An uncertain economy and market volatility have discouraged small investors from participating actively in equity markets. Equity investments by Indian households plunged to a quarter-century low of 4% of total assets in 2011, pointing to the limited success of the finance ministry and the Securities and Exchange Board of India (Sebi), in their attempt to boost retail participation.
Household appetite for stocks has rarely been so low, pointing to their rising risk aversion. According to Reserve Bank of India (RBI) data, households are increasingly switching to bank and non-bank deposits. Even the proportion of cash held by households rose in the last fiscal.
Equity investment as a proportion of household assets peaked at 11% in 1993, but has been falling steadily since then, according to a report by research firm Equitymaster, and RBI data on financial assets and liabilities of the household sector between 1971 and 2011 analysed by FE.
Falling retail participation does not bode well for the government?s disinvestment programme, which has slowed down due to uncertainties in the international and domestic stock markets. The government has already been forced to look at options like buyback of shares and cross-holdings by PSU companies to meet its fiscal deficit target.
This, though, is at variance with finance minister Pranab Mukherjee?s original plan to enable people to share in the ?wealth of nation? ? the public sector undertakings. The government has so far managed to raise a paltry R1,162 crore through disinvestment against the fiscal?s target of R40,000 crore.
National Stock Exchange MD & CEO Ravi Narain feels permitting pension money into the stock market would greatly boost retail/household participation into equities. He also stressed the need to rationalise the securities transaction tax (STT).
For instance, even though the finance ministry notified a portion of Employees? Provident Fund Organisation?s (EPFO) investment for equities, the labour ministry has not implemented the proposal. The EPFO manages around Rs 3.7 lakh crore of workers’ savings.
The new pension scheme, regulated by the Pension Fund Regulatory and Development Authority, has permitted partial investment in stocks. But retirement assets of New Pension Scheme which came into being in 2004 were about Rs 8,000 crore last fiscal, far below the EPFO corpus.
Besides currency, total household assets include instruments like bank deposits, non-bank deposits, life insurance fund, provident and pension fund, claims on government, shares & debentures and units of UTI.
Sebi and market players are pushing the government to enable investment of pension money in the stock market. Sebi is also reviewing the entire initial public offer (IPO) process to make it more convenient for the retail investors to participate in the stock market.
A senior finance ministry official said the government is likely to announce a reduction in STT in the union budget.
In order to boost retail participation; Sebi recently took steps towards a simpler IPO application form, streamlined know-your-customer processes, more disclosures by merchant bankers and simpler language in the issue prospectus.