Increasing retail investor base: SEBI has a tough job ahead
Moneylife Digital Team 02 June 2011

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.

vidhyalakshmi s
1 decade ago
Thank for posting this article which is exacting what Im searching, I ll be great if moneylife team write a article on whether rajiv Gandhi equity saving scheme (50 % tax exemption on capital gain for retail investors those who invest upto Rs.50000 with a lock in period of 3 years ) really a good initiative to attract and increase retail participation in stock market , and clarification with regards to the scheme.
Amit Sharda
1 decade ago
Great Read.. Ya it is really sad to see such low retail participation. NSE and SEBI are trying to push financial literacy programs with tieups with some universities but does not seem to yield satisfactory results.
Retailers need to do some basic research and move towards informed trading from tip based trading/investment.
1 decade ago
To me it looks a grave chance of regaining the lost faith of investors in this financial market which has been more regulated by greedy promoters and operators then any body else.Most of retail investors have lost hugely or those lucky ones who made money have made it by luck(NOT BY THIER MARKET ANALYSIS )because fundamenatls have very rarely worked in this market.
Most investors have preferrred to invest in Real estate,their own business expansion or gold or last but not least the bank deposits for very simple reasons which most o financial experst do not dare to agree and they keep on chanting Mantra of Long term-but to me if our economy is doing good and performance of companies is going well why it does not go in tendem with their stock prices?(thanks to syndicate of promoters and opeartors),
i am again sure it is very tough to regain lost confidence of investors who have burnt their fingers in this fireball.
It will take very long term action on regulators to make RETURN of investors who have LEFT this CASINO.
1 decade ago
Why retail participation in decreasing ? .Only one reason - retailers are loosing money in stock market . One main reason is the wrong advice of Broking firm staffs. They only need more trades to create volume for themselves . Since broking firms reduced their brokerage drastically due to competition they are forced to advice clients for unnecessary trades to generate more brokerage. Any industry can't survive long like this. So there should be some minimum brokerage as in the case of maximum brokerage. If there is something like this, many of the unnecessary trades will be avoided and retailers will make money.
1 decade ago
8 million retail investors in a country of 1250 million works out to mere 0.64% of the population.

To achieve the target of 8% penetration, we have to increase the investor base by another 12 times.

A road map and action plan needs to be evolved in discussion with industry, investor forums, advisors etc.

First we’ve to stop the erosion of the investor base and then work towards bringing in more people.

The initiative should go beyond the investor awareness programs conducted by broking houses and AMCs. The existing initiatives lack depth and penetration.
Shabbir Haidermota
1 decade ago
One suggestion I can give to SEBI in order to increase retail participation over the long term is to lobby with the Ministry of Finance to increase the limit under Section 80C of the Income Tax Act, 1961 to at least Rs.3 lakhs from the present Rs.1 lakh for ELSS Mutual Fund Schemes (which sadly is expected to become ineligible from April 2012 when the new Direct Tax Code kicks in). I have said this to heads of AMCs as well but have not yet found any concrete reply to what any of them are doing to at least attempt to get this done.
Increasing retail participation in equity can even help the Indian equity markets get some depth and not be dependant on the whims of FIIs.
Melvin Joseph
1 decade ago
I agree with all the points raised by Money Life for increasing retail participation in India.I have one more suggestion.
We are going to have a very high youngsters, coming out of colleges and start earning in a growing economy with good disposible income. We should start financial education in the colleges in a bigway.I have seen,candidates coming out of many colleges lacking even the basis of financial knowledge.To them, the only investment is bank deposit.If we can impart basis financial education in the colleges, it will help in a big way towards improving retail participation.
When all other country Pension Funds and FIIs are believing in India and investing in Indian equity market, it is pathetic to see that only 1% of Indians are investing in it. We are good savers, but bad investors!
Deepak K Rao
Replied to Melvin Joseph comment 1 decade ago
Dear Melvin,

Well said, I agree with your kind suggestions.


Free Helpline
Legal Credit