Development of Equity culture in India & current position14/05/2020
Indian equity culture is a notorious concoction of temptation, noise, and information scarcity.
India is indeed a statistical marvel! A country of over a billion people with a $1 trillion plus economy, a middle class population of between 300 million-500 million, around 117 million Smartphone users, and a stock market that boasts capitalization of over a $1 trillion. It’s a country that for some time now has been a data hub to the world owing to its burgeoning BPO, KPO, and IT analytics establishments.
It wouldn’t be an exaggeration then if we call India a land of hopes and promise largely because of her compelling statistics and vast body of data about her economics, consumers, and demographic trends. Ironically, a country washed over by such great proportion of data points has failed brilliantly so far in arming her citizens with actionable information on a wide range of matters. One such class of citizens is the ever vulnerable retail investors and the matter here is about building an equity culture.
The market regulatory bodies SEBI, AMFI have worked hard with the market participants like brokerage and fund houses to push the envelope on investor education since the last two decades. Interestingly, SEBI over the past few years have incentivized the equity culture through a slew of benefits like IPO quotas, price discounts, and tax breaks et al. Nevertheless, the success of these initiatives is highly debatable at best.
Investor Awareness Programs – Temptation or Education?
The brokerage, fund houses, and financial media in India are but dubious stakeholders in the grand project of building equity culture in India. Building an equity culture is an idea and not a trend. Retail investors are often flooded with NFOs and MF schemes when much of the milk has already been skimmed by the fat cats, namely FIIs and HNIs. Recall, not many schemes and NFOs were launched between 2009-2013, when the valuations were cheap and upside price opportunities for long-term retail investors were immense.
Unsurprisingly, during these years Sensex rose over 100% where as retail investors participation grew by just 33%. Come 2014 we have been flooded by a plethora of NFOs and MF schemes when many stocks already have gained, on an average, by well over 30%-60%. Of course, there is immense potential for India’s economy to grow in the next 5 years but isn’t investing supposed to be independent of fads, trends, and upturns?
Building a culture of investing is about being disciplined and regularity. The stakeholders intending to build a robust Indian equity culture must focus on values that are totally independent of market fads and trends. Importantly, investor education is not about tempting gullible investors into overbought and overvalued markets, which has sadly been the only form of education imparted by the equity culture stakeholders.
Financial Media: Noise or News
Indian financial news media (print and TV) has done little in terms helping retail investors understand markets better. Much of what is spoken on business TVs and print media is about events with great importance to the momentum driven portfolios of FIIs than the long-term retail investors. The brilliant case in point is turbulence in Iraq. While oil import risk arising out of the deadly humanitarian crisis in Iraq could potentially affect inflation levels, but the risk to the Indian economy is overblown.
Geopolitical developments are akin to arbitrage opportunities as in they last for a very short duration of time. Investors with flamboyant investment styles are most likely to be affected by such short-term developments than the long-term retail investors. Moreover, not many media or publishing houses aid retail investors by conducting studies on long-term performance of different investment styles, MF schemes (hybrid, capital protection, and arbitrage et al) that could possibly serve as a reference point for small investors for making informed investment decisions.
On the other hand, major data releases like economic indicators, industrial production, Sensex/Nifty movements, and market outlook are expressed in a technical parlance about which much of the retail investors are oblivious. The fact that a major chunk of retail investors make their investment decisions based on tips, advice, and suggestions from a heterogeneous group of brokers, friends, and family members talks a lot about the ineffectiveness of the Indian financial media companies.
As the things stands now the nexus of brokerage, fund houses and financial news companies have succeeded in luring retail investors into yet another Indian bull rally. As I wrap this article the Indian equity culture is a notorious concoction of temptation, noise, and information scarcity!
Broad Constituents in the Indian Capital Markets
Quick summary with stories
Fund Raisers are companies that raise funds from domestic and foreign sources, both public and private. The following sources help companies raise funds.
Fund Providers are the entities that invest in the capital markets. These can be categorized as domestic and foreign investors, institutional and retail investors. The list includes subscribers to primary market issues, investors who buy in the secondary market, traders, speculators, FIIs/ sub-accounts, mutual funds, venture capital funds, NRIs, ADR/GDR investors, etc.
Intermediaries are service providers in the market, including stock brokers, sub-brokers, financiers, merchant bankers, underwriters, depository participants, registrar and transfer agents, FIIs/ sub-accounts, mutual Funds, venture capital funds, portfolio managers, custodians, etc.
Organizations include various entities such as MCX-SX, BSE, NSE, other regional stock exchanges, and the two depositories National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL).
Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Department of Company Affairs (DCA).
Role and Importance Of Capital Market In India
The capital market has a crucial significance to capital formation. For a speedy economic development, the adequate capital formation is necessary. The significance of capital market in economic development is explained below:
Mobilization of Savings And Acceleration Of Capital Formation:
In developing countries like India, the importance of capital market is self-evident. In this market, various types of securities help to mobilize savings from various sectors of the population. The twin features of reasonable return and liquidity in stock exchange are definite incentives to the people to invest in securities. This accelerates the capital formation in the country.
Raising Long-Term Capital
The existence of a stock exchange enables companies to raise permanent capital. The investors cannot commit their funds for a permanent period but companies require funds permanently. The stock exchange resolves this dash of interests by offering an opportunity to investors to buy or sell their securities, while permanent capital with the company remains unaffected.
Promotion Of Industrial Growth
The stock exchange is a central market through which resources are transferred to the industrial sector of the economy. The existence of such an institution encourages people to invest in productive channels. Thus it stimulates industrial growth and economic development of the country by mobilizing funds for investment in the corporate securities.
Ready And Continuous Market
The stock exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities. Easy marketability makes an investment in securities more liquid as compared to other assets.
An important shortage faced by entrepreneurs in developing countries is technical assistance. By offering advisory services relating to the preparation of feasibility reports, identifying growth potential and training entrepreneurs in project management, the financial intermediaries in capital market play an important role.
Reliable Guide to Performance
The capital market serves as a reliable guide to the performance and financial position of corporate, and thereby promotes efficiency.
Proper Channelization of Funds
The prevailing market price of a security and relative yield are the guiding factors for the people to channelize their funds in a particular company. This ensures effective utilization of funds in the public interest.
Provision of Variety Of Services:
The financial institutions functioning in the capital market provide a variety of services such as a grant of long-term and medium-term loans to entrepreneurs, provision of underwriting facilities, assistance in the promotion of companies, participation in equity capital, giving expert advice etc.
Development of Backward Areas
Capital Markets provide funds for projects in backward areas. This facilitates economic development of backward areas. Long-term funds are also provided for development projects in backward and rural areas.
Capital markets make possible to generate foreign capital. Indian firms are able to generate capital funds from overseas markets by way of bonds and other securities. The government has liberalized Foreign Direct Investment (FDI) in the country. This not only brings in the foreign capital but also foreign technology which is important for economic development of the country.
With the help of secondary market, investors can sell off their holdings and convert them into liquid cash. Commercial banks also allow investors to withdraw their deposits, as and when they are in need of funds.