Almost everybody is waiting to see the end of 2020, the year when a virus brought our lives to a grinding halt. People lost lives, livelihoods and struggled to cope with unforeseen challenges. While the economy slowed down drastically, the Indian stock market seemed to cock a snook at the virulent virus. The Sensex soared from 41,253 on 31 December 2019 to 47,613 on 29 December 2020, giving a 15.4% return to those who made the right bets—or simply sat still with their quality stocks.
As people worked from home and discovered interest rates on bank term deposits sliding to a miserable 5.5%, they turned to the stock market in droves. Both depositories now report over 20 million depository participant (DP) accounts each—the NSDL 20.7 million and CDSL 27.8 million. Even accounting for the fact that many investors have multiple DP accounts, over 1 million new accounts were added every month since the lock-down.
The entry of a large number of first-time retail investors exploring the stock market as an investment option along with foreign institutional investment has created a feeling of euphoria. It is excellent that investors are actively seeking ways to improve returns. But, as we start a new decade, it would be also smart to learn from the many chilling financial disasters of 2020 that decimated savers’ money. This will ensure that our finances and savings are in better health in the coming years.
1. Broker Defaults: If you are a new entrant to the stock market, you will be aware that the onus of tracking your investments is on you. Over the past year, a record 18 brokers were declared defaulters and at least four others voluntarily shut shop. The Securities and Exchange Board of India (SEBI) has responded with policy and procedural changes to prevent brokers from misusing your money. These new rules have cast an onerous burden on brokers as well as investors to track investments, return of margin money, etc. To add to the confusion, an investor now receives multiple alerts from both depositories, both Exchanges and investor’s broker, mutual funds, etc. These repetitive messages create confusion and disinterest instead of helping, but the market regulator and Exchanges don't care. Their aim is to shift the burden of regulating intermediaries on to investors by making them responsible. The upshot is that investors depend on financial advisers to track their investments and are trapped all over again.
Here’s what we found in a couple of cases, where a bulge-bracket investor approached Moneylife Foundation for help. One investor was conned by the wealth manager of a leading bank to invest Rs3 crore in 100% capital protected instrument issued by Reliance Home Finance just months before its default. The bank has aggressively denied responsibility and was willing to fight it out in court. To the investor, it would mean further losses on legal fees. Interestingly, this investor had another adviser tracking family investments for a fee. Yet, neither the bank (which earned fat commission on the product and probably lost a client) nor the intermediary took care of the investor’s interest so he came to us for help. The lesson: Play safe when you opt for wealth advice from large banks (this stands true for stocks, mutual funds, realty, real estate investment trusts, art and other hybrid derivatives or leveraged products).
2. Banks: This is the first place where we park our money; so trust is imperative. Yet, 2020 started with cold panic over whether the government would bring back the re-worked FRDI Bill (Financial Resolution and Deposit Insurance Bill) with its controversial ‘bail-in’ clause. Mercifully, the revised Bill did not make an appearance in 2020 and, thanks to the banking disasters like Punjab and Maharashtra Cooperative Bank, Yes Bank and Lakshmi Vilas Bank (LVB), we have had three positive developments. First, all urban and multi-state cooperative banks are now under direct financial supervision by the Reserve Bank of India (RBI). Secondly, deposit insurance has gone up five-fold to Rs5 lakh. Together, this ought to make RBI more vigilant to avoid bank failures. There are well over 1,500 cooperative banks in India and, unless RBI finds a way to avoid bank collapses, the deposit insurance system itself may need to be quickly reworked.
A third positive development with far-reaching consequences is the decision not to nationalise private losses by forcing public sector banks (PSBs) to acquire failed private banks. Probably, a lesson from the IDBI Bank (a pseudo PSB), takeover by Life Insurance Corporation with disastrous results and extraordinarily high costs. A PTI report on 22nd December says it all. “Earlier this month, Finance Minister Nirmala Sitharaman said the recapitalisation was done by the government by infusing Rs21,157 crore into IDBI Bank since 2015; after we came back to power and LIC infused Rs21,624 crore. So both, put together, have given Rs42,781 crore to the Bank. This has helped reduce the net non-performing assets (NPAs) from a peak of 17.3% in September 2018 to 5.97% in September 2019.” The Bank remains under RBI’s prompt corrective action!
Indian bank depositors have been fortunate to have a large public sector banking system (nearly 50% of banks) which safeguarded their savings from losses and humungous bad loans racked up by PSBs. Every Indian pays the price indirectly when PSBs are recapitalised and bailed out by the exchequer, including millions without bank accounts. The merger of 10 large banks into four new ones to be followed by rationalisation of branches will gradually end the security of having our money in a nationalised bank. It is already time to become more vigilant about your bank’s performance, its charges, its attitude to redress of grievances and the extent to which it encourages mis-selling of financial products and insurance, begins now.
3. Bonds, NCDs, Mutual Funds and Their Dangers: This was a year when investors, who moved to the safety of bonds (AT-1 bonds of Yes Bank and LVB), non-convertible debentures (NCDs) of Dewan Housing Finance Ltd (DHFL) and other seemingly safe investments offering higher returns, became victims of failed supervision of regulators, crooked auditors and dubious rating agencies. The saga that began with the collapse Infrastructure Leasing & Financial Services (IL&FS) and DHFL continued into 2020. There is probably more to come, if the forensic audit of the SREI group confirms allegations of siphoning of funds by ScamBreaking.com.
Many of those holding financial paper of these companies were victims of mis-selling by financial advisers who did not bother to warn investors, mainly senior citizens, that credit ratings in India are not dependable; there was practically no exit, since our dysfunctional bond market offers no liquidity to retail investors. The promise of higher returns ended up swallowing a large chunk of savings. This will not change in the coming decade, since those responsible have faced no punishment and are free to lure and deprive other gullible savers.
Often, the same advisers, who sold dubious fixed deposits to senior citizens in the past, have been selling bonds and mutual funds (think Franklin Templeton and how financial advisers are aggressively continuing to mislead investors) which offer them a higher commission. When things go wrong, they jump in to help, so investors stay with them instead of applying their mind and moving away—this is another trick to ponder over, as you plan your finances for the coming decade.
4. Beware of Ponzi Schemes: The final lesson from 2020 is that ponzi schemes come in many forms. They are not necessarily multi-level marketing schemes like QNet and thousands of others that loot the gullible every year. A majority of broker defaults in 2020 were ‘assured return’ schemes offered by brokers, which were nothing but ponzi schemes that offered high returns from money collected from new investors.
Another giant ponzi that may be slowly withering away is Sahara Pariwar. Despite a Supreme Court case and the group founder, Subrata Roy doing jail time, this money-guzzling machine had collected a massive Rs1.10 lakh crore over the decades only because it offered convenience of collection and regular returns, higher than those offered by banks. Today, Sahara is unable to repay investors (Sahara Pariwar: Mysterious Riches, Tall Claims and Struggle To Repay) and its ability to mop up savings through a clutch of opaque cooperative societies may, finally, be coming to an end. Even today, there is little effort to pursue investigations against the group or ensure that those who have made legitimate investments get their money back.
The message from all this is simple: when it comes to your savings, you would better learn to be atmanirbhar, or self-reliant since the government and its regulators are not going to come to your aid. Grievance redress and compensation in India remains an alien concept.