Why does the retail investor shun the capital market?

Are retail investors earning enough? NIRMAL JAIN ET-IG MONDAY, APRIL 24, 2006

In the past 18 months, we have seen an unprecedented flow of funds into our stock markets. During the same period, the shareholding of typical retail investors has been falling almost continuously. While there has been some supply of additional paper through IPOs, FIIs and mutual funds have been able to increase their shareholding in blue-chip companies only at the cost of small retail investors (classified as public in most shareholding pattern tables). In general, promoters have also maintained or increased their stakes. Now that the market has run up over 50% in one year and 200% in the past three years, everybody can see that FIIs and funds have made a huge profit on their investments in India.

Why does the retail investor shun the capital market? Many retail investors burnt their fingers in the previous bull run and would have sworn never to return to the market. Today, I think, media and regulators, albeit working with good intentions, could be causing impediments to the growth in the equity cult. From government to media to regulators, everybody talks about shielding retail investors from the ills of the equity markets. In effect, they have been successful in shielding him/her from the boons and bounties of the equity markets as well. I have no doubt that Sebi has done a commendable job of creating a healthy environment in the market. Recently, Sebi has been able to nip in the bud quite a few scams, including price rigging of Z stocks and misuse of retail quota through fake DP accounts in the IPOs.

However, the problem arises because of the media hype created around such examples. If we highlight excesses of any system, people will tend to lose confidence in the system itself. On the whole, capital markets have been functioning fairly well. Although it is important to control such incidences, their relative importance should not be exaggerated. Also, a number of media correspondents had started warning about possible scams and bubbles just because the sensex touched 6000 or 7000 and did their bit to scare away retail investors. Unfortunately, media revels in scare mongering. Many of them are actually not qualified or experienced enough to take a judgmental call, but they do write with authority.

In India, the retail ownership of equity assets is probably amongst the lowest in developed or developing countries. This should be a wake-up call for our government, as well as for all authorities and bodies associated with the capital market. Is it not that we have got the best regulatory system, but do we want the most effective regulatory system to work as the most effective disciplinary system? Nirmal Jain, MD, India Infoline