Sucheta Dalal :Investor Population: Vanishing Investors
Sucheta Dalal

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Investor Population: Vanishing Investors  

April 30, 2012

Manipulating research studies or media opinion or more investor meets will not increase investor participation

Sucheta Dalal

On 18 May 2009, for the first time in the history of Indian stock markets, trading was halted when stock prices hit the upper circuit exactly a minute after the market opened on Monday morning. The Congress-led United Progressive Alliance's victory was celebrated with a 17.3% gain that day.

Exactly three years later, most of that goodwill has been squandered and India’s finance minister and chief economic advisor are telling people not to expect any significant economic reforms before 2014. Coalition compulsions have been the excuse to justify large-scale loot of public wealth and every important economic growth engine—from aviation to railways, telecom or power—is either making losses or mired in controversy of the government’s making.

This mess is also reflected in the dismal state of the financial sector and the rapid erosion of confidence in banks, insurance and the stock market, despite separate regulators supervising each one of them. The government’s answer to this situation is endless seminars to increase ‘financial literacy’ or ‘restore investor confidence’. While everybody wants to ‘talk’ to savers, it would be far more effective if at least one of the regulators paused to listen to them.

The problem is most acute in the stock market, where the finance minister was persuaded to announce the ridiculous Rajiv Gandhi Equity Investment Scheme offering tax concessions to first-time investors. The mutual fund industry, which is in dire straits, is lobbying to get the finance minister to extend to the equity-investment schemes as well. Everybody is fighting to attract a small group of investors. According to the D Swarup Committee report of 2009, of the 188 million Indians holding financial assets, only “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.” This means that India’s investor population, which was pegged at 21 million in 2000-01 according to a study by the National Council for Applied Economic Research (NCAER), was down to nearly a third by the end of the decade. That study, commissioned by the Securities & Exchange Board of India (SEBI) under chairman DR Mehta, had glossed over the role of the IPO mania of 1993-96 and of vanishing companies in killing investor confidence. I had then written that some of the survey’s findings “seem perplexingly contradictory to anecdotal evidence and investors’ letters to the press.” The fact is that the massive growth in investor population (47%) due to Harshad Mehta’s magic and the decontrol of capital issues leading to an IPO boom died a quick death and there has been no real restoration of investor confidence since then.

In 2011, probably under pressure to prop up the investor population, SEBI, under chairman CB Bhave commissioned yet another survey by the same NCAER. Expectedly, the study, based on a survey of 38,412 households (up from 25,000 in 2000-01) in 44 cities and 40 villages, says that the total number of investor households in India is 24.5 million of which 15.23 million are urban investor households. This implies that nearly 10 million investors are from rural and non-urban centres.

Interestingly, while the mutual fund industry seems to be in terminal decline, NCAER tells us that Indian investors strongly prefer mutual funds. It claims that 43% of urban investors and 46% of rural investors have a ‘strong preference’ for mutual fund investments, as opposed to a mere 22% preferring secondary markets. This is completely contrary to the fact-based position reported by the Association of Mutual Funds of India (AMFI) and raises questions about the quality of NCAER’s study. AMFI data shows that 73% of MF industry’s  assets under management (AUM) come from five major cities, namely, Mumbai, Delhi, Bengaluru, Chennai and Kolkata; here, too, there is a steady erosion of investment. In fact, according to a registrar, the main transactions in fund industry are redemptions.

As for NCAER’s claim that 46% of rural investors have a ‘strong preference’ for mutual funds, facts couldn’t be more different. After the five metros, 10 cities contribute another 13% of the AUM and the rest of India contributes to less than 14% of the AUM.

Another strange assertion in the NCAER study is that “a large proportion of non-participants is satisfied with the role of the regulator SEBI, in regulating markets” and only “2 to 10% of the non-participants… expressed dissatisfaction with the role of the market regulator.” Our question is: How does the opinion of ‘non-participants’ matter? Isn’t it based on the positive press that SEBI engineers by ensuring steady advertising revenue to the media, either directly or through the massive advertising budgets of bourses and regulated entities?

However, the study still has a few interesting observations that a serious regulator should pay attention to. NCAER says, “It is worrying to note, for example, that about 40 per cent of investors believe… that the book building process for initial public offerings (IPOs) is not-transparent.” It also harps on the ‘magnitude’ of the ‘lack of awareness about SEBI’s role’ in the IPO process. In fact, our view is that investor expectations of SEBI are well warranted, given that the regulator’s investigation into seven key IPOs had revealed that prospectuses were packed with fake and fraudulent disclosures and structured to enable quick and easy siphoning of investors’ money. Since SEBI vets every IPO document and makes elaborate ‘observations’, it is fair to say that the process lacks transparency. The IPO scam of 2006 involving massive multiple applications to skew allotments (which was quickly buried under Mr Bhave’s dispensation through a spate of consent orders and paltry settlement amounts) also underlines poor investor perception about the primary market and SEBI’s regulatory competence.

NCAER’s researchers also seem surprised about the legitimate investor expectation that SEBI should intervene actively to prevent price-rigging, manipulation and volatility. Ironically, this was a major issue in 2000-01 as well. NCAER’s 2011 study says it is “puzzling to find a persistently high degree of lack of knowledge about the role of the regulator in the mutual fund markets.” It also harps on information asymmetry and ‘inadequate source of information’ for the ‘retardation’ of market participation by Indian savers. Its solution? No prizes for guessing! More investor camps to provide ‘reliable’ information to investors.

SEBI chairman UK Sinha, an officer of the IAS cadre, like his predecessors, has naturally asked India Inc to join the effort to “enhance awareness about capital markets.” This is in addition to the vast sums spent by stock exchanges. Nobody seems to have pointed out that the intense media focus on stock markets through six business news channels, five business dailies as well as the coverage by non-business media has not increased India’s investor population. In fact, bankers, regulators, bureaucrats and businessmen are always stunned when confronted with statistics that India’s investor population has shrunk while trading volumes and stock indices soared over the past two decades.

Investor confidence is not about manipulating research studies or media opinion. Investor confidence cannot be restored as long as savers are conned by high entry barriers, maddening rules, insider trading, price manipulation, mis-selling, poor grievance redressal and very real losses inflicted on them by the market system.

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at
[email protected]


-- Sucheta Dalal