Wanted: new stocks for a new India

Anyone looking at the pattern of Indian savings today would find it difficult to believe that India was once a land of cheerful risk-takers. Indian merchants happily punted on futures contracts on oilseeds, jute and cotton way back in the early 1900s. Even in the nineties, initial public offers and new fund launches generated mass hysteria on Dalal Street.

But all that is in the past. After the global crisis of 2008, Indian savers have been shunning stocks like the plague and have reduced their financial savings to decadal lows. Worried by this trend, policymakers have been making frenzied efforts to resuscitate the equity cult.

They have reserved quotas for retail investors in initial public offers (IPOs), reduced taxes on equities to nothing and even floated plans such as the Rajiv Gandhi Equity Savings Scheme to dole out tax breaks to people who open demat accounts. Investor awareness programmes talk warily of equities being the only asset to ‘beat inflation’ and their limited risk ‘if held for the long term’. But the small investor is not taking the bait.

It is quite clear why. After all, why does anybody invest in stocks? Not because they can save on some measly taxes or make a 10 per cent return that “beats inflation”. People invest in equities believing that only stocks have the power to transform an ordinary salary-earning citizen into a millionaire in short order. Investors once flocked to a Reliance group IPO or queued up for Morgan Stanley units because they hoped that these were the multi-baggers that would put them securely on the road to riches.

But the massive stock market rout of 2008 and the long period of sub-par returns that followed has robbed Indian investors of this faith in equities. Four out of every ten listed stocks have registered a capital loss over the last five years and a third of the stocks have lost money over a ten-year period. Then how can you convince the investor that equity investing is the cat’s whiskers?

For the seasoned investor to return to the market, his poor return experience with ‘long-term investing’ has to change. This is something over which policymakers have little control.

Yet India’s much-hyped demographics mean that there are thousands of young people joining the workforce every year. Given their rising incomes and aspirations, these first-time investors may have plenty of appetite to take on equity risks, provided the rewards are equally scintillating. But for these savvy young people to take to the equity cult, what we need is a universe of exciting businesses on the markets which they can readily identify with.

Young people actively network on social media, replace their handsets often, hang out in coffee pubs, buy all their stuff online and splurge on travel and eating out. Yet, the Indian markets are sorely lacking in investment options from any of these sectors.

The stock market’s humongous line-up of 6,000-plus listed stocks features not even a solitary social media company, mobile handset maker, e-commerce player or coffee chain.

In fact, compared to India’s bellwether indices which are chock-a-block with banks, industrial giants and software companies, even the age-old Dow Jones Industrial Average presents a pretty appealing picture with Walt Disney, McDonald’s, Visa, Home Depot and American Express jostling with the Caterpillars and the Exxon Mobils. The Nasdaq obviously, is a young investor’s delight offering up opportunities to partake of Facebook, Google and Twitter

Unless young investors can really see and feel the potential of the firms they are investing in, they are unlikely to take a fancy to equity investing.

But why has the Indian listed universe failed to change with the times? One explanation for this could be that Indian entrepreneurs aren’t really innovators, making it difficult for an Indian WhatsApp or a Indian Facebook to emerge from the ranks of BPOs and textile exporters.

But this doesn’t appear to be right given that a number of startups promoted by people of Indian origin have made it big in Silicon Valley.

Or it could be that the moribund primary markets in India over the last five years have prevented really entrepreneurial companies from seeking public money. In these cases, the retail investor’s loss was probably the private equity firms’ gain. By the time the private equity investors decide to exit their investment, business valuations may already have factored in the firms’ potential.

Or it could even be that SEBI’s well-intentioned measures in recent years, to make the primary market ultra-safe for small investors, sets up too high an entry barrier for the really entrepreneurial firms.

While there can be no compromise on governance issues, promising startups with a good idea but very little financial backing or track record may not be confident of hiring good merchant bankers, deciding on an acceptable price band or drumming up the institutional interest necessary for a book-built offer.

All this suggests that policymakers should rethink their entire approach to this revive-the-equity-cult project. Trying to convince young Indians that equities aren’t all that risky and egging them on to invest in boring state-sponsored schemes isn’t working. So why not persuade promising startups with contemporary business ideas to stop shying away from the public market and list themselves on the bourses? Then, it may be quite easy to get young Indians to bet on stocks the way their grandfathers did.