Siddharth Shah, the newly elected chairman of BSE Brokers’ Forum (BBF) speaks with Jason Monteiro of Moneylife about issues of declining retail participation in the capital market and steps need to get common investors back
Moneylife (ML): The BBF is a platform where brokers can voice their concerns. What are the current issues faced by brokers?
Siddarth Shah (SS): Declining retail participation in the capital markets is the biggest concern for all brokers. Since the last 15 years, the Forum has seen many reforms but nothing has evolved so far from the policy makers for increasing participation from retail investors. Over the past three years the number of demat accounts has remained more or less the same. There has been no growth.
Reforms happen for the benefit of people but we regret that there have not been many efforts for increasing retail participation. Like in the case of equity mutual funds, here also there is a negative growth.
Due to high volatility, investors are confused. Earlier investors used to participate in the market irrespective of the rising or falling, but now there is no participation.
This is one of the main priorities of the BBF to address the issue of retail participation.
ML: How can this issue of low retail participation be addressed?
SS: The market is not controlled by an individual. Moreover, brokers do not have any authority to tell investors that this is the right time to buy or this is the right time to sell. Currently there are crisis in the Europe and in the US and due to these factors the (stock) markets are bound to remain volatile.
I think there has to be sufficient incentive for someone who wants to participate in the markets. Obviously, everyone participates in the market with the view to make money. But we often guide them that this is not the place for the short term or quick gains and they would have to enter only with a long term view.
We as brokers are here to guide you and educate you, we can show you the pluses and minuses of the economy, we know, we study and spend sufficient time on that. We are here to educate the retail investors before they take a call.
We would like to tell the government that we are at that juncture where most of the reforms are done in the capital market. It is now time to look how we can get retail participation back in the markets.
There should be some sort of tax exemption given to salaried class people and small business class for their investment in the capital market. The exemption can be provided on the same lines of infrastructure bonds where tax relief for an investment of up to Rs20,000 is given.
As the government wants to boost the infrastructure sector it gives an incentive to invest. In the same way, the government should provide incentives for investments in the secondary market as well.
For example, if anyone invests up to Rs25,000 in the secondary markets for long term then he should get a tax rebate under Section 80C. The government can put a restriction such that the investments are to be made only in index stocks such that the investors do not invest in ill-governed companies and loose their money. This would be one way to get retail participation by incentivising.
Another way is to educate investors about the capital market. At present, no one really knows about the capital market and its transactions till he became graduate. It is only after they do their MBA or a certification course they learn the intricacies of the capital market.
The policy should be simplified and the government and the regulator have to streamline the policies that benefit the investors.
SEBI is taking that route by streamlining the KYC form. Earlier the investor needed to sign at around 50 times, but now it has been brought down to just 3-4 signatures. They realised the inconvenience caused to investors. SEBI also plans to come out with a KYC Repository Agency (KRA), which will be similar to mutual funds, therefore one KYC can be used across all brokers and later on even other financial institutions like banks may use the same KYC. Therefore, the regulator seems to be slowly addressing these operational issues.
The current regime at SEBI is very proactive and they are coming up with resolutions quickly.
ML: Does BSE plan to go public any time soon?
SS: Yes, that is a very important agenda for us as a Forum. Listing is the biggest issue for the Exchange. It was announced five years ago but nothing has happened so far. We think the listing should be done as soon as possible. The blockade is at the regulator’s end as they are not able to provide the guidelines on how to list your own shares on the exchange.
Two years back the Jalan Committee did not suggest that it is a good idea to list the Exchange but the report neither said no for it. As per the BSE management is concerned, they are ready (for listing).
We are just waiting for SEBI nod to go ahead. The problem lies with the listing agreement. BSE has provided details of two-three international models where the exchanges have been listed and how they follow compliance. It is up to SEBI to decide which model we can opt for.
ML: Do you all see MCX-SX as a competitor?
SS: There would be competition if there is active retail participation, which is not the case at present. The regulator and the government have to take steps so that the equity cult is developed.
ML: BBF sends representations to regulators and government authorities; could you tell us about the recent representations sent?
SS: Our recent representation was to TRAI with regard to the ban on bulk SMS. Messages which are sent by brokers to clients with regards to their transactions were getting blocked. After the representation, about ten days back, TRAI agreed to allow messages permitted by SEBI. Therefore, brokers now can send messages on transactions to their client.
Apart from the representations, every quarter we plan to publish research and white papers, which can be assessed by investors as well as brokers.
ML: How does brokers benefit from the Forum?
SS: This is an open platform for brokers to voice their problems and concerns related with compliance and operations. The forum facilitates the same between SEBI, exchange and other government authorities. It is a platform for collective bargain, where the Forum follows up issues with the authorities. Whoever is a member of either the BSE and the NSE can join the Forum by paying a subscription fee.
ML: What are the other initiatives taken by BBF?
SS: We periodically conduct seminars for brokers on new business initiatives, like MF through stock exchange. We discuss and tell them (the brokers) about operational and compliance issues.
We look forward to conduct full day seminars for investors on market outlook and plan to get experts to speak on equities and commodities and on how they see the market in the immediate term and one or two years down the line. We plan to start from January and will continue once in a quarter.
If complaints of low-income MFI clients are resolved at the earliest, it would help avoid another crisis, as was seen in 2010
During the peak of the crisis, I remember Suresh Gurumani, the then CEO of SKS Micro-Finance, responded to my post in the micro-finance practice a Yahoo discussion group by saying that one of the most important tasks that he had accomplished at SKS (when has was there), was the establishment of toll-free number where low-income consumers could file their complaints. While I am not sure how the initiative has worked on the ground, it is imperative to follow-up on the idea for several reasons given below and it would be great if the proposed micro-finance bill explicitly brings in the following aspects—concerning complaints and consumer protection mechanisms—as part of the overall regulatory and operational architecture for micro-finance in India.
Let us first set the record straight. Customer complaints are not only a very valuable source of feedback but they also provide very useful information for the MFI. Complaints from micro-finance clients reveal what information they receive about their financial services and how and to what extent they understand the disclosure that is provided. This information is valuable to all stakeholders, including MFI (micro-finance institution) managers, supervisors, regulators and other stakeholders.
Therefore, at a minimum, all MFIs should be obliged to have a designated department (or at least few officers) responsible for handling complaints and redressing the same. There is a need for MFIs to set up specialised complaint departments to receive complaints from clients and investigate if indeed an error had been made by the institution. All MFIs —large and small—should have at least few officers designated to receive such complaints. When taking a new loan and/or opening a new account (where MFIs are permitted to access savings) and buying any new service (such as insurance or pensions), the client should be advised in person and also in writing as to where complaints, inquiries and disputes should be submitted.
Further, for each district, there should be one/few, clearly identified, locations where low-income clients of micro-finance services can go to discuss their financial problems. These offices should have a toll-free telephone line so that anyone from anywhere in the country can obtain information about the micro-finance services and their rights as consumers in case of a dispute. Clients should also be encouraged to file their complaints by visiting the complaints offices or by sending them through postal mail (e-filing of complaints is an option, as well). Thus, irrespective of the exact nature of the organisation of the complaint mechanism, MFI clients should have at least few identifiable locations where they can make inquiries, obtain reliable information and be directed as to how to request resolution of a dispute. Apart from English and/or Hindi, all of this must be available in local languages, as well. Disputes over specific cases will have to be handled by a separate redressal mechanism given above (special department), failing which the clients would have the right to approach concerned departments of the regulator/state governments and/or designated ombudsman.
And regulators/supervisors, as part of the supervision process, should regularly review the complaint files of the MFIs that they oversee. Regulators/supervisors, while conducting on-site supervision visits at MFIs concerned, should review each MFI’s complaint files. They should also review the ways in which MFIs treat their clients —and wherever necessary, they should enforce the basic tenants of any consumer protection aspects. This would imply that their on-site supervision would include random visits to MFI branches and the associated field areas. Once this starts happening, regulators/supervisors must review complaint files (from the available database) to identify which MFIs receive a high number of complaints from low-income clients and why—and what remedial actions are taken. One interesting approach could be for the regulators to publish an annual report on the number of client complaints by MFIs and the common sources of the complaints. Without doubt, that could become the best deterrent for any deviant and abusive behaviour that became the talk of the town during the 2010 Indian micro-finance crisis. And there is a great opportunity to further develop these ideas and institutionalise all of them in Indian micro-finance through the proposed micro-finance bill that is to be introduced, debated and hopefully passed in the forthcoming winter session of Parliament.