Who is blocking new investors?

Jun 02 2014, 04:32 IST
Comments 0
SummaryFixing the IPO market alone would bring investors to the capital market

Retail investors have been quitting the capital markets for a long period. It is misleading to assume that they have disappeared post the last market crash in 2008. In fact, even during the bull market of 2004-07, the net addition of new retail investors into the market was far from the desired levels. When the markets crashed in 2008, the hollowness of our secondary market was much visible as mid-cap and small-cap companies suffered heavily due to a lack of liquidity.

In an active secondary market, the retail investors actively participate in trading. However, it doesn't mean that new investors enter the market just

because the secondary market

is vibrant.

The steps taken to promote the entry of new investors, like the Rajiv Gandhi Equity Savings Scheme (RGESS), failed miserably, due to design failures. No amount of monetary incentives, like what was offered by RGESS in the secondary market, could make any significant increase in the number of new investors, due to the policy makers' failure to understand the evolution of the 'retail investor' in the market. The policy makers need to have clarity on how and when new investors enter the market.

Most often, the first participation of a retail investor in the secondary market is through the IPOs, as has been in the past, and not through the secondary market purchases. A new investor first starts his investment in IPOs as a baby step and learns the tricks of the markets and risk-taking very slowly, until he gains confidence to play in the secondary market.

My view is that post the so-called liberalisation of the primary market, in the form of free pricing, retail investors shied away from IPOs and consequently from the secondary market, too. It is not absolutely right to say that free pricing of IPOs is the only reason for investorsí apathy in IPOs. I am sure that many will say that several IPOs were very successful in the primary market even after free pricing was introduced. But the most relevant question is, why did issues fail to attract new investors even though they were successful in the market at times?

Why IPOs are avoided?

After free pricing and reforms were introduced in the primary market in the mid-90s, the commissions payable to sub-brokers and brokers were reduced to a fraction of what it used to be. A broker/sub-broker used to get at least 2.5% commission for IPOs on an allotment basis,

Single Page Format
Ads by Google

More from FE Special

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...