Sucheta Dalal :Wanted: Retail Investors
Sucheta Dalal

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Wanted: Retail Investors  

February 25, 2010

Despite economic prosperity and multiplying 24-hour business channels, retail investors are staying out of IPOs, mutual funds and pension funds—gypped by self-serving intermediaries and irritated by cumbersome rules of unaccountable regulators. Sucheta Dalal analyses


Media reports suggest that the government is giving up on the fond hope of raising Rs30,000 crore from the capital market in a jiffy, to lower the fiscal deficit. Instead, it is resorting to the highly dubious practice of asking revenue agencies to whip and extort tax collections from the corporate world by fair means or foul. The pride of the nation, National Thermal Power Corporation (NTPC), managed to get a subscription of 1.2 times for its follow-on public offer (FPO) with a retail participation for just 16% of the total 42.8 million shares reserved for the retail investors’ category. For its total shares on offer, NTPC received a dismal 80,000 applications from retail investors all over the country. Worse, it discovered that the French auction route was a mistake.

It is no surprise to us at Moneylife that the government was badly misled on the disinvestment issue with the impression that investors were waiting to snap up any IPO (initial public offering) or FPO of public sector undertakings (PSUs) at the highest possible prices.  Somebody in the government must realise that the share prices of listed PSUs, based on a tiny floating stock, are unreal and it cannot hope to attract investors based on that benchmark. In fact, the finance ministry needs to face up to a macro problem that it has been ignoring all along—that retail investors are an endangered species. There is plenty of evidence of this in the investment pattern of mutual funds and IPOs of the past few years, but it is the failure of NTPC’s FPO that ought to ring some loud alarm bells in the government. Consider these facts:

1. Just 8 Million
The first page of the Swarup Committee report on “Investor Awareness and Protection” (2009) says: “Today, there’s an army of nearly 3 million financial advisers plus banking staff selling non-banking financial products. They serve about 188 million investors holding financial assets. Of these, 8 million investors participate in debt and equity markets, either directly or indirectly through complex and risk-bearing products like mutual funds and market-linked insurance plans.”

Read this again: Of the 188 million investors holding financial assets, only 8 million participate in debt and equity “either directly or indirectly” and these include mutual funds and market-linked insurance plans (also known as ULIPS).

This means that retail investors are bypassing the capital market, despite a five-year monster bull run when trading volumes soared, stock indices spiralled up (the Sensex shot up from around 3,000 to 21,000) and the salaries of the National Stock Exchange’s (NSE) top brass rose faster than the indices and the best Indian companies.

The Swarup Committee report shows that the retail investor population has shrunk to less than half since 2000-01. More worrisome should be the realisation that the retail investor population has been shrinking continuously since 1991-92, when Dr Manmohan Singh, as finance minister, kicked off India’s liberalisation process and was advised to scrap control of capital issues, without putting in place any mechanism to rein-in corporate greed.

In 2003, SEBI and the National Council of Applied Economic Research (NCAER) estimated that 21 million individuals had invested in equity or debentures while 19 million had invested in mutual funds. The reference period for this study was 2000-01.

The SEBI-NCAER survey further said that the number of equity investor ‘households’ in India had halved from 12.1 million in 1998-99 to 6.1 million in 2000-01. Now, the Swarup Committee says that the number of individual retail investors too has shrunk to just eight million. This is clearly a frightening situation. Funnily, the Swarup Committee itself hasn’t found it fit to discuss the dwindling investor population numbers; instead it breezily voices the expectation that the number of people holding financial assets will increase to 200 million.

What will these people invest in? Insurance? Mutual funds? IPOs? Direct equity? The New Pension Scheme (NPS) which nobody knows about because there are no intermediaries? Routes to buying and holding these assets are beset with regulatory potholes, continuous changes in rules and no effective protection against mis-selling and poor performance.

2. IPO Disasters
There is a good reason why market old-timers are nostalgic about the Controller of Capital Issues (CCI).  Having a government body fix the offer price of IPOs is repugnant to a modern capital market; but, in India, it prevented investors from being routinely skewered by irresponsible market intermediaries (read brokers and investment bankers), greedy companies, a clueless regulator and manipulative media.

Since 1991-92, when CCI was scrapped, investors have been ripped off during every bull market; the primary market has been largely dead during bear markets. In fact, the fallout of every bear market has been the permanent exit of lakhs of investors. The last time, it was the bull run of 2003-07 when companies raised money but investors were ripped off.
This time around, even the soaring stock indices of 2009 and the rush of foreign portfolio money has left investors cold. In a frightening indictment of government policies, the retail investor is simply refusing to bite; fascinatingly, he/she is not swayed by the advertising blitzkrieg by companies either.

Take the case of DB Realty, whose IPO opened for subscription in February 2010. After spending a phenomenal Rs13.5 crore on advertisements in the Times of India alone, and probably an equal amount or more on other media, it received just 23,000 retail subscriptions and a pathetic 457 applications from high networth individuals (HNIs).

The numbers in other IPOs are worse and those that attracted larger subscriptions are also viewed with suspicion by retail investors, after some negative post-listing performances. A reputed group like Godrej attracted only 18,300 retail applications and 50 HNI applications for the Godrej Properties issue.

So sharp is the disenchantment that even the employees’ quota of IPOs goes abegging. If employees do not trust a company’s claims about its price and prospects, why should others? For instance, Jubilant FoodWorks Ltd received a dismal 0.25% subscription while Emmbi Polyarns Limited received just 0.6% subscription for shares reserved for the employee category. Even in the case of NTPC, the employee quota received just 43% subscription.

“It is a crisis situation,” says an IPO expert; he also says that some companies are planning their IPOs without any expectation of retail subscription. A leading advertising agency is now advising clients not to waste money on a media blitzkrieg when it does not yield results. Well, if retail investment is being written off, are mutual funds doing any better?

3. Mutual Dislike
India’s policymakers have declared that mutual funds (MFs) must be the investment vehicle of choice for retail investors and the government has tried to encourage their participation by offering generous tax-breaks. But here are some dismal facts about MFs.

Mutual fund penetration in India is just around 3%, according to the Economic Survey (of 2007-08), nearly two decades after the industry was opened up—first to nationalised banks and later to private and foreign funds. Worse, 80% of the investment comes from eight cities, showing no market penetration at all; and only 7.7% of financial savings are allocated to mutual funds.

Even more alarming has been the trend over the past year. Investors have been withdrawing money virtually every month for the past 13 months—whether we are in a bull market or a bear market. After the ban on entry-load that came into play from 1 August 2009, outflow of money from MF schemes accelerated, since most financial advisors could no longer get incentives to sell and service funds. Industry leaders have been defending the new system publicly by arguing that the system would adjust to paying advisory fees, sooner rather than later. Industry leaders have also been trying to explain away the continuous haemorrhage of funds as ‘profit-booking’. Fund executives argue that redemptions are happening because people are exiting as they have come up to a break-even level on their investments of 2007 and 2008. According to data available to Moneylife from a leading registrar, redemptions have far exceeded inflows into mutual funds between March 2009 and January 2010. While the Sensex has soared 68% in this period, net flows continued to remain negative, except in a couple of months when new fund offerings (NFOs) boosted inflows.

In July 2009 and January 2010, net flows amounted to nearly Rs2,000 crore and Rs175 crore, respectively, aided by robust NFO purchases. In all the other months, net flows have remained in negative territory—uncorrelated to the market direction. In January 2010, outflows reached a phenomenal Rs2,100 crore—the highest level in recent times.

4. New Pension Scheme
NPS was launched with great fanfare for the public last year. According to Moneylife, it is one of the most attractive investment schemes going for your long-term savings. Yet, as on 12th February, the 952 branches of various banks and financial services companies had collected just 3,690 forms. PFRDA (Pension Fund Regulatory and Development Authority) shows them as registered users. All we know is that they had collected forms. Clearly, behind the dazzling 8% GDP growth, multiplying 24-hour business channels and a stream of financial products, something is fundamentally wrong. Gypped by self-serving intermediaries, irritated by cumbersome rules and uncared for by unaccountable regulators, retail investors are staying out.

Why are these facts unknown to many decision-makers? If they are known, why has there been so little debate on the fundamental contradiction between economic prosperity and media hype of financial markets on the one hand and dwindling retail investor base on the other? The reason is simple—there is a convergence of vested interests that is working overtime to mislead the government and the country. And the bureaucrats in the finance ministry, who are ever proud of saying that they ‘don’t understand the capital market’, are easily fooled. Let’s take equity issues.

• The media has a direct vested interest in creating the hype. A bull market promises large advertising budgets. It has a vested interest in devoting newsprint or television time to hyping the importance of the Sensex and the capers of corporate India.

•  Intermediaries, such as investment bankers, are working without fees or even without reimbursement of their expenses, in the hope of using their association with the disinvestment process to drum up other business. Nobody pays a price for misleading issuers on pricing nor are they responsible for post-issue performance.

• The regulator follows a disclosure-based policy and watches benignly when an IPO of an unknown company, whose promoter is accused of murder, bucks the trend and gets a huge over-subscription. Doesn’t it smell anything wrong?

• Stock exchanges, which are the first-line regulators, are now fully focused on maximising profits, often to justify the incredible salaries paid to their top brass. So they are focused on media management (through large advertising budgets) and encourage listing at any cost, because it leads to higher fees and turnover.

The biggest problem is that the regulator has almost no truck with retail investors. SEBI operates out of an ivory tower and the few retail investors who stubbornly manage to seek appointments with SEBI officials or write to them are treated with arrogance and disdain. Obviously aware of this criticism, SEBI has joined hands with the media to launch investor seminars, but if preaching from a pulpit could convert retail investors, then at least 10% of India’s 180-million-strong middle-class would have invested in stocks and shares after two decades of SEBI’s existence.

It is a pity that the country has no mechanism to review the regulator’s performance, when development and growth of the securities market is its core mandate. Otherwise, big policy failures and all the evidence of the vanishing retail investor ought to have caused a big shake-up in the structure of the various regulators—of the capital market, pension and insurance.

Listless Listing
Investment bankers prefer not to talk about it; but here is an unnerving fact.
In a recent high-profile IPO, there were no applications from retail investors in Bengaluru and Chennai; there were only a handful from Hyderabad. Indeed, market intermediaries talk of a Mumbai-Delhi corridor (via towns of Gujarat) as the only region in this vast country from where IPO applications come. There is a reason for this. Investors, who jumped into IPOs to participate in the great Indian bull market of the past few years, have been through a wringer and are unlikely to return to it anytime soon. Take a look at the table.

It is remarkable that half of the issues that were listed about five years ago are still under water. The figure goes up for 2006 (55%) and even higher for 2007 (70%) and 2008 (75%). The situation in the IPO market is symptomatic: uninformed investors meeting greedy intermediaries and issuers in a laissez faire environment of: ‘to each his own’. If the regulator and the finance ministry are not bothered, that is perfectly alright. But then, they should not worry about lack of retail participation when it comes to the government’s disinvestment programme.

-- Sucheta Dalal