The Narendra Modi government is bombarded with many suggestions. Soon there will be clamour for measures to bring more retail investors to the stock market. The previous government's attempt in this direction was a "government scheme" - the socialist answer to all problems. Pranab Mukherjee, aided by bright minds in his ministry and in the Securities and Exchange Board of India (Sebi), had come up with the Rajiv Gandhi Equity Savings Scheme - which, predictably, has been a huge flop. So what can be done about this issue of getting retail investors into stock markets?
The short answer is, do nothing. Save the effort for more fruitful stuff. The reason for doing nothing is the changed market structure on the one hand, and learnings from behavioural theorists on the other. Let me explain starting with some background and drawing on my three decades of observing this issue.
In the 1980s, the role of retail investors in capital formation was a popular topic of discussion. The business press devoted reams of newsprint to how to get more retail investors to buy stocks. Frequent seminars and workshops organised by the chambers of commerce were devoted to the subject. There used to be official committees in the finance ministry deliberating on "retail participation" in the market every few years.
It was an economic issue. India suffered from a shortage of capital. It could come from government Budgets or from retail savings. Capital inflows from abroad were disallowed. Not only was the government constrained to supply capital, but it was even expropriating retail savings from the small savings schemes and from the banks. Private businesses remained starved of capital.
What was the way out? Economists suggested that India should channel retail savings into private companies through the stock market. Hence, the endless seminars, articles and committees to push, pull, prod and goad retail investors. Instead of getting the banks to intermediate the flow of capital from retail savings (bank deposits) to companies via bank loans, the idea was to remove this intermediation and let the capital flow directly. This was part of the reason why we had a massive boom in new issues in 1985-87. Most companies of that era were shady and disappeared quickly. Regulation and grievance redress systems for investors did not existent.
At the policy level, this meant putting the cart before the horse. Ensuring the public sector remained one of the biggest players in the economic game, keeping banks under government control and then asking a stunted private sector to access the retail savers made no sense. Worse, until 1992, there was no market regulator. The scam of 1992 gave long delayed statutory teeth to Sebi, which in turn made way for the liberalisation of Indian markets to foreign investors.
Once the domestic market opened up to foreign capital in 1993, the economic logic of getting domestic retail investors into the stock market to supply capital started to get weaker with every passing day. Remember, India's economic liberalisation came immediately after the fall of the Berlin Wall and the rise of globalisation that included freer movement of capital across the world. Such movement got a further boost after 2000 as China contributed to the global savings glut. In the past five years, without much public mention, India has attracted billions of dollars to its debt market, too. Meanwhile, Indian businesses have grown bigger, and developed better access to global equity and debt markets.
It is true that all these developments bypassed small businesses - but that is a fact everywhere. There is no robust system of connecting small businesses to retail or institutional investors anywhere in the world. They continue to depend on bank lending or own sources (friends, families and fools) of capital. The short point is, Indian businesses don't need retail savings to grow.
The second reason to not fret about poor retail participation is the growing realisation, backed by numerous academic studies, that we are not hardwired to deal with money - especially with aspects of finance that are probabilistic in nature. We love certainty and predictability. Stocks are anything but. We hate randomness. Stock movements are often random. We love trends and extrapolations. We cannot bring ourselves to buy stocks when prices have dropped sharply, because we extrapolate that they will go down further. We buy stocks when prices are high, extrapolating that they will go higher. This often leads to poor returns. Such behavioural biases lead most people to lose money in stocks, and even in equity mutual funds. To encourage them to invest in stocks is the same as encouraging them to try self-medication for neurological problems.
All this while the market regulator and exchanges have been promoting the myth that only if you are knowledgeable and thoughtful enough will you do well by buying stocks. This is pure claptrap of the 1970s vintage, before academics opened our eyes to how irrational we are.
There is another half of an argument in favour of getting retail investors into the stock market: that it will help the government's divestment programme. That's a cynical use of savers and not even worth discussing.
The Modi government has many priorities. Pulling or pushing retail investors into the stock market is not one of them. But he does need to do something else for them. He can ensure that whoever voluntarily chooses to enter the market gets a fair deal from companies and market intermediaries. Both Sebi and exchanges fail miserably on that count now. Indeed poor grievance redress system and market manipulation happen to be the final argument to not encourage savers to invest in stocks.
The writer is the editor of www.moneylife.in
editor@moneylife.in
editor@moneylife.in
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