The Hindu Business Line : Retail investors must `focus on equity with a long-term view'

"To make money, retail investors should follow professional and competent advice and pick companies with a long-term and established track record. Most important, they should avoid leveraging but invest from their own funds."

MR NIRMAL JAIN, FOUNDER AND CHAIRMAN, INDIA INFOLINE LTD

Volatility will be an integral part of markets the world over, according to Mr Nirmal Jain, founder and Chairman of India Infoline Ltd. "Neither the regulators nor the Governments nor any analyst can take the volatility away from equity investing," he told Business Line in an exclusive interview.

Excerpts from the interview:

Of late, a number of foreign brokerages such as Citigroup, Bear Stearns and Aberdeen Investment Trust have come out with a cautious outlook on India. Is this an indication that FII inflows will slow?As valuations become steep, FII investments may slow. But I think the valuations will get readjusted to next year's estimates once all top corporate results are out. We have seen some of the software companies showing good results this year in spite of the steep appreciation in the rupee. Although the market has corrected, it has also bounced back.

Therefore, if the valuations remain at current levels, FII investments may slow. However, there is lot of interest on the fringe. Therefore, if valuations become attractive again, the FII investment flow may resume its momentum.

Where is the market heading, particularly in the backdrop of the high inflation and interest rates?

The market has re-bounded strongly. This is primarily because of the fact that the India story is intact, economic growth is strong and most investors expect the high inflation and interest rate regime will get corrected soon. Interest rates may have already peaked and in future we may not see any further interest rate increases. Also, in the last few weeks, inflation has been showing a declining trend.

Stock exchange data show that retail investors have remained net sellers so far in 2007. Do you see the trend continuing? What is your advice to them in the current milieu?

On the face of it, retail investors are finding it difficult to handle the volatility similar to that witnessed in May 2004 and May 2006. Also, many retail investors are unable to take a long-term view. My advice to them is to focus on equity investing with a long-term view. Volatility will become an integral part of the markets, world over. Neither the regulators nor the government nor any analyst can take the volatility away from equity investing. So, in order to make money, retail investors should follow professional and competent advice and pick companies with long-term and established track record. Most important, they should avoid leveraging but invest from their own funds. They should invest only part of their investible resources in equity if their risk-taking ability is low.

Mergers and acquisitions have been taking place thick and fast in the brokerage space. There were even rumours that your company was in talks with a couple of foreign brokerages. Any progress on that front

We have consistently refuted all such rumours about acquisition of our company. As far as India Infoline is concerned, we have no plans to sell out or get merged or acquired. On the other hand, we are looking around for opportunities to acquire small broking houses. So far we have not been very successful on the acquisition front. Rumours that our company is in talks with a couple of foreign brokerages are baseless and incorrect.

Online trading has caught on. How many such accounts do you handle? What is the growth rate?

In early 1999, when Internet penetration in India was at its infancy and the future unknown, we took the hard decision of killing our earlier business model and embracing the Internet. Online trading has been growing at a tremendous pace. Our customer base has exceeded 150,000 and is growing at more than 10,000 customers a month.

It is easy to use banks such as ICICI Bank and HDFC Bank for online trading. Is your operation better than banks, where the transaction of funds from customers account is smooth? What is your volume of trading in terms of value or rupee?

Yes. Our operation is better than banks because we have payment gateway arrangements with seven leading banks, including ICICI Bank and HDFC Bank. Our online trading segment sees business of about Rs 1,000 crore a day.

World over there is an apprehension about hedge and private equity funds. What is your call? Are they in need of tight regulation?

Despite ongoing apprehension on hedge funds and private equity funds investing in India, they are here to stay. They have played an important role in providing liquid capital to enterprises as well as to the market.

However, a number of hedge funds are highly leveraged, with some of them leveraged almost four times, a level which we would consider serious even for individual investors. Therefore, there is a need to tighten regulation world over. As far as India is concerned, I think it is better if we allow the hedge funds to come directly because regulating them becomes easier. If they enter either through participatory notes (PNs) or FII sub-accounts, regulation becomes difficult. As for PNs, the transactions as well as the settlements happen outside India and we can have no information. Hence, the SEBI move to invite hedge funds to register in India is very positive.

Will allowing institutions to short sell result in a more realistic evaluation of the market?

It will give further liquidity and when the market gets speculatively charged, institutional investors backed by more competent and professional research and advice can act as a catalyst to cool it down or balance the sentiment.

With the setting in of corporatisation, do you foresee any perceptible changes in the functions of exchanges?

With corporatisation, the exchanges will become more public and more answerable. Although exchanges have put in a great effort of building systems and stringent regulatory environments, there is a feeling that they still work more like a monopolistic and quasi-government organisation. Corporatisation will have a huge immediate impact on the work culture, increasing competition, transparency and accountability and ensuring that the interests of investors are upheld at all times.

Will the close relationship between exchanges and broker-dealers continue post-demutualisation?

In my opinion we should not allow the relationship between brokerage dealers and exchange to continue the way it used to work in the olden days of the BSE. We have seen the merits of demutualisation, and the way the NSE has been functioning. I think both the BSE and the NSE should be corporatised and demutualised to provide healthy competition to each other and great service to investors.

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