In the decade since India began to liberalise its economy, the capital market has transformed beyond recognition. In a few short years, it has switched from a primitive, default-prone, broker-dominated system to a nationwide, automated, paperless system that is almost at par with the best in the world. The entry of new players such as mutual funds and foreign institutional investors and newer trading opportunities has enhanced liquidity, and trading volumes have shot up from a few hundred crore to over Rs 5,000 crore everyday. In the process, the daily zigzag of stock indices has begun to hog a great deal of media space. Current affairs and news channels sport mandatory ticker tapes of stock prices and have frequent business news capsules focussed on market-related developments. We are also, the only country to boast four English language business dailies at our literacy levels.
Yet, for all the frenzied pace of reform, the capital market has remained, as some economists called it, a poor “sideshow” to the economy. With individual investors staying out of the market, the large turnovers are dominated by speculative churning of stock rather than investment buying. The statistics paint a grim picture. India’s investor population, which has been variously estimated at two crore may in fact be grossly exaggerated, but we will come to that later. These investors account for barely seven per cent of all Indian households since 1995. Investors in mutual fund units (mainly Unit Trust of India) are slightly higher at 23 million (year 2000), but this probably confirms that investors perceived them to be as safe as bank deposits and postal savings schemes.
The biggest growth in investor population happened between June 1991 to 1995 coinciding with the post Harshad Mehta phase and the initial public offerings mania that brought to grief millions of investors. But repeated scams have brought this growth to a grinding halt. Reserve Bank of India statistics show that in the year 2000, only 7.5 per cent of total financial savings of the household sector went into the capital market as against 22.9 per cent in 1991-92 (during the Harshad Mehta-led bull run). The largest ever investor survey conducted by the Securities and Exchange Board of India and the National Council of Applied Economic Research, also in 2000 reveals that investors find the primary as well as the secondary market extremely risky; another recent study by Dr L C Gupta and others confirms the situation. If this exemplifies a gross failure of the regulatory system in dealing with financial scams since liberalisation, then hold on - the picture only gets much worse.
The National Share Depository Ltd with its 37.25 lakh active accounts and the Central Depository of Securities Ltd accounting for the rest, together have under 40 lakh depository accounts. Both depositories say that over 99.7 per cent of the trading settlement now occurs in dematerialised form. Even if you ignore the fact that several investors have multiple depository accounts, the investor population would seems to shrink to a quarter of the two crore claim by authoritative surveys. NSDL Managing Director, C B Bhave, admits to being perplexed by the statistics, more so because the number of depository accounts seems to have reached a plateau at the 40 lakh level. This suggests that India’s investor population might indeed be much smaller.
It could be argued that millions of investors have still not opened expensive demat accounts and that depository statistics do not give the correct picture. But how significant are their numbers? Even if an investor with a portfolio of five shares chose to sell any of them, he/she would probably open a depository account (although Sebi has a 500 share window for physical trades, it is more-or-less defunct) and be counted in the depository statistics.
Is it possible that India’s investor population is a pathetic 50 lakh or so, rather than two crore? That depends on how one defines an investor. Just as we have an absurdly low benchmark for deciding literacy levels, we have similarly farcical notions about what constitutes an investor.
Evidence is in the Sebi-NCAER study of 25,000 households. It shows that a stunning 90 per cent of the equity investor population owns five stocks or less. Over 75 per cent own shares in just three companies and just under a quarter of all investors have only bought shares in one company. Look at it another way. Nearly 84 per cent of all equity investors have put less than Rs 25,000 in the market and a big 41 per cent has only Rs 10,000 or less invested through bourses. Do any of these classify as genuine investors? Why did so many people invest in a single stock? Was it because they were victims of the vanishing company scam of 1993-97 and turned distrustful?
Interestingly, although businessmen accuse investors of being greedy, the bulk of them are long-term investors. Nearly 79 per cent of primary market investors hold on to their investment for over three years. In the secondary market, a quarter of all investors hold stock for five years plus while an overwhelming 64 per cent hold shares for three years or more.
The figures suggest that India had serious investors who were defeated by repeated scams and supervisory failure and have stayed away from the market. It further means that the large trading volumes that we see on Indian stock exchanges are largely institutional trades or those of large individual operators and small speculators. The question then is, does the Indian capital market hog attention that is completely disproportionate to its relevance to the economy? Or, have we moved to a market that is largely dominated by institutional players?
The dead IPO market as well as various investor surveys suggest that the problem is utter failure of supervision. In fact, various studies have confirmed the extent of investor disenchantment. For example:
Dr Gupta writes (NSE News), “Our survey shows that confidence in the market mechanism has also received blow after blow over the last few years due to repeated market scandals”.
The Shankar Acharya Committee appointed by the finance ministry in 1998 concluded that “most corporates enjoy little credibility with investors”.
The investor data ought to embarrass any finance minister or regulator. The government needs to learn a few lessons from the US, where the best and the biggest (Enron and its auditor Arthur Andersen) are punished for their transgressions with speed and ruthlessness. Otherwise, the capital market will turn into a mere casino, which is incapable of attracting investors and financing industrial development. -- Sucheta Dalal