The SEBI chief is worried about poor retail participation. The regulator and the exchanges are alone responsible for this. Will anything change?
The Securities and Exchange Board of India (SEBI) has finally woken up to the fact that it has fallen short in its key role to develop the capital market and increase the base of investors. Today, SEBI chief UK Sinha admitted as much, saying that the market regulator would take steps to get retail investors back into the market. While the new SEBI chief's policy changes are well-intentioned, the measures to be taken would make sense only if they are grounded in reality. We will be keenly watching what SEBI does, for Moneylife alone has been highlighting how investors have been pushed out of the capital market system by a combination of factors.
In India, the retail participation in the stock market has declined from 20 million in the 1990s to 12 million in 1999, and just around 8 million in 2009, according to official data, this despite the fact that the Sensex has grown by 20 times during this period. As a percentage of the total population, the retail investor participation is just 1.3%, whereas in the US and China it is 27.7% and 10.5% respectively, according to the Bimal Jalan Committee report. The SEBI chief has targeted an optimistic figure of 8% for retail participation in India.
As has been pointed out by Moneylife repeatedly in the past, the decline in investor participation is due to many complex issues for which the regulator and the stock exchanges are squarely responsible. This cannot be resolved by making just one or two policy changes. The market is riddled with problems ranging from the difficulties for investors in opening a demat account to price manipulation, poor grievance redressal and the lack of proper guidance. Retail investors face a tough time, and to add to this they are taken for a ride by greedy investment advisors.
In August last year, Union minister of state for finance, Namo Narain Meena, revealed in Parliament the reality of the Indian 'equity cult'. He said around 50% of the cash market transactions on the National Stock Exchange (during April-June 2010) came from a shockingly low 451 investors, of whom 156 were proprietary traders, while 50% of the trading in NSE's derivatives segment came from just 106 investors of whom 58 were proprietary traders. Only 6% of client accounts contributed to 90% of the trading in the cash segment. 80% of turnover came from just 41,654 investors. In other words, 1,50,546 investors (78%) accounted for just 10% of trading turnover.
Moneylife magazine and Moneylife Foundation have on a regular basis highlighted these issues through articles and seminars. In the month of February, Moneylife Foundation released a position paper on the issues faced by retail investors, alarmed by the decline in retail participation. This paper was sent to the finance minister, the finance secretary, the joint secretary, Capital Markets, and Yashwant Sinha, head of the Standing Committee on Finance. Investors face multiple issues as identified by Moneylife Foundation. Some of these are listed below:
To open a demat account an investor has to go thorough cumbersome KYC procedures. Along with this, the customer has to sign on numerous forms, many of which they sign without asking too many questions. The charges involved in opening and maintaining a demat account are not in favour of the retail investor either. Investors have to cough up nearly Rs550-Rs3,500 just open an account and then there are account maintenance and transaction charges. Brokers usually ignore those with small investments and look for investors with bigger pockets, as they earn higher commissions on the later.
The power of attorney (POA), which gives brokers the power to operate their clients account for conducting trades, is often misused by the brokers. In August 2009, an individual from the brokerage firm India Infoline was arrested for conducting unauthorised trades in an investors' account that led to a loss of Rs13 lakh for the investor (Read, Harassed Investors.) This is taking place in spite of the lengthy and complicated procedure of creating a demat account and is a de-motivation for the investor.
Portfolio management services (PMS) are no better in servicing clients. There are several cases where investors have been duped by fanciful presentations of the brokerage firms. The major problem is that this area is not yet regulated. Investment norms are not clear and there is no restriction to churning and trading. They have been cases where investors have lost a major portion of their fund value due to excessive churning. (Read, Will Portfolio Managers Be Accountable?)
The issues related to demat accounts, mis-selling, and PMS can be tackled to some extent with proper investor education. But, issues like price manipulation, corrupt accounting practices and over-pricing and incorrect grading of IPOs, are issues which cannot be controlled by the investor. It is the job of the regulator to take stern action against such malpractices. But, SEBI has not seriously pursued investor protection.
Investor protection is one of the primary objectives of SEBI. But, its grievance redressal system is not up to the mark. In May 2009, the chief information commissioner (CIC) under the Right to Information (RTI) Act had severely criticised the regulator's handling of investor grievances. The CIC said that SEBI was not providing the right support to information-seekers and rejected requests even when it had the power to obtain details from stock exchanges.
"The response of the regulators in India has been knee-jerk and panicky. Instead of trying to punish wrongdoers after in-depth investigation and sensitivity to market practices, the regulators have only succeeded in eroding investors' confidence in the market by high-profile arrests and media hype," says Deena Mehta managing director, Asit C Mehta Investment Interrmediates, and one of the three trading member-directors on the board of the Bombay Stock Exchange.