The capital markets regulator wants to double the investment limit for small investors in public issues from Rs 1 lakh to Rs 2 lakh. With the Coal India issue looming large it?s not surprising that the government wants to make sure it gets the Rs 15,000 crore or more that it?s looking for. And since around 30% of an issue is reserved for small investors, it needs to make sure it gets a good enough response from them. Obviously, simply allowing investors to put in more money is not going to be enough; at the end of the day, it?s the quality of the business whose shares are on offer and the valuations that will determine how the issue fares. But yes, since the data shows that three-fourths of the total number of applications for an IPO is made for amounts between Rs 80,000 and Rs 1 lakh, there is perhaps sense in increasing the threshold.
A glance at retail subscriptions to IPOs, over the last year or so, shows that small investors weren?t really falling over each other to write out cheques. Several issues closed without the quota for small investors being used up. The fault lay clearly in the way the issues were priced; although the Sensex was close to a 30-month high in the last week of July, more than half of the nearly 30 IPOs that hit the market since January 2010 were trading below their issue price. Even otherwise, the volatility in the market seems to have spooked investors who have stayed away since late 2008.
Even most of those who are around are punting rather than investing and so prefer to trade in the derivatives segment rather than buy shares outright. While secondary market volumes have grown at a 43% CAGR between 2004-09, volumes in the futures and options (F&O) space have clocked a compounded growth of 52% with the result that volumes in the space account for three-fourths of total volumes. Meanwhile, the share of deliveries to the total value, although above trough levels, is less than 25% and it?s possible much of this would be accounted for by institutions, whether local or foreign. So while volumes in the secondary market may have risen 60% year-on-year to Rs 97,800 crore in 2009-10, much of the action has happened in the derivatives segment, which is why broking is such a tough business.
Also, in terms of absolute numbers, there aren?t too many participants in the market. The government recently informed Parliament that the number of clients who traded in the derivatives segment, in the three months to June 2010, was 5.74 lakh. And fewer than 2,200 accounted for 80% of the derivatives turnover while only 31 lakh investors traded in the NSE cash segment. Of these 52% were retail, high-net worth individuals and corporate customers while institutions and proprietary traders accounted for a share of 24% each. About 90% of the trading, during these three months, was done by fewer than two lakh investors while 80% of the turnover was accounted for by fewer than 42,000 investors. While the numbers may appear small, it reinforces the point that not too many small investors are really keen to participate directly in the market; they?ve probably learnt the hard way that investing is best left to professionals.
It is not such a bad thing. After all, what?s important is that the share of household savings, which is invested in the capital market?whether through mutual funds or insurance companies?goes up. However, that doesn?t seem to be happening. The latest numbers will be out soon but gross household financial savings, as a share of GDP, actually fell to 14% of GDP in 2008-09, according to provisional estimates of RBI. And within this, the share of financial savings that went into shares and debentures was only 2.6% (preliminary estimate) in 2008-09, compared to 12.4% (provisional estimate) in the previous year. On the other hand, the share of savings that went into deposits rose nearly 600 basis points to 58.5%. So most people would rather play safe even if inflation is eroding the value of their savings. Also, the outflows from mutual funds over the past year or so since entry loads were banned indicate how much of a push product these schemes were. Individuals need to be encouraged to invest in equities and the way to channel their savings into the stock market is to encourage them to buy schemes of mutual funds. With a bit of prodding, people should be willing to park some of their savings in mutual funds or Ulips. So, perhaps commissions on mutual funds need to be restored, maybe not to the earlier levels of 2.25%, but enough to make it attractive for agents to sell these products. For sure, the commissions on Ulips were almost usurious and needed to be brought down and while agents may be miffed, over time they will learn to live with smaller incentives. But that?s the way forward.
shobhana.subramanian@ expressindia.com