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RETAIL INVESTORS IN INDIAN CAPITAL MARKET SOME ISSUES

M. Anuradha Reddy Dept. of Commerce & Business Management Mahatma Gandhi University Nalgonda 508001 INDIA Abstract

Capital market is the backbone of any countrys economy. It facilitates conversion of savings to investments. Capital market can be classified as primary and secondary market. The fresh issue of securities takes place in primary market and trading among investors takes place in secondary market. Primary market is also known as new issues market. Equity investors first enter capital market though investment in primary market. In India, common investors participating in the equity primary market is massive. The number of companies offering equity through primary markets increased continuously in the post independence period till the year 1995. After 1995, there is a continuous slump experienced by the primary market offering equity. The main reason for slump is lack of investor confidence in the primary market. So it is important to understand the causes and measures of revival of investor confidence leading to capital mobilization and investment in right avenues creating, economic growth in the country. The retail investors play important role in the capital market. Though, their individual contribution may be small but, when it is summed it will become a huge amount/fund. The economic disparities can be reduced by encouraging these retail investors. A survey results says that only 12 per cent of the savings amount is coming to capital market. The present paper is a modest attempt to study the retail investors in Indian capital market.

Volume:01, Number:01, Nov-2011 : RJCBS www.theinternationaljournal.org

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Introduction Capital market is the backbone of any countrys economy. It facilitates conversion of savings to investments. Capital market can be classified as primary and secondary market. The fresh issue of securities takes place in primary market and trading among investors takes place in secondary market. Primary market is also known as new issues market. Equity investors first enter capital market though investment in primary market. In India, common investors participating in the equity primary market is massive. The number of companies offering equity through primary markets increased continuously in the post independence period till the year 1995. After 1995, there is a continuous slump experienced by the primary market offering equity. The main reason for slump is lack of investor confidence in the primary market. So it is important to understand the causes and measures of revival of investor confidence leading to capital mobilization and investment in right avenues creating, economic growth in the country. The retail investors play important role in the capital market. Though, their individual contribution may be small but, when it is summed it will become a huge amount/fund. The economic disparities can be reduced by encouraging these retail investors. A survey results says that only 12 per cent of the savings amount is coming to capital market. The present paper is a modest attempt to study the retail investors in Indian capital market. Objectives of the study The objectives of this paper are as follows: to study the response of retain investors to the recent public issues. to identify the problems of retail investors, and to suggest the suitable strategies to improve the confidence of retail investors. Who is a retail investor? According to Securities and Exchange Board of India (SEBI) Retail individual investor means an investor who applies or bids for securities of or for a value of not more than Rs.1,00,000. Retail investor is an individual who purchases small amounts of securities for him/herself, as opposed to an institutional investor. These are also called individual investors or small investors. An individual who purchases securities for his/her own personal account rather than for an organization. Retail investors typically trade in much smaller amounts than institutional investors such as mutual funds, pensions, or university endowments. Retail investors typically exert less influence over corporate decisions than larger, institutional shareholders. Although there is some controversy over whether a high level of institutional ownership improves a companys management, there is no disputing the fact that institutional shareholders with 10,000 votes usually wield more influence than an average retail shareholder with just 100 votes. Retail investing activity pales in the shadow of institutional investing activity. Not only do retail investors make smaller trades, they also tend to trade less frequently than institutional investors, which account for most of the market's trading volume. However, the widening use of online trading and better access to financial information has increased the number of retail investors in recent years. As opposed to institutional owners, small investors seldom have access to corporate boardrooms or discussions and rarely have the opportunity to meet personally with a company's executives. Volume:01, Number:01, Nov-2011 : RJCBS www.theinternationaljournal.org Page 12

For this reason, many retail investors tend to regard institutional ownership of a security as a sign of approval and are easily influenced by institutional trading activity. Literature Review A study by Bloomfield, Libby and Nelson (2002) explained about the importance of information. It also indicates that less informed investors are over confidant in investments. Providing more information to professional investors only could harm the welfare of less informed investors if less informed investors are not aware of the extent of their informational disadvantage. Statman (2002) made a comparative study of investors today and investors a century ago. He concluded that todays investors are more rapidly informed than their predecessors, but they are neither better informed nor better behaved. Hall (2002) has conducted research on brokers recommendations. He found that investors who invested in the Johannesburg securities Exchange (JSE) based on their brokers advice, were able to get risk adjusted returns superior or equal to the market. Lee Hsien Loong (2000) while addressing Financial Institutions in Bangkok stressed the importance of rebuilding investor confidence for prosperity of ASEAN countries. He indicated that for investor confidence, rebuilding of sound fundamentals, dealing with capital account risks, economic co-operation among ASEAN, corporate restructuring, banking sector reforms and improvement of political and social conditions is important. Carolyn Kay Brancato (2002) indicated that even though Singapore had its share of stock market scams and corporate scandals, measures have been initiated to restore investor confidence. Reforms initiated by Government of Singapore, Regulatory authority, associations and media have resulted in regaining investor confidence. The Hindu (2002), online edition of Indian national newspaper has indicated that the spate of scandals in United States were being addressed by stricter laws and strong actions against culprits to prevent any recurrence of these events and to restore investor confidence. Gupta (1996) has indicated that from the angle of investor protection, the regulation of the new issue market is important for several reasons. The number of small investors in new issue market is massive. Most of new investors make their first entry into equity investments via the new issue market. So retaining common investor confidence in primary markets is important. The following Table (Table: 1) depicts the response of retail investors for Initial Public Offerings (IPO) in the first two months of 2008. Table: 1 Retail investors responses for recent IPOs Sl. Company Name No. of shares No. of shares No. of times of total No. Offered/reserved applied for. meant for the category 1 Reliance power Limited 68400000 1017218385 14.8716 2 J. Kumar Infra projects 2205000 3734335 1.6936 Limited 3 Future capital holdings 1926840 106397672 55.2187 Limited 4 Wockhardt Hospitals (*IPO withdrawn) Limited Volume:01, Number:01, Nov-2011 : RJCBS www.theinternationaljournal.org Page 13

5 6 7 8 9 10 11 12

Tulsi Extructions Limited SVEC constructions limited Rural Electrification Corpn. Limited Shriram EPC Limited IRB infrastructure Developers Limited GSS America Infotech Limited Emaar MGF Limited KNR Limited

1960000 1400000 45665100 1500000 15279800 1169000 30771187

4821000 677950 350656620 943640 15121860 231945 14455750 750505

2.4597 0.4843 (*IPO withdrawn) 7.6789 0.6291 0.9897 0.1984 0.4698 (*IPO withdrawn) 0.2772

Constructions 2707105

From the above table one can understand the response to various issues. Due to poor response from the investors the issues of Wockhardt Hospitals Limited, SVEC constructions limited and Emaar MGF Limited have withdrawn their issues. Globus Spirits IPO was scheduled to open on February 19th, but because of the lack of the interest in the primary markets from the investors, Globus Spirits IPO has been postponed indefinitely. A survey conducted by Max New York and National Council for Applied Economic Research (NCAER) reveals that Indian households keep 65 percent of their savings in liquid assets like bank or post office deposits and cash at home, invest 23 percent in physical investments like real estate and gold and only 12 percent in financial instruments. The survey covered 342 towns and almost 2000 villages across 250 districts and 2255 wards. The sample size included 63016 households, equally divided between rural and urban areas. Problems of Retail investors Lack of awareness: Majority of the population do not know about the capital market activities. This may be because of their educational background, income levels, and accessibility to the market. Awareness is essential to deal with the trading activities otherwise there may be huge losses for the investors. Economic reforms had opened the way for all foreign players to enter in to the Indian market. It has become more complex to understand the stock market especially for the retail investors. Real estate boom: Presently the real estate sector is attracting more investors compared to any other sectors. This is due to high potentiality of gains and continuous increasing prices of real estate assets. Mainly with the advent of Multi National Corporations (MNC) the urban based real estate sector is expanding in a rapid manner. Retail investors are showing more interest towards real estate investment rather than capital market investment. Many corporate giants like DLF are expanding the real estate and property business; so many people are following the same investment practices. Stock Market volatility: the main aspect which affecting the retail investors entry is the market volatility. Sometimes the massive decline in the indices is also one Volume:01, Number:01, Nov-2011 : RJCBS www.theinternationaljournal.org Page 14

important problem faced by the retail investors. Scams like Harshad Mehatha, Khethan Parekh etc.., are also lagging behind the entry of retail investors. The BSE Sensex declined by 826 points on 18th May, 2006 and 616 points on 2nd April, 2007 and 615 points on 1st August, 2007 and 541 points on 27th July, 2007. Recently we are experiencing the continuous down trend in the stock exchanges. Despite a strong response to the Rs. 11000-crore IPO of Reliance Power (R Power), the market fell sharply with 30-share BSE Sensex shedding 476.96 points or 2.30% to 20,251.09 on Tuesday,15 January 2008 as heavyweights faced selling pressure. Bharti Airtel, Reliance Energy and ICICI Bank slumped. All the sectoral indices on BSE were in red. Banking, FMCG and power stocks were worst hit in the fall. The Sensex lost 382.98 points or 1.89% to 19,868.11 on 16 January 2008 as the prospects of a recession in the United States triggered a sell-off in the global markets. The market remained subdued for the day although it made some recovery from its lows in the late trade. The market breadth was weak. The market slipped for the fourth straight session with Sensex declining 167.29 points or 0.84% to 19,700.82 on Thursday, 17 January 2008, giving up early gains as index heavyweights Reliance Industries (RIL) and ICICI Bank declined. RIL dipped after it reported Q3 December 2007 results, which were boosted by one-off gains. The market breadth was strong. Sensex plunged 687.12 points or 3.49% to 19,013.70 on Friday, 18 January 2008, in a broad-based decline. Reliance Industries (RIL), ICICI Bank and DLF, plunged. All the sectoral indices on BSE were in the red. BSE oil & gas and realty indices were the worst hit in the fall. Small-caps and mid-cap stocks sank. Protection of interest of retail investors: According to SEBI norms every listed company which is issuing the shares through 100 percent book building process should reserve 35 percent of shares for the retail investors. Many of the IPOs between the year 2003 and 2005 were found to be fraudulent, with the multiple demat accounts only few investors were allotted with more number of shares. These types of incidents are making the retail investors to think again and again before entering in to the market. The regulatory authorities have taken some initiations in this regard, even though; they failed to fulfill the confidence in to the retail investors minds. Intermediaries: Majority of the retail investors cannot take their own decisions to purchase or to sell the shares. In general, Intermediaries such as stock brokers and sub brokers influence their decisions. Sometimes the brokers or sub brokers may mislead the investors. Mainly to get their remuneration in the form of service charges or commission they may suggest inefficient company shares also. The regulatory authorities are not able to curb on the activities of these intermediaries. Alternative investment avenues: This is also one of the reasons for the poor response from the retail investors. A survey conducted by Max New York and national Council for Applied Economic Research (NCAER) reveals that Indian households keep 65 percent of their savings in liquid assets like bank or post office deposits and cash at home, invest 23 percent in physical investments like real estate and gold and only 12 percent in financial instruments. Technological problems: Generally the retail investors do their trading through the share brokers. Thanks to the on-line trading facility, the accessibility problem has been reduced. But, the poor technology is leading to heavy losses for the retail Volume:01, Number:01, Nov-2011 : RJCBS www.theinternationaljournal.org Page 15

investors. They are not able to sell/purchase shares in line with the movements. Many retail investors who trade shares online are unable to tap the best price movements on the bourses, thanks to connectivity problems or log-in delays. This Monday when the market dipped in the morning I could not trade on my Web site for a whole hour till 11 a.m., said Mr T. Ramesh, who is a customer of ICICI Direct.com. Strategies to overcome problems The retail investors are needed to be attracted by the markets. To attract them the regulatory authorities such as Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), Ministry of Company affairs, Ministry of Finance have to take certain initiative and corrective actions. Awareness creation: The most important thing is to create awareness among the masses. This could attract them to invest in the capital markets rather than other investments. It is necessary to establish training institutes to train the professionals who are dealing/working in the stock market related fields. For this the regulatory bodies may take the help of other professional bodies like Institute of Chartered Accountants of India (ICAI), institute of Cost and Works Accountants of India (ICWAI), Institute of company secretaries of India (ICSI) and others. Through awareness one can attract the retail investors easily. The regulatory authorities also have to organize work shops, seminars, and campaigns etc... To making the people to know the practicalities of the capital markets. As per the Disclosure and Investment Practices (DIP) guidelines the shareholders are entitled to the following rights. Some of them are as follows; 1. To receive the share certificates, on allotment or transfer (if opted for transaction in physical mode) as the case may be, in due time. 2. To receive copies of the Annual Report containing the Balance Sheet, the Profit & Loss account and the Auditors Report. 3. To participate and vote in general meetings either personally or through proxy. 4. To receive dividends in due time once approved in general meetings. 5. To receive corporate benefits like rights, bonus, etc. once approved. 6. To apply to Company Law Board (CLB) to call or direct the Annual General Meeting. 7. To inspect the minute books of the general meetings and to receive copies thereof. 8. To proceed against the company by way of civil or criminal proceedings. 9. To apply for the winding up of the company. 10. To receive the residual proceeds. Besides the above rights, which you enjoy as an individual shareholder, you also enjoy the following rights as a group: a) To requisite an Extra-ordinary General meeting. b) To demand a poll on any resolution. c) To apply to CLB to investigate the affairs of the company. d) To apply to CLB for relief in cases of oppression and/or mismanagement. Regulation of intermediaries: In this regard the regulatory bodies have to act strictly. Being the intermediaries are the key players in the market it is necessary to govern these. The practices of client registrations with brokers or sub brokers, Volume:01, Number:01, Nov-2011 : RJCBS www.theinternationaljournal.org Page 16

depository participants activities are to examine with regular intervals. The commission charges and service charges are needed to be reviewed and necessary measures are to be taken wherever necessary. Quota protection: As we discussed earlier, the reserved quota for retail investors (35 percent, if the is 100 percent through book building process) should be allotted to retail investors only. It is the responsibility of the regulatory authorities to ensure that the entire issuance is according to the norms. The multiple demat accounts opening and malpractices of few people are to be observes, if anybody found to be guilty they should be penalized. Corporate Governance Practices: Retail investors will trust the capital markets when they are transparent. The corporate governance practices are needed to be followed by the every participant in the capital market. This can be the most prominent tool to build the confidence in the minds of the retail investors. Priority to the retail investors: In the recent past, we have seen the exponential growth of foreign Institutional Investors (FIIs), Qualified institutional Buyers (QIBs) that growth may be because of the Government policies, rules and regulations. It is desirable to give priority to the retail investors also. Every time when the stock market crashes generally the retail investors are becoming the victims. It can be avoided by concentrating equally on the retail investors. Corporate Governance Practices: The regulating authorities have to ensure that all the corporate organizations are practicing good corporate governance practices. This in turn will improve the confidence of the retail investors. Many violations are taking place in the global financial markets in this regard. In all the scams retail investors are losing huge amount. The incidents like Global Trust Bank, the recent issue of Satyam computers etc. are making the retail investors to not to invest in the capital market. Technology improvement: The technology plays vital role in selling/ purchasing the financial instruments. The on-line terminal system should be improved. Many retail investors are not able to sell/purchase during volatile situations. Stock exchanges should provide the best quality technology service to the investors. Conclusion From the above all, it is clear that till today we failed to attract the retail investors in attracting to the capital market. No doubt, retail investors will come to capital market provided that sufficient protection is available for their investment. In India currently 19 Stock Exchanges are operating, with a huge number of brokers (brokers: 9,462 sub brokers are 38,976 and 4,125 corporate brokers in the cash segment as on 31st Dec, 2007). Retail investors can pump large investments if necessary steps taken. Being the income levels are increasing continuously they are now in a position to invest in the assets. If we succeed to build confidence India can exceed all other major capital markets. References: 1. Bloomfield, Robert J, Libby, Robert and Nelson, Mark W., Confidence and the welfare of less informed investors, Social science research network. 2. Brancato, Carolyn Kay. (2002), Singapore corporate and investor confidence, Conference board site of Price Water Coopers. 3. Gupta, L.C. (1996), Challenges before Securities and Exchange Board of India (SEBI), Economic and Political weekly, March 23, pp 751-757. 4. Hall, John.H., Are brokers buy, hold and sell recommendations of value to individual Volume:01, Number:01, Nov-2011 : RJCBS www.theinternationaljournal.org Page 17

investors?, University of Pretoria, working paper series. 5. Loong, H Sien(2000), Asean post crisis : rebuilding confidence and prosperity, Website of Thailand. 6. Statman, Meir. A century of investors, Santa Clara university Department of Finance, working paper no. 02-01. 7 www.sebi.gov.in 8 www.nseindia.com 9 www.bseindia.com 10 www.rbi.org.in 11 www.conference-board.org/products/research.cfm ***

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