Ensuring increased participation in the capital market
A fundamentally strong financial market is essential to generate the required funds for the emerging economies. Despite Indian economy growing at a reasonable pace than most others (though slowed down considerably) most of the domestic investors are too disinclined to take part in the growth story through the stock market route.
Our saving rate is about 30% of the GDP (the highest in the world) and all set to rise to 39 % (rough estimates) in 2017 though a bit of slowdown was witnessed in previous year. Despite having a reasonable saving rate, most of our savings are diverted to unproductive assets like gold further increasing Current Account Deficit (CAD) of the country. Therefore, the need of the hour is to guarantee increased financial inclusion and infusion of domestic savings into the stock market.
Something about 7,800 scripts are listed on the Indian stock market and less than 3,000 are trading on an active level at present.
The main reason for such dismal attitude of our retail investors towards equities is the rate of risk associated with the Indian stock market due to its speculative culture. In addition, high transaction costs including brokerage, depository charges and SEBI turnover fee hurt investor sentiments more.
Only around 20 million investors from the top 10 major cities of the country contribute around 80% to the trading volume. Our stock market is heavily dependent on the Foreign Institutional Investment (FII) and any sudden inflow or outflow of the FII money results in its instability.
It was very clearly witnessed post budget 2013-14 that the stock market slumped to a new low due to uncertainty of tax clause for the money being pumped through Mauritius route and other tax havens .It suitably shows how our bourses are highly dependent on FII inflows.
As per the recent figures (as of 31stDecember, 2012) FII hold shares of worth around Rs 11.59 lakh crore in Indian market. This accounts to 17.5% of total market value.
The data from SEBI shows the huge amount of FII’s already invested in Indian economy (both in equity and debt) early in the present year from January 2013 to February 2013.
In addition, Participatory Notes (PN’s) are emerging as the most preferred option for money laundering, further increasing volatility in the stock market.PN accounted for a rise of 1,75,829 till October of 2012.Though, according to some experts the contribution of Participatory Notes have reduced to around 11% in FII’s presently, still it is not a small number by any means.
Consequently, investors shy away from such a “risk prone” stock market. As per the experts, most of the investors that invested in 2007 are still to break even especially those who invested in realty, PSU banks and infra stocks.
Additionally, major chunk of equity shares are possessed by the promoters leaving almost a negligible amount (in form of outstanding shares) for retail participants in the stock market.
Of late, Indian government has taken some new and bold steps to revive the culture of equity trade among domestic investors and one of them is through Rajiv Gandhi Equity Savings Scheme for people with less than Rs 12 lakh of income annually (revised from Rs 10 lakh).
Recently, Securities and Exchange Control Board (SEBI) has also issued new guidelines where it made mandatory for promoters to lower their shareholding in the company to about 75%.
The most important and widely discussed fact is the lack of adequate transparency in our system.
Newly, SEBI has come out with new guidelines which would surely put a smile back on the face of investors, this time around. The statutory body has taken strict action against defaulters as evident in the Sahara case where the business house raised funds flouting the prescribed norms. It has tightened its noose around the people that are actively manipulating the already weak IPO market of the country.
A computerized investor’s grievance redressal mechanism has been introduced of late.Investors’s awareness campaigns have been organized around the country and helplines in 14 languages have been initiated in order to attract more investors.
Presently, a single KYC registration is sufficient enough for all transactions in the capital market unlike in the past; therefore making the system hassle free.SEBI has plans to compensate fund houses more if they enter into the cities beyond the top 15 list. People are permitted to invest up to Rs 20,000 in cash even if they do not hold a bank account or permanent account number, presently.
It would have been in the interest of our economy if government abolished the Security Transaction tax (STT) completely rather than reducing it and introduced capital gains tax instead (even on long term capital gains) in order to increase the volume of trade.
Though, government is doing its bits now in whatever way it thinks the best but a lot is expected still in ensuring increased participation of retail investors in the capital market.