Sucheta Dalal :Investors disenchanted (4 February 2002)
Sucheta Dalal

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Investors disenchanted (4 February 2002)  

A couple of years ago, SEBI joined NCAER to conduct what is probably India’s largest investor perception survey. While the survey provided an exhaustive statistical compilation of data, it glossed over investors’ disenchantment, and refused to probe why the primary market was dead for several years. In 2001, Prof L.C. Gupta, former member SEBI conducted a survey of ‘Indian households’ Investment Preferences’ which probably sets the record straight on several issues. He found that the number of investors in India is stagnating since 1997 and that just about 18 per cent of the investor population thinks that the Indian stock market is a ‘good place for long-term investment’. Also, investors say that reforms have made the secondary market safer but the new issue market is much riskier—this is the exact reverse of their perception a decade ago. The IPO market is in the doldrums since 1996 except for the IT bubble of 1999-2000. This, says the Professor, is ‘ample evidence of gross failure of the regulatory system in dealing effectively with fraudulent promoters and managements and with corporate governance problems’. Something for the Finance Minister to ponder over before giving undue importance to the volatile Sensex.

Getting regulation right

The most important conclusion of Prof Gupta’s study is that the spectacular developments in the secondary market have provided no tangible benefits to economic growth in real terms. Apart from the fact that the investor population is stagnating, Prof Gupta categorically states that the number of share owning households in India is just four per cent of the population and that the SEBI-NCAER estimate of 7.6 per cent is a ‘gross over-estimate’. Also, unlike the developed world, Indian investors do not switch to equities when interest rates drop, they just hold on to cash or fixed-income products. This has probably to do with their risk perception about the capital market. Over 62 per cent of the investors polled cited stock price manipulation and excessive volatility as their major worry in the secondary market and another 10 per cent cited excessive insider trading as the main problem. Investor confidence in the capital market received a further blow after a spate of repeated financial scandals in recent times. Prof Gupta’s survey concludes that the prospects of increased flow of household savings into the stock market are rather bleak unless the regulatory authorities succeed in strengthening the investor’s confidence both in the market mechanism and in the corporate managements.

Needed — universal client ID

While on surveys and empirical studies, a study based on cumulative average return and trading volume patterns shows that the problem of insider trading in India is so rampant that ‘it is difficult to find instances where there has been no abnormal price movement before a major corporate announcement’. The study was done by Manish Agarwal and Harminder Singh of the Delhi School of Economics; and the authors say: ‘what is more worrying is that in all these years SEBI has done very little apart from initiating probes, that too, very often, only after media outcry’. This is something that SEBI should note when it pats itself on the back for its splendid performance over the last seven years. According to the authors, an electronic record and archival system with a universal client ID, as is prevalent in the developed world, will help nail the problem.

Reasoned SEBI orders

Nearly four years ago, 23 investors’ associations had signed a memorandum demanding some basic changes that they would like in capital market regulation and information dissemination. Among these was a demand that when SEBI issues press statements announcing disciplinary action, they should be adequately detailed so that investors’ can make an informed judgement about the intermediary that is being punished. They also demanded that SEBI, as a quasi judicial authority, should be asked to give reasoned orders in disputes before it, which should then be published and classified in a way that helps create case law for the capital market. However, over the years, the press releases did turn less sketchy, but the demand for reasoned orders was simply ignored. We now learn that the much-awaited amendment to the SEBI Act, which may be promulgated through an ordinance will force SEBI to issue such reasoned orders. But it is unlikely that this significant reform will be implemented during the tenure of the present SEBI chief.

TAILPIECE: Ratan Tata is all set to add to his helicoptor pilot’s licence by acquiring a private pilots’ license to fly the Falcon 200 owned by Indian Hotels. Last week, the shy Tata Group chief, was in Indore completing his quota of night flying hours without attracting any publicity. Tata will soon join the tiny band of Indian industrialists who not only own corporate aircraft but fly them too.

-- Sucheta Dalal