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Small investors and stock market

THE PRIME MINISTER'S exhortation to the small investors to return to the stock market is timely and ought to be welcomed if only because it highlights the urgency of the problem. Much of the Prime Minister's message to the investors is not new however. The stock market's weaknesses have been analysed threadbare several times before. Numerous prescriptions to remedy the malaise have also been made. Two committees of parliamentarians have gone into the entire gamut of stock market issues including safety of investors' money. The first submitted its report in 1993 and the second in December last year. Both the reports were meant to influence policy changes in the financial sector so that the stock markets, banks and other intermediaries become safer places for investors to park their funds in. However, given that they were probing irregularities in securities transactions, it was no coincidence that stock markets rather than banking dominated their agenda.

The whole point is that the policy framework towards the capital market has not suffered for want of advice. However, it has been infinitely more difficult to instil investor confidence even after making major strides in reforming the system. The country has had a long capital market tradition. Yet it was the beginning of economic reform that brought the institution into sharp focus. The early 1990s was the time when the Indian capital market came to occupy its rightful place as a significant institutional intermediary between the savings class and the corporates mobilising capital. Among other major developments the capital market regulator, the SEBI — set up only in the late 1980s — came to acquire a legal status in 1992. Investor protection, very similar to what the Prime Minister has outlined more recently, has been the number one priority of the regulator right from its inception. In fact, numerous policy and regulatory initiatives to strengthen the market edifice have all had the investor interests in full view. It is also conceded that many of those succeeded in transforming the stock markets beyond recognition. More than a decade after the start of the reform, the stock markets have become technology savvy and much better capitalised. There is far greater professionalism now among the various intermediaries such as brokers, more transparency and efficiency in trading as well as in settlements. Paperless holding and trading of shares (demat), harnessing of communication technology to pave the way for shorter (and therefore safer) settlement cycles have been significant achievements in a record time. A big achievement of the reform era has been the setting up of the NSE, which together with the BSE has taken online trading across the country. The list of achievements is long and has infinite possibilities for progressing further. Just last week the country's two principal exchanges commenced retailing of gilts to the small investors. There has been a greater clarity on regulation and in the days to come there will be better surveillance as well as monitoring.

If despite all the numerous achievements the small investors have virtually dropped out, more unconventional measures might have to be taken to re-instil confidence. According to recent RBI statistics, the household sector's investment in shares and debentures continues to be negligible, at just 0.3 per cent of the GDP and 2.4 per cent of the financial assets. There is no escaping the fact that the other principal users of the market, the companies and their intermediaries, have let down the small investors recently. Corporate governance, so frequently preached, has not been practised by many corporates. Reform itself has had the unintended effect of favouring the large, mostly institutional, investors over the small ones. In fact, not very long ago there was an official exhortation to the latter to take the mutual funds route to the markets. By many other parameters too the small investor gets a raw deal. The primary market is in a moribund state. Many quality multinational and domestic listings have come off the exchanges leading to a paucity of safe scrips. Investor education, a priority area, has to extend to the rural areas. As the Prime Minister has rightly emphasised, financial literature, especially the risk-reward aspects of any investment, will have to be propagated in regional languages as well.

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