The sorry plight of the unprotected small investor

The system of directed loans to crony capitalists makes the plight of the individual saver/investor a sorry one indeed. Recently, depositors of a bank called Kapol Bank, which was shut down, were informed that they would get back only ₹1 lakh, irrespective of the amount they had deposited with the bank. This is called a ‘bail in’, as opposed to a ‘bail out’, under which the depositors are rescued, or bailed out, by the government pumping in more (taxpayer) money. So, instead of the taxpayer, it is the depositor who suffers.

There are seven PSU banks which are on the RBI watch-list for Prompt Corrective Action. If any bank from this list is directed to go for a bail in, and depositors lose their deposits, it will cause a panic. Most likely, they will be merged with larger banks to protect depositors.

Why did things come to this stage? Basically because of what this columnist calls the ‘Sadim’ touch, which is the opposite of the ‘Midas’ touch. Everything King Midas touched in the fable, turned to gold; in the hands of the government however, thanks to interference by politicians, gold turns to dross. Think of banks. Think of textile mills (it was land appreciation that saved them). Think of Air India. So bank deposits are not safe; GTB, a private bank, went bust and had to be merged with OBC. Yet the small depositor has to periodically submit to know your customer (KYC) norms and repeat the process for each institution. Why?

The small saver also has to bear random charges imposed unilaterally by banks, which justify the action as being necessary to service their investors. Banks can raise from depositors/lenders up to nine times the amount of funds it can from shareholders. Yet people like Aditya Puri justify charges on depositors by stating that they need to service shareholders!

So, is a small investor better off investing in an equity mutual fund? Marginally so. Those with a longer memory would recall that they were unfairly hit when the US64 scheme (of the Unit Trust of India) was restructured and the promised repurchase price lowered. The then government transferred shares in three valuable companies (ITC, Axis Bank and L&T) to itself. These three have significantly appreciated, but the small unit-holders who were short-changed are not getting anything from the sale of these three companies; the proceeds will go to the government.

Private sector mutual funds are better. But, as a large chunk of the fund manager’s pay is linked to performance, all mutual funds behave in more or less similar manner. In the US, a majority of them underperform the index. This has led to the rise of passive funds, or ETFs.

The whole system acts against the interest of the small investor. The investigative agencies water down the investigation, by allowing crucial papers to slip out of their greased palms. It is only four years later that the government is ordering a forensic audit of the ‘crashed’ computers of NSEL and FTIL. Why does it take four years to do the obvious? The answer should be obvious. The government must do more to protect the individual investor and hand out exemplary punishment to scamsters, in order to deter others.

(The writer is India Head — Finance, Asia/Haymarket. The views are personal.)

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