Financial Inclusion is lacking without retail equity participation

While most of the Indians know about the Reserve Bank of India, only a trivial fraction is aware of Securities and Exchange Board of India (SEBI), a statutory body regulating the functioning of the stock market. Bullish trend in the NSE or BSE is cheered by many, but of us how many have actually held shares/ debentures, or for that matter have earned any dividend/ interest? Of course, almost every economist and all books on fiscal matters regard banking and stock market as the backbones of any economy. India has so far been successful (though greater heights have only been attained after the Pradhan Mantri Jan Dhan Yojana) in widening the services and the customer base of banking sector; however the percentage of Indians holding a demat account is still below 2.

Leave futures and options, the irony is that a common man is unfamiliar with NSE, BSE, NSDL, or a Depository Participant. Let me consider this with respect to requirement of funds by any corporate house that, in case zero or low commitment funds are absent, needs to approach banks, financial institutions, and foreign investors. Yes, the scenario will sound more apt if we talk just about the listed companies on recognized SEs; still it cannot be denied that with requisite push to the number of transactions in the SEs, more and more companies would look forward to entering the sphere. Herein, it is vital to note that the Bombay Stock Exchange (BSE), the oldest exchange in Asia, has just over 5000 companies listed, of which more than 1200 are in the suspended category.

Shares, of course, is one of the most relaxed ways for corporate houses to raise money for taking up a new project or for restructuring as they carry nil commitments (dividend is payable only on profits). Bank loans, on the contrary, carry debt servicing charges and hence are to be taken care of even when the business does not prove viable. With respect to shareholders, shares means contributing in the corporate house’s evolution, earning some extra bit which is not possible with fixed rate of interest in banks, and tax benefits. The economy, on the whole, with an upsurge in transactions on share market, profits from controlled foreign liabilities, and much greater savings. Banks and FIs are also to gain with decreased NPAs and reduced burden of handling cumbersome records.

Money vs. Capital market is a gone discussion. Today, every economy knows the crucial role of capital market, without which sustainable development is unmanageable. Herein, the Indian economy embraces just over 20 million demat accounts, of which more than 30 per cent are zero-balance with nil transactions. Another 5-8 per cent is held purely by commodity traders who do not have any equity exposure. The months of February and March this year witnessed record closure of demat accounts (over 52000 closed in January), despite the anticipated bullish trend in the stock market. It was only in 2008, that a push was seen in the number of demat accounts when Coal India came up with India’s largest equity public issue. The Rajiv Gandhi Equity Scheme (RGESS), which was launched with the aim of enhancing equity participation, has not yielded any outcomes.

Enhanced sharing of retail investors is indispensable if the new government is targeting better milieu for corporates and financial inclusion of common man. The RGESS allowed investments by retail investors of up to INR 50,000 in the domestic capital market with 50 per cent tax savings. However, the then-rulers failed to comprehend the fact that even the literate and working section of our society is unaware of the basics of share trading. Those lured towards the bullish trend have lost their money owing to high risks and low data. Experts have many a time revealed how market makers build up market for a particular stock without any fundamentals, owing to which an unknown investor participates with a view to making quick profits, however, ends up losing the hard-earned money when the market abruptly falls. The capital market, in the current state, has made it dreadful for the corporate houses to plan timely expansions and strategic restructurings. Cited hereunder are some proposals to the vibrant new PM.

Prior to launching any scheme such as the RGESS, the concepts of capital market, share trading, risks and gains, and IEPF are to be made acknowledged. Along with, banks and other DPs will have to be encouraged to open no-frills demat accounts, since most of the closures are backed by obligatory annual maintenance charges and nil transactions. The PMJDY model can be replicated. SEBI and the MCA must realign their rules related to IPOs and FPOs. NDSL and CSDL have though provided an apt platform for trading, the quandaries in understanding the milieu, that changes every other second, are to be curbed. Entering into four agreements and 20 signatures for opening a demat account is the primary hurdle. Investor education, both at pre-account opening stage and post-account opening stage, is necessary. Hindrances while investing in overseas stocks, for instances, problems faced by Indians in buying the recently launched Alibaba IPO due to Indian brokers not attracted towards overseas trading accounts, need to be curbed.

It is now a known fact that the intermediaries follow their prospective clients only until they get a demat account opened; however no aids like newsletters or seminars are arranged for making the client aware of the prevailing trends. This renders most of the accounts dormant or losses incurred due to false market trends sponsored by market makers. With limited know-how of the capital market, employees of the PSU banks fail to encourage the prospective customers for demat account opening. In tier-II and tier-III cities, trade fairs, literatures and briefings on capital market can change the current trend. Along with, depositories and stock exchanges are to be stimulated to spend a part of their earnings in organizing investor education programmes. DPs should also be directed to send regular updates to customers with future projections on current stocks so that investments are not based just on the trend set by market makers. Though the list of suggestions is not exhaustive, if the push is accorded to Indian capital market similar to the lately launched PMJDY, viability along with stability can be expected.

95 thoughts on “Financial Inclusion is lacking without retail equity participation

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    Share market is only a gamble.
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    I have a demat account for years.
    I am paying those standing charges but don’t know where to invest.
    Indian share market is only for FIIs.

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