The Hindu Business Line : Retail investors' apathy

The two recent mega public issues in quick succession, the first an IPO (initial public offer) by DLF and second an FPO (follow-on public offer) by the redoubtable financial power house, ICICI, elicited lukewarm response from retail investors what with a portion of the 35 per cent reservation for them devolving onto the QIBs (Qualified Institutional Bidders) which, along with mutual funds and high net worth individuals, otherwise hog the remaining 65 per cent. ICICI's condescension to the retail investors to offer a discount of Rs 50 per share with reference to the offer price to the institutional category did not in the ultimate analysis endear itself to it.

Many commentators are secretly delighted with this indifference on the part of the retail investors. In fact some have gone on record in the past protesting the 35 per cent reservation for them forgetting blissfully that the major chunk, 65 per cent, is also reserved this time round for the movers and shakers of the share market.

Price, the key

Be that as it may, what explains the apathy on the part of the retail investors? Ex facie, it is the price. The middle-class is extremely price sensitive, be it perishables or durables or even financial products. The mind-boggling premium nonchalantly collected in IPOs without so much as an explanation is the principal cause for this. In the case of an FPO, investors have the benefit of judging the issue on the touchstone of market quotations in the run-up to the issue. But IPO is simply a blind alley. It is another matter that quite often retail investors who tail the institutional investors too profit by selling off in the secondary market.

The capital market, primary as well as secondary, is therefore firmly in the grip of the institutional investors. They call the shots at both the places. In the manner of a diamond cutting a diamond, the government must strengthen the hands of mutual funds catering to retail investors. Mutual funds were born in the US in response to the felt need of retail investors to channel their investments steering clear of the mind-fields the capital market is littered with.

Boost mutual funds

But in India, ironically, even the mutual fund, avowedly existing for the welfare of retail investors, appears to have become the handmaiden of the corporates. The Securities and Exchange Board of India must act immediately to rescue the mutual fund industry. Simultaneously, it must wean the retail investors away from direct investment in favour of investing through the medium of mutual funds. Once the mutual funds truly start representing the small investors, 50 per cent of any IPO must be reserved for it, which effectively would be in favour of the retail investors.

The Finance Minister, Mr P. Chidambaram, has called upon public sector companies to go public by getting their shares listed. This may also be construed as a harbinger of things to come — government disinvestment through offer of shares to public abandoning the strategic sale route, which invariably gets mired in controversies. SEBI must act soon lest even the shares of public sector companies meant to be unloaded to public are cornered by the institutional investors.

(The author is a New Delhi-based Chartered Accountant.)

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