Capital markets need retail investor boost to flourish

Written by Rajiv Bajaj | Updated: Jul 8 2014, 08:25am hrs
A robust economy is always built on sound capital markets. But we as a nation have over-reliance on foreign portfolio investments as we lack adequate flows of domestic household savings into capital markets.

We need to set a fresh vision for bringing in $100 billion of domestic household savings into capital markets over the next five years. At an estimate, this would be a realistic 6% of incremental household financial savings in next five years. The average annual household savings in capital markets since 2008-09 have been less than 1% of total household savings, which is way too low for a developing economy. Indian households need to channelise part of their savings into capital markets. The following steps can drive growth.

The National Pension System (NPS) should replace the existing Employee Pension Scheme (EPS), becoming the mandatory provision, such as the superannuation plans of Australia and Section 401K in the US. These plans are mandatory for those employed in both private and public sectors, and a minimum percentage of salary has to be deducted by the employer.

NPS was introduced with a similar intent, but it has not taken off. The global experience is that people do not commit to long-term retirement and social security provision unless mandated by law. The time has come to treat the central government and private sector employees on equal footing. NPS, at present, is mandatory for lakhs of central government employees. The government can extend the same to the private sector. Another reason for NPS failure is that the commercials are too low.

Pension schemes should carry incentives for employers in encouraging workers to save for retirement. The employer should be allowed to match the employees contribution, making it tax-deductible. At present, NPS has a provision where corporates get the above benefits if they enroll their employees for pension plans as a group. Such provisions can be extended to individual accounts too.

Second, we need a national agenda for promoting the equity culture through systematic investment plans (SIP) in mutual fund (MF) schemes. Millions have already created substantial wealth by participating in capital markets, using the services of professional fund managers. However, despite over two decades of existence of such plans and a consistent track record, participation in SIPs remains limited to barely 1.5- 2 crore investors. It is easily possible to take these SIPs to 10 crore investors in the next five years if there is a concerted policy effort supported by the government.

At present, an investor can start an SIP in any equity MF with a minimum of R100 every month. This is a good option to channelise the savings of lower income groups into capital markets. Also, a certain category of SIPs (micro SIPs) are exempt from KYC and PAN requirements. This can be extended to all SIPs. A tax incentive can be given to encourage households to start long-term SIPs.

We need efforts to channelise gold holdings into capital markets. Indian households, religious institutions and trusts together hold 31,000 tonne of gold, worth $1.4 trillion. This money can be brought to capital markets by incentivising households through gold bonds.

It is important to educate investors on the benefits of long- term investing in equities through MFs and insurance products. This will bring back the confidence and trust of the investor in equity markets. Funds lying in investor education or protection funds with government and stock exchanges can be utilised for this purpose.

The writer is vice-chairman & managing director, Bajaj Capital