrained the spread of ASBA in tier-II and tier-III cities. Many investors are shy of investing through this route as they are not clear about who has to be approached if there are mistakes in allotment. There also seems to be a lack of awareness among investors as this facility has not received wide publicity in smaller cities and towns.
Secondary market Small investors continue to grapple with various issues that act as a deterrent in their participation in the secondary market. Despite substantial improvements in the structure and functioning of secondary markets in this country, there remains a huge scope for improvement if individual investors have to be attracted to the market.
Demat issues, KYC and costs: A Moneylife reader wrote to us, “When I opened an account with a broker, I submitted all the details as required under KYC (know your customer) norms. So, when you are again asked to submit the same set of documents, it will annoy you. When investors have opened trading accounts after satisfying all KYC conditions, they should not be made to go through this procedure again.” Many would identify with this person’s agony. Issues like these continue to rattle investors even before they begin transacting in the market. Apart from cumbersome KYC procedures, retail investors encounter several problems with the demat system. India’s demat system is a mandatory business service which is priced unreasonably for retail investors. Investors have to shell out all kinds of charges—account opening, account maintenance, demat charges—which, when added up, cost anywhere between Rs550-Rs3,500 just for opening and setting up an account with a broker.
Under the current system of fixed pricing for demat services, those with small investments find a demat account expensive to maintain. Apart from this, shares of some companies are yet to be converted into demat form, which greatly inconveniences shareholders. There are some, like Minda Industries and Shakti Pumps, who send dividend warrants to shareholders, instead of crediting the dividend proceeds directly to the bank account, even when the shares have been converted to demat form.
Market manipulation: Emami Infrastructure created quite a stir on the day of its listing in July last year. Its shares opened as high as Rs598.80 on the NSE, only to come crashing down to Rs86, translating into an astounding drop of 86%! How can a scrip witness such high volatility in one day? How is it that the shares of a well-known firm like Shree Ashtavinayak Cine Vision stay locked in the lower circuit day after day, and then suddenly reverse course and stay locked in the upper circuit for days together? These are but a few instances of suspicious activity in stock trading. According to regular reports by the Intelligence Bureau (IB), which has been keeping tabs on the market activity of several entities, price rigging and manipulation runs rampant in the markets. There is a clear promoter-broker nexus that is working overtime at the expense of minority shareholders. The fact is that the regulator has been unable to contain widespread manipulation, despite introduction of newer technologies like Integrated Market Surveillance System (IMSS). In such circumstances, small investors would obviously develop an aversion to the stock markets. As readers of Moneylife know, we have been constantly highlighting cases of insider trading and price manipulation for over two years now in our ‘Unquoted’ section.
Consent orders: It is crucial that individuals and entities that engage in unfair trade practices and illegal conduct be held accountable and punished. Unfortunately, under the current system, even repeated offenders escape fitting punishment with a mere fine under SEBI’s consent order mechanism. Take, for instance, Top Media Entertainment, accused of manipulating its own stock, went scot-free after voluntarily promising to stay away from the market. Mangal Keshav Securities, a front entity of barred manipulator Ketan Parekh, was allowed to escape with mere fines, through consent applications, for circular trading and price rigging in a host of scrips. The philosophy behind consent orders is that the regulator avoids long drawn out litigation and permits the wrongdoer not to admit guilt, on the condition that the consent order will put out details of the charges against the entity in the public domain. The financial cost is supposed to be high enough to act as a deterrent.
Instead, SEBI’s consent orders are seen as a quick escape mechanism for anyone who is caught violating market regulations—the amount paid would depend on the skills of the lawyer who negotiates the settlement. A total of Rs150 crore has been collected during CB Bhave’s tenure. Almost the entire IPO process has been stymied through these consent proceedings. Even the largest filing by Anil Ambani’s group company has only raised questions about the quality of accounts, the role of auditors and whether all of this was buried by SEBI’s consent order. Power of attorney: In August 2009, an official of brokerage firm India Infoline was arrested for carrying out unauthorised trades on an investor’s account and causing losses to the tune of Rs13 lakh to her. Similar complaints of unauthorised trading were levelled against almost every leading broker for misusing powers given by the client in the Power of Attorney (PoA) agreement. Though SEBI has finally woken up to this misuse and has brought in several restrictions on PoA agreements, brokers continue to flout these rules and cock a snook at regulatory norms.
Almost every broker insists that an investor should open a demat account with a depository that the broker is comfortable with. This forces investors to bear the cost and effort of opening unnecessary demat accounts. Similarly, brokerage firms set up by banks insist on opening designated bank accounts with the same bank and also maintain a deposit with it. These factors are driving investors away from the capital market.
Tax clarity: Mismatch in tax deducted at source (TDS) data proves to be a problem for many individuals. Around 50% of the claims filed for tax refunds are pending due to a mismatch in the details mentioned in the TDS form. In most cases, an assessee is unable to claim a refund. The only solution for this is that the individual has to write a letter to the concerned deductor to revise or rectify the TDS return. At times, even the deductor is unaware of the tax code. It is the taxpayer who will have to run from pillar to post to get it rectified. Just a minor data-entry error can be a major inconvenience to the taxpayer.
Another problem area for taxpayers is the distinction between ‘investors’ and ‘traders’. The debate on the classification of income from the sale of shares under ‘business income’ or ‘capital gains’ still finds no logical conclusion.
Grievance redressal: In her report titled “Redressal Mechanism for Investors under Securities Law”, Deena Mehta, managing director, Asit C Mehta Investment Interrmediates and one of the three trading member-directors on the board of the Bombay Stock Exchange, correctly states that the biggest difference between Indian markets and overseas markets is speedy disposal of cases and harsh and immediate punishment to wrongdoers.
“The response of the regulators in India has been knee-jerk and panicky. Instead of trying to punish wrongdoers after in-depth investigation and sensitivity to market practices, the regulators have only succeeded in eroding the investors’ confidence in the market by high-profile arrests and media hype,” mentions the report. While SEBI provides online registration of grievances and a tracking number, our experience is that investors are not happy with this process. SEBI, however, believes that it has set up a robust mechanism.
Mis-selling: When Prashant Naik, a small investor, approached his advisor last year for suggestions on a good mutual fund to invest in, he was in for a surprise. The advisor made a strong pitch in favour of a unit-linked insurance plan (ULIP). “He spent 30 minutes trying to convince me to buy this ULIP product and took no interest in discussing mutual funds,” says Mr Naik. This, sadly, is what many advisors have resorted to, after the scrapping of entry-load on mutual funds (MFs).
With commissions eradicated, MFs found distributors deserting their products in favour of better revenue-yielding products like ULIPs. The resultant upheaval in the sector and frequent changes in rules and regulations over the last one-and-a-half years have confused investors. Many small investors are unable to get affordable and credible investment advice. This is driving investors away from an investment avenue that would ideally help them beat inflation.
According to data on MF subscriptions released by the Association of Mutual Funds in India (AMFI) in December 2010, last year witnessed a total net outflow of more than Rs16,000 crore from equity mutual funds.
Portfolio management services: Recently, an investor discovered that Kotak Mahindra Bank had pocketed a whopping Rs1 crore by hustling him into buying its India Growth Fund from a group entity. He was told that it was a ‘discounted’ offer from a distress seller and that there was a clamour to buy the Fund. Only later did he realise that he had been duped, as the Fund turned out to be a dud. Cases like these are frighteningly common in PMS (portfolio management services) products. What lures most investors to PMS are the unbridled, unregulated, and sometimes, false claims.
An ophthalmologist, who had invested Rs42 lakh in a PMS with JM Financial in 2007, had to walk out of it in early 2009 with half the sum. JM Financial’s executives had boasted to him that their money-management skills would ‘separate the men from the boys’ in a downturn.
Another investor wrote to Moneylife that he had attended a fancy presentation by a brokerage firm which claimed 95% accuracy in stock selection.
The trouble is that this arena remains unregulated. Investment norms are sketchy and there is no restriction on churning and trading. There are no rules to prevent false claims and fake sales pitches. There is no publicly available, easily comparable information on the performance record of service providers. A few disclosures have been mandated by SEBI over the past years, but not enough has been done to allow investors to make an informed choice about portfolio managers.
Recommendations
From Moneylife Foundation Position Paper on “Issues Faced by Retail Investors”
• On IPO pricing, SEBI should use its power of moral suasion with intermediaries to help keep prices reasonable. IPO grading must be made more independent by paying grading fees through the vast sums of money available with stock exchanges and SEBI in investor protection funds.
• Depositories and demat accounts are at the centre of any trading activity and detailed KYC obtained and maintained at the depository ought to be sufficient for identity proof for all capital market transactions.
• Burden of TDS on individuals must be eliminated, especially since they have no powers to ensure or enforce rectification or compliance.
• PMS remain opaque and virtually unregulated. SEBI must make it mandatory for performance data to be revealed on individual websites, on sales literature and on a statutorily-mandated database.
• An investor wanting to buy a stock needs to be able to access online all information about a company, as reported to a statutory database. SEBI needs to hasten the process of completing CorpFiling or re-introduce Electronic Data Information Filing and Retrieval System (EDIFAR).
• For grievance redressal, SEBI should issue a monthly press release detailing the category of complaints it has received with details about their resolution. It must also highlight which company/intermediary has the highest number of complaints against it in a given month. SEBI should work with investor/consumer associations to have an open house for grievance redressal. Such open-house meetings must be publicised by SEBI at its own expense, in order to ensure wider participation. Also, to ensure that the capital market remains healthy, speedy and exemplary punishment to the guilty is a necessity.
• Moneylife Foundation believes that all decisions pertaining to investors are currently being taken on the basis of feedback from market intermediaries rather than investors. Nobody asks what the investor wants. Investors are not adequately represented on SEBI’s committees. This has to be rectified.
• Stock tips and financial advice on television without any accountability remains peculiar to the Indian market and erodes the credibility of its capital market. SEBI should ban stock tips through televised investment advice.
.jpg "MoneyLife")
