Restoring investor trust is need of the hour

DS Mehta

In the last three years, the depressed capital market has affected liquidity, risk diversification, saving mobilisation and economic growth. This has happened despite government steps such as allowing companies to buy back their shares under specified conditions, limited removal of restrictions on inter-corporate investments and loans, tax-free dividends and allowing restricted `badla' trading. Unfortunately, the market continues to be sluggish and is showing no signs of revival.

The despondency in the capital market is largely due to loss of faith by retail investors. Other factors that contributed to the gloom include political uncertainty at the Centre, economic sanctions against India, the Asian crisis and downgrading of the Indian credit rating. The sentiments of the investors received a further jolt by the loss of confidence in UTI, the most favoured saving and investment scheme till now.

For the resurgence of the capital market, a few steps are necessary. These are:

Reintroduction of relaxed`badla', including reduced margins and extended carry forward period.

Mandatory equity rating to revive the confidence of small investors.

Encouraging professional capital market intermediaries and rating them as well as the merchant bankers.

Broadbasing the SEBI board of directors, providing 50 per cent representation from eminent persons in the capital market, stockbrokers, merchant bankers and mutual funds.

Providing tax incentives for investments in shares of new companies, similar to the existing incentives under Section 80 CC of the I-T Act, 1961.

Reducing the rate of long-term capital gains to 10 per cent from the existing 20 per cent, on par with foreign institutional investors (FIIs). This will remove not only an anomaly, but also encourage Indian investments.

Bringing service tax on brokers under the provisions of the Income-Tax Act.

Removing the 60 per cent ceiling on inter-corporate investments and loans.

Bringing down governmentborrowings from the market so that more funds are available to the corporates at a lower rate of interest.

Investing part of insurance, pensions and provident funds in equity.

Developing an efficient system of custodial and depository services and extending the scope of the latter to individual investors

Introducing compulsory market making to impart liquidity to scrips and to widen and deepen trading in the secondary market.

Allowing banks to extend liberal loans against the security of shares.

Raising the limit of loans for different categories such as individuals, partnership firms, limited companies and stockbroking firms.

Exempting investments in shares from income tax.

Introducing non-voting shares to ensure that such shareholders not only get shares at some discounted price, but are also assured of dividend in exchange for not exercising their voting rights.

While the above measures may help in the revival of the capital market to an extent, itis necessary to come out with some radical measure to restore the faith of individual investors who rightly or wrongly feel that they have been cheated by companies that do not give any dividend for years. Some investors have come up with the innovative idea that the management of a company that fails to give a dividend for 2-3 years in succession should be changed by law, even if they hold a majority stake in the company. Such a step, it is argued will compel the existing owners to make the management more professional.

The idea is that if the existing management has failed to make profits and give dividends, others should be given a chance. And if they, too, fail, the company has no right to exist. Such an assurance to investors, it is felt, will go a long way in restoring their confidence.

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