T N Ninan: What equity cult?

WEEKEND RUMINATIONS

The bars and restaurants in downtown Mumbai are once more full of noisy people having a good time because the Sensex makes them feel rich again.

Without wanting to be a party-pooper, this is a good time to ask how Indian the stock market is, and how much of a role the "small investor" plays in this market. In other words, is this a playground for the few or a market for the many?

In theory, there is mass participation, since companies like Reliance Industries count their shareholders in millions. But when you look at the hard money, the numbers tell a different story.

Even in Reliance, the promoters hold 47 per cent of the company; foreign institutional investors and GDRs account for a further 28 per cent, and some of the rest is held by the Indian financial institutions.

The general public holds (directly and through mutual funds) no more than 15 per cent or thereabouts. And this is the company whose founder is credited with a seminal role in spreading the equity cult in the country.

Two other points are worth registering. The market capitalisation of India's stock market, at roughly Rs 15,00,000 crore, is about half of India's GDP.

That ratio in most other emerging markets of any consequence is much greater. This means the stock market is not as important in India as its counterparts are in other countries.

Second, the average Indian puts a miserable 1.5 per cent of his savings in stocks and shares (and equity mutual funds). Not only is that figure unusually low by the normal international yardsticks, it is also much lower than it used to be (more than 5 per cent).

Clearly, successive scams and boom-bust cycles have made your man in the street wary of mucking around in the middle of rampaging bulls and bears.

This is both ironic and predictable. Ironic, because the fact is that the Indian stock market has got much fairer for retail investors; there is greater transparency and disclosure, brokers can't rig the market as easily as they used to, and the market is much more efficient in the way it handles transactions.

But predictable too, because it is the FIIs who tend to move quickly when the mood in the market changes, and either ride the boom or leave the market when it is into a downturn.

Indeed, FII moves virtually determine whether the market is going to go up or down. In contrast, your retail investor (as happens elsewhere in the world) gets into a bull market too late to enjoy its benefits, and gets out of the market too long after the bears have taken charge.

Mutual funds are the natural alternative for retail investors who have burnt their fingers as a result of successive scams (Harshad Mehta, Ketan Parekh) or don't trust their own judgment in volatile situations.

But trust in fund managers isn't too high, either""because of the experience with the UTI and the general perception that many fund managers often don't manage to beat the index. The result is a lack of faith in the market.

Changes in the primary market have reinforced these trends. Public share issues are increasingly "book-built" affairs that give a huge advantage to institutional players (who, unlike retail buyers, can book shares without paying any money up front). And the old rules that led to under-priced offerings that left more on the table for the buyer, disappeared long ago.

Shareholding patterns in the large companies reflect these trends. Thus, foreign investors now own 69 per cent of ICICI, 62 per cent of HDFC, 65 per cent of Satyam, and 48 per cent of Infosys.

In many other companies of comparable scale, they hold between 30 per cent and 40 per cent. If you take away the foreign and promoter holdings in the 10 companies with the biggest valuations (which account for a third of the value of all listed shares), you discover that domestic non-promoter investors (including the financial institutions and mutual funds) hold no more than 25 per cent of the total stock in these companies. FIIs and GDRs accounted for slightly more than that number.

In other words, the Reliance picture is pretty representative of large-cap stocks. There may be millions of retail investors in India, but the truth is they haven't got that much money in the market; so India isn't exactly the home of the "equity cult".