We are at the end of another hugely successful year from the capital market perspective. The monster bull run continued this year and the popular Sensex briefly scaled a new high of 14,000. The primary market was buoyant and mega issues in realty and infrastructure were snapped up and over-subscribed several times over at astonishing high premia.
Yet, for all this euphoria, the retail investor was largely absent from the capital market. Many of them burnt their fingers by foolishly trusting brokers to trade on their behalf. Others found it too much of a burden to comply with the growing paper work and entry barriers, including one-sided broker registration forms that are too complex to understand, or the need to open demat accounts, get PAN cards and deal with the complexities of a automated trading system. They stayed out of the market.
A good indicator of investor participation is the number of Depository accounts (DP accounts) that exist. According to the Securities and Exchange Board of India (Sebi), the National Securities Depository Ltd (NSDL) has approximately 75 lakh DP accounts while the Central Depository of Securities Ltd (CDSL) has around 24 lakh accounts. This includes multiple accounts that investors are forced to open if shares are held jointly with their spouse or children. Even conservatively, this suggests that not more than 50 lakh investors are active in the market at the end of a powerful three-year bull run. It is also important to remember that India claims an investor population of 1.9 crore (including those who hold mutual fund units), which is under 2 per cent of the total population, especially in the context of the hype generated by every significant movement of the Sensex.
Another indicator of the low relevance of retail investors is the fact that Sebi met registered investor groups for the first time last week. On the positive side, Sebi, with the help of investor groups has made a serious attempt at increasing representation from all parts of the country. The interaction indicated huge consensus among retail investors on a large number of issues, which has virtually set the agenda for investor action in 2007.
For instance, all 17 investor associations passed a unanimous resolution asking Sebi to start mandatory grading of Initial Public Offerings (IPOs) on the grounds that investors find it difficult to understand the complex and often convoluted disclosures in offer documents. While Sebi has already accepted the primary market committee’s recommendation to make IPO grading mandatory, it will have to be cleared by the Sebi board when it meets in January.
Another issue on which there was unanimous concurrence was the high demat costs, which have stunted the growth of depository infrastructure. For several years now, investors have demanded that listed companies, who are the biggest beneficiaries of paperless trading, should bear some of the cost. Secondly, demat charges must be distributed in a way that DP services are more viable and bank branches around the country are interested in offering the service.
A third issue attracted widespread opposition. It is the delisting rules as proposed by Sebi and the proposal to scrap the reverse delisting mechanism. Investors agreed that several thousand companies, which are mere shells and have very little public shareholding, ought to be delisted. Dr. Kirit Somaiya of the Investor Grievances Forum (IGF) strongly argued that the delisting process should not penalise small shareholders.
The Midas Touch Investor Association of Kanpur has opposed the Bombay Stock Exchange (BSE) plan to delist 650 companies. The association runs an Investor Helpline, which found that letters addressed to 115 companies were returned undelivered. Yet, none of these figure among those categorised as “unknown” by the BSE. Virendra Jain of Midas Touch has correctly demanded that the BSE must put on hold its delisting plan and update/enlarge its ‘unknown’ category. The ‘unknown’ category itself is an anomaly in a modern stock exchange. How can a company that has raised public funds after due legal processes be categorised as “unknown”? For the past 20 years, stock exchanges have been sending letters to Registered Offices of companies and delisting them if successive letters are returned because the addressee is not found. This hurts investors and suits companies who are happy to vanish after having picked investors’ pockets.
Surely, stock exchanges cannot get away with such perfunctory action any longer. Both national bourses collect hefty transaction charges and are also have nearly Rs 150 crore each in their Investor Protection Fund. They are best placed to initiate a series of actions including an investigation into the promoters’ whereabouts, filing a police complaint and a winding up petition on behalf of investors. Investor associations urged Sebi to ask stock exchanges to do a lot more by way of investor protection.
Dr. Somaiya also raised several key issues on which there was general consensus. These include a need to put in place a proper regulatory system for realty mutual funds, concern over extreme secondary market volatility, worry over the revival of the dubious grey market in case of IPOs and the fact that companies with fairly dubious antecedents are in the Futures & Options list.
Sebi insists that the F&O list is based on a set of objective criteria and any company that meets these is automatically admitted to the derivatives trading list. However, investors want at least a cooling off period in case of newly listed or demerged companies, because these are most prone to manipulation immediately after listing.
Finally, Sebi’s long delayed interaction with investor groups again revealed that the India’s automated trading system has left large chunks of the potential population out of the market because they have no access to trading infrastructure. If the government is serious about growing the investor population and decent geographical spread, it will require both education and modernisation.