Indian IPO Market - Prospects & Challenges
(by R.Kannan)
(This article of mine was originally published in "ICFAI READER" issue of October 2004
published by The ICFAI University Press)

Insignificant Participation of Retail Investors in Primary Market
(Only 2% of the retail investors in India enter the primary market as against 51% in other European countries and US.
The reasons for the lukewarm response in retail segment and steps needed to increase the
participation of retail investors in Indian capital market.)

At present the stock market dealings are by high net worth individuals, portfolio investors, domestic financial institutions, and foreign financial institutions. Most of these categories are not actually long term investors in the security market, but carry on trading activities, involving regular selling/buying of securities based on the volatility of the market. They use sophisticated software to carry out stock valuations forecast which direction the volatility would move.

There are other unique features equally significant. The turnover in the cash segment in NSE during January 2004 is stated as Rs.134268 Crores of rupees. But bulk of the turnover centers round a select few premium chips (securities) and there is no widespread distribution of stocks traded. There could be in fact less volatility in the price movement of these securities. The value of lot size can be within reach of the small investor unlike the premium chips, where it can anything near Rs.5 Lacs or more.

The third anomaly in the market is major trading takes place in NSE followed by BSE. These two exchanges have turned out to be market for trading high value securities. The system of screen trading and establishment of nation wide trading centres by these two stock exchanges have driven out of business the Regional Stock Exchanges numbering over 15.

All these years the individual investor could keep away from the stock market, since he could get adequate return from depositing his savings in commercial banks fixed deposits, when the ruling interest was over 8 to 10 percent per annum in the era of high inflation and directed interest rates.

Domestic savings in India is around 23 to 25% of our GDP and of this as much as much As 19 to 20% is accounted by the small saver of the category "households". Bank deposits are no longer attractive to this category of savers. To some extent they avail the parking sources of mutual funds and government small savings schemes, but individual savers must be encouraged to plan investments in equity and debit securities listed in the stock exchange and hold them for a period of 3 to 5 years. These category of savers cannot take decision using sophisticated software tasking advantage of short-term priced variations. But they can study the long-term implications. The profile of the Corporate house, whose stocks are to be invested in, the extent of corporate governance it follows, the progressive trend of its financial indicators and the NAV statistics. In fact quite a few of the mid-sized companies have the market value of their equity shares at par or even below the NAV.

The category consists of individual who can invest between Rs.50,000 to Rs.10 Lacs. Bulk of the deposits of commercial banks is contributed by this group. Institutional Investors like mutual funds or insurance Companies, Pension funds in turn invest funds pooled from this sector. In the changed environment of declining rates of interest on Bank deposits and small savings, there is also need a prime need for this potentially powerful group to turn to investment in stock exchange securities in part at least.

As Per statistics published by SEBI the savings by house hods during the year 200-01 amounted to Rs. 2,64,699 Crore comprising as under:-

1. Savings held in currency Rs.16901 Crore

2. Bank Deposits Rs.109400 Crores

3. Non-bank deposits Rs.8979 Crore

4. Life Insurance Rs.34455 Crore

5. Pension & Provident Fund Rs.53937 Crore

6. Claims on Government(Includes investment in shares and debentures of credit/non-credit societies and public sector bonds)Rs.34806 Crore

7. Shares & Debentures Rs.8579 Crore

8. Unit Trust (minus) Rs.-1343 Crore

SEBI further observes that There was a structural change in the composition of financial assets of households in that the share of investment in shares and debentures which had increased from 2.9 per cent in 1997-98 to 6.4 per cent in 1999-2000 declined to 2.7 per cent in 2000-01. Frequent scams in the Securities market and the dominance of trading segment as compared to Investment portion in the market keeps the middle class urban investor, who are potentially the class of investors who can park their savings in this sector.

The participation of the individual investors in the securities market was also significant in the early Nineties before the Harshad Mehta Scam. The gullible individual investor had burnt his fingers more than once and hence he shies away from this market. But he burnt his fingers because he stooped to speculate. He must be taught to choose stock exchange securities as a product for term-investment spread over 3 to 5 years looking for fair return around 8 to 9% and not windfall income.

Short-term trading in securities carries an element of risk. Long term invest spread between 3 to 5 years spread in a portfolio of equities/bonds should appeal to the investors once market turns stable and scams are distant events fading away from memory. Investment in equities can be initially started at a smaller level and progressively increased by the investors as they get experience and more confidence.

The contributing reasons are two fold:

1. Household investors have no guidance in personal investment and to make a reasoned choice between various products available.

2. No promotional agency or representative approaches the household savers and solicit business in this category, unlike insurance, mutual fund or even small savings.

What can be done to change the situation?

1. Personal Investment as a subject to be included in educational institutions in courses like Commerce & Economics. Short-term courses ranging from 15 days to one month also given to interested persons. The stock exchange to take the initiative for this.

2. Commercial banks should provide the service of handling investments in securities on behalf of their customers.

3. Regional Exchanges should specialise in providing service to individual/small investors, leave the field for NSE/BSE to high Net worth Investors.

4. These exchanges should give attention to mid-cap securities in particular those corporates that are located in their region.

5. Brokers registered to operate in these exchanges may be permitted to deal with other products suitable for small investor like products of mutual funds and insurance companies, Government Small Savings etc.

6. The broker should be primarily a marketing agent with skill to guide investors to take informed decisions. The stock exchange should make available to him profile of the corporates who shares are listed therein. In standardised formats.

7. Banks should pool the orders of their customers and subscribe in bulk in the case of new public issues and private placements and distribute to their customers for a service fee.

Thus we will have a market and an organizational set up suited for the small investor. His potential total saving per year is Rs.2,60,000 Crores. The stock exchange can aim to initially pool 5% of this and eventually 10% by way of investment in its securities.