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C. J. George

FOR a country of India's size, the retail participation of investors in equity market seems disproportionately low. The number of depository participant accounts with National Securities Depository Limited (NSDL) stands at a little above 5 million which obviously includes all kinds of permutations and combinations of names, thanks to the IPO boom of the early 1990s.

The market framework is at par with that of any of the developed countries'. The T+2 settlement system, dematerialisation, screen-based nationwide computerised trading and the robust regulatory framework have together strengthened the infrastructure.

If India is a hot investment destination, it is more because of the robustness of the market infrastructure, than perhaps the relative under-valuation of Indian equities. The rapid penetration of NSE and BSE trading terminals should further attract investors from across India, much beyond the historic concentration of investor population to Maharashtra and Gujarat, and Delhi and Calcutta.

With trading terminals of the NSE or the BSE in at least 400 towns, it means virtually 400 SEs; this provides instant liquidity to stocks. Apart from liquidity; there are such facilities as SPEED-e that empower an investor with trading and settlement abilities.

After the IPO boom of the early 1990s, there was no substantial addition to the investor population. In the backdrop of the robust market infrastructure, the next IPO boom, if it happens, can dramatically increase the number of investors, harnessing private capital on a large scale. If such a market boom sustains, the number of equity investors can increase from less than 7 million to 50 million. In the event of such growth, the Indian brokerage industry will face ever greater challenges. The business of broking will take on an institutional nature and banks and broking firms of size will capture the space due to the sheer enormity of the capital required.

But the moot question is: Will we reach the 50 million mark of investor population with the current incentives and environment? An obvious way to do so would be through the IPO route, given its success in attracting investors. For this, regulators and stakeholders will have to take a call on the priorities facing them. This implies that the IPO market distribution structure and pricing must change. Today, an investor chases after IPO application forms just as he did 15 years ago, and still continues to make payments/receive refunds the way as before.

An investor undergoes the harrowing experience of getting a unique client code from the broker and a DP account from the depository participant. It is mandatory that the same DP account be recorded in the IPO form. In such acase, why should the system to repeatedly force an investor applying for an IPO to chasethe application form, fill it and submit it.

Imagine the even more tedious process that an NRI applying for an IPO has to go through. He has to get the application from India, fill it, attach a cheque/draft and send it back. In most cases, by the time the application reaches India, the last date is over.

This demonstrates the way reforms have bypassed primary market — either by design or by oversight. Further, the aggressive pricing of an IPO in tune with its potential secondary market valuation is no different from direct entry into the secondary market. Thus, if we continue down this road, then reaching the 50-million-investor mark is achievable only in the distant future. The strategies should then revolve around education, training and awareness campaigns, as are being conducted now by the market participants.

The country has always overlooked the potential of our Diaspora as stock market investors. At a time when the rupee is showing signs of strength, every NRI wants to be invested in India.

Unfortunately, the only avenue for them is via the decades-old the Portfolio Investment Scheme. Every time an NRI makes a profit on a transaction, 30 per cent tax is deducted but when he/she makes a loss that is not allowed to be adjusted with past or future profits till the time he/she files an income-tax return and claims a refund. Who will go through this unwieldy process when today many forex control regulations have changed? Thus, NRIs invest in the stock markets of other countries. The investible resources with the Diaspora are large and innovative ways are needed to attract this wealth to the Indian market.

Finally, the proof of the success of market reforms lies in the expansion and development of the market, in general. What we can truly boast of is the manifold growth in trading turnover. The reforms, structural or otherwise, should result in a widening of the investor base and raising of larger amounts. That should be the sole test of the success of market reforms.

That the state-of-art trading technology, electronic settlements, T+2 rolling settlement, and a stronger regulatory framework have not attracted investors to the desired extent means there still lurks some serious problem, somewhere.

(The author is Managing Director, Geojit Financial Services.)

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