I am not into Indian philosophy and spiritualism and stuff like that, having allowed myself to be steeped, over the years, in the study of the mundane world of finance and corporate management. But what my Sanskrit teacher at school told me about the ‘Advaita' philosophy of the saint-philosopher, Adi Sankara, is instructive for an understanding of financial markets and retail investor behaviour at the present juncture.

Adi Sankara advocated a spiritual world view that saw human beings essentially as a manifestation of a Supreme Being. But the former, however, tend to see themselves as different and distinct from that Supreme Being which, in Adi Sankara's view, was entirely understandable. He argued that the human tendency to perceive as reality, what was essentially an ‘illusion' or false reality, is solely due to the latter's ignorance of the true nature of things. An analogy would help make the meaning clear.

The true reality

You walk on a desolate path in the dead of night. There is darkness all around. You chance upon a piece of rope that is slightly coiled to resemble a serpent. You quickly jump out of the way to avoid being bitten. At that moment, nothing can persuade you to see the rope as anything but a serpent. But that doesn't alter the true reality of what was lying on your path, namely, a mere piece of coiled rope. It would require some illumination to clear the misconception that prompts us to see the rope as a serpent.

Adi Sankara was an exceptional human being. Such was his charisma or ‘aura', if you prefer, that he could persuade the general public to regard their perception of distinctiveness from a ‘Supreme Being' as an illusion — much like their view of the rope on the road as a serpent in the darkness of the night. But the average banker, mutual fund manager or insurance professional has a more daunting task on his hands, bereft as he is of any of the qualities of the founder of the Advaita school of Hindu philosophy.

The average retail investor is scared of the stock market at this point in time. He sees it as a place where his wealth is certain to be destroyed. He is equally wary of corporate debt instruments. Indeed, he sees corporates as a giant suction pump that would gobble up his savings for good.

The figures speak for themselves. In 2010, corporates managed to raise close to Rs 38,000 crore in equity offerings during the course of 60 visits to the primary market. But, in 2011, the primary market floatation was down to half the previous year's number. More significantly, the amounts raised from the public are only a fifth. In short, retail investors see a corporate outlet for their savings as the serpent that could harm them. How can the community of bankers and insurance managers persuade the public to see the corporate outlet for their savings as a harmless rope?

They aren't engaging in a ‘serpent' or a ‘rope' debate with the retail investing public. They seem to be saying, ‘Fine, if you think the stock market is a pit where snakes abound, we won't argue with you to the contrary. It may or may not be a harmless collection of ropes. But give us the money all the same. We will manage it in a safe and secure way.' But what do they actually do? They promptly go and give it to the same corporates that retail investors have shunned.

Same destination

In the first half of the current fiscal (April- September), domestic financial institutions, banks, mutual funds and insurance companies have gone and invested, as a rough ballpark figure, close to Rs 16,000 crore in equity shares through secondary market purchases. These institutions have been the principal drivers of growth of investments in the primary market, the few that have hit the stands this year. In contrast, retail investors have been exiting the secondary market and have also been conspicuous by their absence in the primary market. In other words, retail savings have been going to the very class of instruments (corporate debt and equity) that their owners have been shunning as venomous snakes.

Banks have told the retail investors that their monies would be safe with them. There is deposit insurance protection available to their savings, they point out. If that doesn't convince the depositors, they have another argument up their sleeve. They would say, ‘Sure, some of our corporate investments bomb. But the losses would be to the account of someone else (shareholders in the equity of banks). So you are safe.'

The other day, the Chairman of State Bank of India was on record as saying that their loans to Kingfisher Airlines are a non-performing asset. This is the interesting point. Even at the height of hype about Kingfisher Airlines, nothing would have persuaded the ordinary investing public to take an exposure to either the airlines' debt or its equity. But they have gone and done precisely that through their deposits with the SBI. The admission by the bank's chairman hasn't led to a run on the bank's deposits.

The Government too, for its part, has held out by its past conduct, that it would never allow a bank to fail. So obviously, the ploy seems to be working. Mutual funds and insurance companies have their own ‘silver bullet' arguments into making the retail investing public do what they wouldn't have done on their own, if left to themselves.

The conclusion is inescapable. Whether retail investors like it or not, their savings have no outlet other than to seek corporate avenues for deployment. Financial institutions have come up with their own version of making the public do what their instincts tell them not to do.

Financial intermediaries do not dispel the darkness of ignorance, destroy perceptions of false reality and reveal the true nature of the investment world, as Adi Sankara sought to do for the human condition in the physical world. They just present an alternative illusion.

blfeedback@thehindu.co.in

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