Indian Industry needs cheaper capital to survive and be cost effective, in order to tide over the current slowdown in the markets. Indian Investor is seeking a reasonably better return to beat the current double digit inflation. Only a healthy equity market will be the meeting point for both of them, with the US recovery and gold bleeding.
Money will be available for the industries at reasonably low cost and better return is possible for the small & retail investor, if a few basic issues are addressed.
The BSE IPO Index has crashed and majority of the IPOs in the last 5 years are trading below their issue price. IPOs are not giving better returns to the investor as they are either priced extremely higher or markets fall continuously without any respite.
The very fact that the return is not guaranteed in stock markets itself, chases away majority of the investor though they understand the rules of the game. As we all know, less than 2 % of Indian public invest in equity. In such a scenario, the extreme volatilities also cause panic and add to the exit of investors from the markets.
It’s a well-known fact that the small & retail investors are not responsible for these extreme volatilities. The high volume trades by the big investors, particularly the jobbers, traders, hedge funds and probably the FIIs may be the cause for such extreme volatilities. The introduction of automated algo trading systems and co-location facilities which probably gives discriminating advantages to the moneyed section, are much debated and controversial topics.
In the long term, overdependence on the FIIs and a few top brokers for our market stability (& liquidity ) may not be good for our country. It has to be broad based in order to penetrate the nooks and corners of the Country.
The bottom line is that, while small investors who invest hardly a few thousand rupees in the market are put to unnecessary harassment, big investors get away with bare minimum formalities – most of the times. This should change and small investors should be made to feel comfortable and ease with the risks associated with the markets.
Entry procedure should be more simplified.
Look at the steps one small investor has to go through to take a big risk & invest in a market which does not guarantee him even the capital:
I. Open a Trading Account with a SEBI Registered Stock Broker, for which he needs:
i. Passport size photo
ii. PAN Card
iii. ID Proof
iv. Address Proof
v. Bank Account – A Cancelled Cheque leaf
vi. Proof of Demat Account
vii. Account opening charges anywhere between Rs 100/- to Rs. 500/-
II. Demat Account: In order to open a Trading Account with a stock broker, he needs to have a Demat A/C with a DP, for which he needs the following documents:
i. Passport size photo
ii. PAN Card
iii. ID Proof
iv. Address Proof
v. Bank Account – A Cancelled Cheque leaf
vi. Account opening charges Rs 100/- to Rs. 500/-
III. Therefore, for opening a Demat Account with a DP, he needs a Bank Account, for which he needs the following documents:
i. Passport size photo
ii. PAN Card
iii. ID Proof
iv. Address Proof
v. Minimum balance of Rs. 5,000/- or so.
IV. To open a Bank Account you need a PAN card for which you need the following documents again:
i. Passport size photo
ii. ID Proof
iii. Address Proof
iv. Charges around Rs 100/- to Rs. 150/-
V. How to get an Address Proof for an old lady/housewife who does not know to drive or never travels abroad, like :
i. Driving License
ii. Passport
OR Voter ID card & Ration Card – which is highly difficult to decipher
At the outset, it may look simple for the city bred or the people in the market; but for the new entrant from semi urban areas and women, it’s a nightmare. Inspite of going through such extensive process which is hard to understand for many people in India, most of them lose money. If that is the case, who will invest in Indian markets.
A retired officer who held very senior positions in the Government was very proudly boasting - in an investor awareness program - that he has never invested even a single rupee in the equity markets in his life and he never will - for reasons best known to him. It is his personal choice and one cannot comment about it. However, it reflects the attitude of most of the people towards the markets.
In my opinion, the Government should insist on every officer of reasonably senior cadre to invest a small part of their savings in equity or funds consisting basically of shares of PSUs. It goes without saying that, this will certainly improve many things for the betterment of the public!
The typical solution we give to these retaIL investors is “take the Mutual Fund” route – as though it is a all-in-one remedy for all the investor woes. The statistics proves that most of the mutual funds are either giving negative returns or returns not matching even the inflation, over longer periods of time. This is more misleading than investing in the direct equity, which clearly specifies the risks involved atleast. MF again, is meant for the learned investor.
The Small and Medium Brokers from RSEs, who used to take care of the interest of the retail investors for many decades, were systematically driven out.
It is unfashionable today, to talk about the relevance of the SMBs ( but not SMEs, as it is inclusive growth & fashionable! ). The SMBs were rarely the cause for any systemic risks in the past. It was always some of the big players who were responsible.
The fact of the matter is, retail investor is simply ignored by the volume players as they don”t add to their bottom-line in a big way.
This will only lead to the remaining equity investors also losing faith in the markets and move on their investments to unproductive assets like gold and other physical assets – where the KYC norms are either liberal or altogether absent. In this process, the overall economic growth of our Country and associated benefits like wealth creation likely to be enjoyed by a small set of FIIs and might move out of the country anytime in the future.
What should be done to save the situation? What is needed is not the “top down” approach but “bootom-up” approach.
To start-with, the procedures for investing by small investors should be simplified as everything is routed through cheque. For example,
i. Anybody who has a demat account should be allotted a UID & permitted to trade through any SEBI Registered Broker without any further registration process, like the OTCEI days of early 1990s. KRA is not exactly serving this purpose and it is now, one more addition to the existing forms.
ii. Demat A/C should be opened simply based on the Bank A/C without insisting on any other attachments or proofs.
iii. BANK A/C should be opened only based on PAN Card without insisting on any other attachments.
iv. All the forms should be bi-lingual – in English as well as vernacular.
v. Investors should never be insisted to give their networth statement or income proof on a regular basis; It is upto the IT department to catch them for any wrong doing.
vi. Serious punitive action must be taken quickly against any intentional violations to deter any further malpractice in the future.
The list can go on . . . . This will atleast a starting point, to some extent prevent outsiders from depleting our resources and allow the citizens of this country to enjoy the rightful fruits of their labour.
( This was published in the Tamilnadu Investor Digest - latest Issue )
