Small investors hold key to stockmarket boom
The Times of India
Copyright (C) 2000 The Times of India; Source: World Reporter (TM)
No it wouldn't. How, then, can we expect capital markets to be popular if their main customer, viz. the small investor, is denied access to most rides?
Globally capital markets are being institutionalised. Over the past two decades the proportion of equity holding in individual hands in the US has fallen from 65 to 33 per cent; correspondingly, that of institutions has gone up in converse proporation.
The consequence of this, as we have observed both in global markets as well as our domestic markets, is increased volatility.
Last week at the BSE, the Sensex initially climbed 322 points (6 per cent of the Friday closing price) over the first two days (of a four day week), then fell 369 over the next two (7 per cent).
One really bemoans the fate of individual investors in India, for the way the system is often stacked against them. Start with initial public offerings (IPOs.) Individual investors are being denied the chance to participate in new economy stocks.
Because of restrictions on capital movement, Indian investors have been unable to participate in the boom in Nasdaq. They are held captive in a domestic market, in an unfriendly environment. This suits domestic issuers of capital just fine.
It also suits banks and financial institutions just fine as, in the absence of worthwhile equity issues, investors are forced to flock to debt issues of IDBI and ICICI , which are rated triple A by rating agencies set up by these institutions. Around 80 per cent of money raised through public issues went into debt issues of these two institutions.
New dot-com ventures are unable to list on the main exchanges because of existing listing guidelines which allow entry only to companies with a dividend and profit track record. Hence they are funded by either venture capitalists, angel investors or through a foreign listing (e.g. Satyam Infoway.)
Indian investors do not get to participate, at least not till the business reaches an advanced stage. The few good equity issues which did come out were through a book build issue which is again weighed in favour of institutional investors, although SEBI has recently taken an initiative to correct that.
The better brick and mortar companies, too, have various funding options, including GDR/ ADR issues, or, as Reliance has so deftly proved, brilliantly timed issuances of debt paper.
Nor is the government forthcoming with attractively priced issues of PSU stocks that would give investors an incentive to save.
Banks are also cutting down on deposit rates, under pressure from their biggest customer, the government of India, who is in financial trouble with uncontrollable fiscal deficits.
This makes bank deposits an unattractive option. The investor's confidence has also been shaken by troubles at UTI resulting in a huge bailout last year. Fortunately, some good investments made by their largest scheme, US 64, has paid off and the net asset value (NAV) has now supposedly climbed to above an arbitrarily set repurchase price.
The government has initiated talks to link repurchase price to NAV; the sooner this is done the better it would be for the health of capital markets.
Small wonder, then, that household savings rates have fallen 2 per cent. Shutting out the small investors is the worst possible way to get him to save enough for the investments but that is the way things are progressing.
So the investor's choice are restricted to investing through the mutual fund or setting out on his own. Collections by private sector mutual funds have been rising. Investments in the secondary market exposes investors to the sort of wild gyrations he recently witnessed, besides a whole host of unfair practices.
Circuit breakers which stop trading if stock prices hit 8 per cent above or below the previous close are perversely acting anti small investor, instead of for him, as intended. Large operators, sometimes acting in concert with fund managers, are better able to manipulate stock prices by misusing the circuit filters.
They place large buying orders on the way up, at the ceiling, consecutively for several days. When the circuit is finally lifted, they rush in to buy stock they felt deprivated for, exactly as intended by the operators.
In news of interest last week was the share buyback announcement by RIL, using funds it had raised through external commercial borrowings issues abroad and has now brought back ($1 b.) The stock spurted on the news, going up to a high of Rs 376. Then, upon news that the buyback was to be undertaken at Rs 303, it fell, to close the week around that level. Being one of the heavyweights, this pulled down the Sensex.
Results of both Infosys and Satyam for the year to March were excellent; this did not, however, stanch a slide in their stockprices, after the fall at NASDAQ, where both companies have listed their ADRs.
The coming week would see the same sort of wild gyrations in which scenario it is best to stay away. Roller coaster rides are fun only at Disney World.