G N Bajpai, ET 25/2/2010
The Indian capital markets are usually characterised by a cacophonous clamour. But, over the raucous din, two voices that continue to be heard are: (a) inadequate participation of individual investors compared to the size and potential, and (b) desultory protection of the interest of small investors, with the cries getting louder after every fall in the market or discovery of misconduct by an entrepreneur or set of entrepreneurs.
Attempts to deal with these have been sporadic and the fundamental issue is yet to be addressed comprehensively. In fact, Indian investors have always supported aspirations of Indian entrepreneurs by pooling in the required equity capital. In certain cases, they have behaved like venture capitalists by providing financial resources through primary and secondary markets transactions even to startups.
Today, the Indian entrepreneurs who are in queue to raise risk capital through IPOs appear to be a concerned lot, as the participation of individual investors in the recent issues has been poor. This is so notwithstanding (a) a return to the path of high GDP growth of India, (c) high savings rate, (c) global liquidity orchestrated by stimulus packages, and (d) India once again becoming the flavour of fund managers across geographies.
Actually, there appears to be a dichotomy. Individual investors thronged capital markets — primary and secondary, directly and through mutual funds — when the index was at the high level of over 21,000, and exited when the index crashed following the global meltdown. At a time when the index has bounced back and some good issues like NTPC are up for grabs, the government of India as well as entrepreneurs are baffled by the indifference of the individual investor.
Although one can ascribe the reluctance of individual investor to having lost his shirt after the market suddenly collapsed, following the global meltdown, the genesis for his apathy lies somewhere else. Financial illiteracy is rampant in Indian society. There is always a herd-like desire to enter the market when it is high, and a rush for cover when the market takes a beating.
It is inherent in the nature of capital markets to go up and down. However, empirical studies have revealed that in the medium to long duration, investment in equities delivers much higher rate of return to the investor when compared to fixed-income securities, metals and other forms of investment. So, individual investors should normally be taking a call of entry and exit with a medium to long duration perspective. Thus, they should enter when the market falls and book profits when the peaks are scaled. Strangely, the converse happens. They cry foul with every fall. The answer lies in educating both current and future investors.
The yearning for learning about the financial markets must begin early in life. It was in this context that some time in 2004, the Securities and Exchange Board of India (Sebi) had written to the ministry of human resources development to incorporate lessons on financial markets, investment and risks in each avenue of investment from IX standard. India is a young nation with over 18% of the population below the age of 15 and over 65% below the age of 35.
These citizens are the current and future investors of the higher future disposable incomes expected to be generated by high GDP growth. It is, therefore, important that these young minds are taught the fundamentals of financial markets so that even if they pursue a profession or vocation that is unconnected with the financial markets, they will have a better appreciation and intuitively seek further information, build greater understanding and take informed decisions before investing.
The obvious benefits of such a literacy campaign would be: (a) regret and cries on the fall of markets will be far lower as investors would have taken the conscious decision of investing, (b) the rate of volatility in the capital market would be reduced as they would be more stable investors, (c) the propensity of markets to collapse suddenly may also get diminished, and, above all, (d) greater participation of individual investors.
Introduction of lessons on financial markets as part of curriculum should be supplemented by a variety measures of educating the investing community. Even though various institutions — such as RBI, Sebi, stock exchanges, depositories and the ministry of company affairs — periodically run different programmes and campaigns, these initiatives are not coordinated and, therefore, do not deliver an optimal outcome. In fact, in quite a few cases, these have become rituals and benefit only the media with an increase in their revenues.
In the light of the fact that none of the agencies is willing to pass on the resources to some other authority or organisation, it may be worthwhile to create a separate body — represented by RBI, Sebi, Irda, PFRDA, ministry of company affairs, stock exchanges and depositories — where the resources are pooled by all. This body should be managed independently by an administration comprising high level of accomplished professionals who would then guide the coordinated action in educating India about the financial markets.
The new body’s prime focus should be educating investors about the nature and nuances of financial markets. This body should have representatives from all the regulatory bodies, both primary and secondary. The organisation should take stock of the resources available with all the aforementioned bodies and allocate responsibilities accordingly.
Each of the regulatory bodies may be assigned a method of education, so that the resources deliver optimal result. This will also ensure that there is no duplication/replication and there is link in the efforts of all the constituents. This body can also, in case it is required, take up investors’ issues — though not exactly in the manner of class action suits — with appropriate authorities, corporates and entrepreneurs.
The efficacy of this body will depend on how it is set up. If it’s set up under a legislation, it will benefit from its provisions and will possibly deliver expected outcome in a greater measure.
The smoother run of a growth economy depends on the availability of resources and an efficient allocation, which has a direct and proportionate bearing on investor confidence. Investor confidence is determined by the level of understanding of financial markets, which is enabled by education. Hence, the education of investors should be treated as an element of great significance, which cannot be delayed any further.
(The author is former chairman of SEBI and LIC of India)