Where are the retail investors? Everyone seems to be looking for individual or retail investors. The government and the Securities and Exchange Board of India (Sebi) have made several attempts to get them back in the market but to no avail. The Sensex is around 20,000 and individual investors are still shying away.
Retail investors' equity mutual fund assets have dropped 30 per cent in the past three years, while nearly a fourth of mutual fund portfolios were closed last year, data from the Association of Mutual Funds in India (Amfi) show. Since the beginning of this financial year till the end of October, equity folios have declined 7.7 per cent to 30.62 million, from 33.17 million as on March 31. The story is no different for stocks. Between September 2012 and the corresponding period this year, retail holdings in BSE 500 stocks have fallen from 8.16 per cent to 7.5 per cent - down Rs 57,180 crore, in terms of retail market capitalisation. According to the latest report from CRISIL on mutual fund folio numbers, a sharp decline in retail ones in the equity category has been the outcome of the ongoing volatility in the segment. As a result, investors are fleeing to safer instruments like fixed income. The report further states that debt funds continued to attract retail investors, with the category witnessing an uninterrupted rise in retail folios since March 2009. Debt funds added 179,000 folios over the past six months (ended September), compared to 169,000 folios added in the previous six months ended March.
Therefore, Sebi is making yet another attempt to draw retail investors to equities. After market players responded negatively to the safety net proposition of the regulator, as an alternative the latter is debating whether to allow companies to issue convertible debentures, along with equity shares, during their initial public offerings (IPOs). The route will help both aggressive and risk-averse investors, as both shares and debentures will be available for them.
A convertible debenture can be a fully or partially convertible bond, typically with a fixed tenure and a fixed coupon rate. This can either be redeemed or converted into equity shares at a pre-determined price on a future date. In case a company's shares perform poorly after listing, the investor might not convert the bonds to equity and simply redeem at maturity.
"The advantage with convertibles is that a bondholder will not run the risk of losing money on the first day of listing, with many stock prices having fallen soon after. What is to be seen is whether these bonds will be zero-coupon ones or will they earn three-four per cent or earn on a par with bank deposits. Investors would also like to know if the bond conversion will be triggered at the company's will or at the investor's. And, if the bonds will be compulsorily or optionally convertible," says Prithvi Haldea, chairman of Prime Database. Experts say for a company or bond issuer, it can be a tricky situation if investors have the option to redeem. These may be smaller term bonds, of one to three years, after which period an investor could convert or redeem. Say, the stock price post-listing falls and all bondholders want to redeem; the company will lose all that money. And, though bonds can be converted at a pre-fixed price, if compulsorily convertible redemption will become a problem for investors.
Shriram Subramanian, founder and managing director of InGovern Research Services, a proxy advisory firm, feels the safety net was a bad idea. "In comparison, having convertibles is a positive idea. Investors get to know the company while participating in a safer instrument, they earn interest on the investment and also have time in hand before taking a call on converting to equity," he says. At the same time, there are chances that conversion is allowed at a premium, say, at the prevailing market price at the time of conversion. Convertibles will also not allow companies to sit back and assume bondholders will surely convert to equities. Bondholders could always redeem if the stock price is unattractive. At that time, if the company has plans for a new venture or product, it will need back-up to raise that much money to execute its plans. Companies will require to be flexible in their fund-raising structure, adds Subramanian.
Experts say convertible bonds were popular in India till about 2001. Ashvin Parekh, senior expert and advisor (financial services) at EY India, says convertibles work when there is steady growth in the stock price. In a volatile one like now, they do not. "Instead, make convertibles a long-term product by giving multiple options. That may work better than a one-time option," he says.
There are a few issues with the convertibles proposition, says Sai Venkateshwaran, partner and head (accounting advisory services) at KPMG India. One, the convertibles will give the upside of equity but no downside risk; will it be then a premium instrument? Two, what is the level of security planned for retail investors? For instance, in many foreign currency convertible bond issues, it has been seen that at redemption, there is a huge liability for the company and bondholders take a haircut. Finally, as the convertibles will be unsecured bonds, how much safety can be promised to buyers anyway?
The safety net proposition demanded only the issuer take care of the market volatility for investors. In convertibles, only if the markets are not volatile will it pay the bondholders. Therefore, most experts believe it's better not to mandate any norm. Some other measures can be looked at for corrective pricing of public issues.
Sandeep Parekh, a former executive director of Sebi and the founder of Finsec Law Advisors, says neither the safety net nor convertibles is a great idea. "Instead of making provisions for risk-averse investors, try to get those on board who can stomach the risk. Equities is a risky product. Why should either a company or shareholder pay for the safety of investors who can't take the risk? Such investors should be asked to stick to fixed income," he says.
Whenever such norms are brought in the market, many promoters start playing the market around redemption time to keep their stock price higher and push bondholders to convert to equities, says Subramanian. Hence, many say convertibles are unlikely to be as successful as touted.
Sebi has taken several steps to woo small investors to the stock markets. However, there are no visible green shoots and retail investor participation continues to languish at multi-year lows. Here are a few of these steps.
Rajiv Gandhi Equity Saving Scheme (RGESS): Introduced in 2012-13, it is a tax-saving one for individuals who have never directly invested in equities before. The scheme is meant for only those who earn a total income of Rs 12 lakh from this year. However, investors were free to churn their holdings after a year, provided the underlying investment value was intact. The scheme failed to strike a chord with investors. In its first year, RGESS saw inflows of less than Rs 40 crore.
Why it didn't click
Guaranteed IPO allotment: Sebi changed the allotment process to ensure investors get at least one lot of shares (barring hugely oversubscribed IPOs). Once one lot of shares is allotted to all applications, excess shares are given to investors who bid a higher amount. Small investors can simply invest Rs 10,000 to Rs 15,000 and get full allotment.
Why it didn't click
No-frills demat: Depositories were asked to provide the Basic Services Demat Account (BSDA), which cost less and offered basic features. These accounts don't have any annual maintenance charges if the value of securities held in the account is less than Rs 50,000. For value of securities between Rs 50,000 and Rs 2 lakh, the investor has to pay an annual charge of Rs 100. At present, most brokerages charge Rs 750 or upwards as annual maintenance charges.
Why it didn't click
Why it didn't click
"Most global stock markets now see more institutional players participating directly in equities. Retail investors participate in equities only through the mutual fund route. Sebi should do the same in India and allow retail investors to come only through mutual funds, without bothering with the high risk-taking ability," says Avinash Gupta, senior director & leader (financial advisory), Deloitte in India.
The other ways to get back retail investors is through the National Pension System, which can invest up to half of its corpus in equities. Some also say the finance ministry could do well by deploying a part of the Employees' Provident Fund Organisation corpus in the stock market.
Retail investors' equity mutual fund assets have dropped 30 per cent in the past three years, while nearly a fourth of mutual fund portfolios were closed last year, data from the Association of Mutual Funds in India (Amfi) show. Since the beginning of this financial year till the end of October, equity folios have declined 7.7 per cent to 30.62 million, from 33.17 million as on March 31. The story is no different for stocks. Between September 2012 and the corresponding period this year, retail holdings in BSE 500 stocks have fallen from 8.16 per cent to 7.5 per cent - down Rs 57,180 crore, in terms of retail market capitalisation. According to the latest report from CRISIL on mutual fund folio numbers, a sharp decline in retail ones in the equity category has been the outcome of the ongoing volatility in the segment. As a result, investors are fleeing to safer instruments like fixed income. The report further states that debt funds continued to attract retail investors, with the category witnessing an uninterrupted rise in retail folios since March 2009. Debt funds added 179,000 folios over the past six months (ended September), compared to 169,000 folios added in the previous six months ended March.
Therefore, Sebi is making yet another attempt to draw retail investors to equities. After market players responded negatively to the safety net proposition of the regulator, as an alternative the latter is debating whether to allow companies to issue convertible debentures, along with equity shares, during their initial public offerings (IPOs). The route will help both aggressive and risk-averse investors, as both shares and debentures will be available for them.
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The companies would issue convertibles and, after a period, these would necessarily have to be converted into equity or be treated as debt instruments, Sebi Chairman U K Sinha had explained recently on the sidelines of an investor conference. The concept of convertible debentures is not new. Companies can issue these even now. However, Sebi might make it compulsory for companies to issues these when going for an IPO.
A convertible debenture can be a fully or partially convertible bond, typically with a fixed tenure and a fixed coupon rate. This can either be redeemed or converted into equity shares at a pre-determined price on a future date. In case a company's shares perform poorly after listing, the investor might not convert the bonds to equity and simply redeem at maturity.
"The advantage with convertibles is that a bondholder will not run the risk of losing money on the first day of listing, with many stock prices having fallen soon after. What is to be seen is whether these bonds will be zero-coupon ones or will they earn three-four per cent or earn on a par with bank deposits. Investors would also like to know if the bond conversion will be triggered at the company's will or at the investor's. And, if the bonds will be compulsorily or optionally convertible," says Prithvi Haldea, chairman of Prime Database. Experts say for a company or bond issuer, it can be a tricky situation if investors have the option to redeem. These may be smaller term bonds, of one to three years, after which period an investor could convert or redeem. Say, the stock price post-listing falls and all bondholders want to redeem; the company will lose all that money. And, though bonds can be converted at a pre-fixed price, if compulsorily convertible redemption will become a problem for investors.
Shriram Subramanian, founder and managing director of InGovern Research Services, a proxy advisory firm, feels the safety net was a bad idea. "In comparison, having convertibles is a positive idea. Investors get to know the company while participating in a safer instrument, they earn interest on the investment and also have time in hand before taking a call on converting to equity," he says. At the same time, there are chances that conversion is allowed at a premium, say, at the prevailing market price at the time of conversion. Convertibles will also not allow companies to sit back and assume bondholders will surely convert to equities. Bondholders could always redeem if the stock price is unattractive. At that time, if the company has plans for a new venture or product, it will need back-up to raise that much money to execute its plans. Companies will require to be flexible in their fund-raising structure, adds Subramanian.
Experts say convertible bonds were popular in India till about 2001. Ashvin Parekh, senior expert and advisor (financial services) at EY India, says convertibles work when there is steady growth in the stock price. In a volatile one like now, they do not. "Instead, make convertibles a long-term product by giving multiple options. That may work better than a one-time option," he says.
There are a few issues with the convertibles proposition, says Sai Venkateshwaran, partner and head (accounting advisory services) at KPMG India. One, the convertibles will give the upside of equity but no downside risk; will it be then a premium instrument? Two, what is the level of security planned for retail investors? For instance, in many foreign currency convertible bond issues, it has been seen that at redemption, there is a huge liability for the company and bondholders take a haircut. Finally, as the convertibles will be unsecured bonds, how much safety can be promised to buyers anyway?
The safety net proposition demanded only the issuer take care of the market volatility for investors. In convertibles, only if the markets are not volatile will it pay the bondholders. Therefore, most experts believe it's better not to mandate any norm. Some other measures can be looked at for corrective pricing of public issues.
Sandeep Parekh, a former executive director of Sebi and the founder of Finsec Law Advisors, says neither the safety net nor convertibles is a great idea. "Instead of making provisions for risk-averse investors, try to get those on board who can stomach the risk. Equities is a risky product. Why should either a company or shareholder pay for the safety of investors who can't take the risk? Such investors should be asked to stick to fixed income," he says.
Whenever such norms are brought in the market, many promoters start playing the market around redemption time to keep their stock price higher and push bondholders to convert to equities, says Subramanian. Hence, many say convertibles are unlikely to be as successful as touted.
Sebi has taken several steps to woo small investors to the stock markets. However, there are no visible green shoots and retail investor participation continues to languish at multi-year lows. Here are a few of these steps.
Rajiv Gandhi Equity Saving Scheme (RGESS): Introduced in 2012-13, it is a tax-saving one for individuals who have never directly invested in equities before. The scheme is meant for only those who earn a total income of Rs 12 lakh from this year. However, investors were free to churn their holdings after a year, provided the underlying investment value was intact. The scheme failed to strike a chord with investors. In its first year, RGESS saw inflows of less than Rs 40 crore.
Why it didn't click
- Too complex for a first-time investor
- Involved opening RGESS-compliant demat accounts, different usual accounts
- Stocks have to be chosen only from 100 earmarked ones
- Investors didn't understand the norms for churning stocks
Guaranteed IPO allotment: Sebi changed the allotment process to ensure investors get at least one lot of shares (barring hugely oversubscribed IPOs). Once one lot of shares is allotted to all applications, excess shares are given to investors who bid a higher amount. Small investors can simply invest Rs 10,000 to Rs 15,000 and get full allotment.
Why it didn't click
- No activity in the primary market in the past two years
- |IPOs like JustDial or MCX were oversubscribed; bankers couldn't accommodate all investor
No-frills demat: Depositories were asked to provide the Basic Services Demat Account (BSDA), which cost less and offered basic features. These accounts don't have any annual maintenance charges if the value of securities held in the account is less than Rs 50,000. For value of securities between Rs 50,000 and Rs 2 lakh, the investor has to pay an annual charge of Rs 100. At present, most brokerages charge Rs 750 or upwards as annual maintenance charges.
Why it didn't click
- Since BSDA, the total number of demat accounts have been static
- There wasn't much awareness created
- Market conditions remained volatile
Why it didn't click
- Mostly institutional investors shifting to direct plans
- Equity funds' direct plans constitute less than three per cent of the total at present
- Low awareness and logistical difficulties
"Most global stock markets now see more institutional players participating directly in equities. Retail investors participate in equities only through the mutual fund route. Sebi should do the same in India and allow retail investors to come only through mutual funds, without bothering with the high risk-taking ability," says Avinash Gupta, senior director & leader (financial advisory), Deloitte in India.
The other ways to get back retail investors is through the National Pension System, which can invest up to half of its corpus in equities. Some also say the finance ministry could do well by deploying a part of the Employees' Provident Fund Organisation corpus in the stock market.