Investor survey leaves several questions unanswered

The main merit of the survey is its utility as a census for the capital market. It shows that despite the dramatic changes in the structure, automation, geographical dispersion, and regulatory framework of the Indian capital market, equity and debentures remain low in the list of investment preferences of Indians. Traditional investment avenues such as – fixed deposits, post office recurring deposits, life insurance policies, Unit Trust of India (UTI) schemes, other mutual fund units and bonds of public sector undertakings are, in that order, more popular than equity or debentures. This is clearly a reflection of the inability of market intermediaries to inspire better confidence in these instruments. The survey makes a couple of specific references to the disenchantment of investors with equity/debentures, but fails to probe the reason for their dissatisfaction. Indeed, some of its findings seem perplexingly contradictory to anecdotal evidence and investors letters to the press. For instance, the growth ofinvestor households is pegged at a compounded rate of 22 per cent in the period between 1985-86 and 1998-99 with sharper growth in the 1990s. The study says that, "(T)he majority of investor households entered the market after 1991".

The primary market, which is identified as the preferred equity investment avenue of investors, showed a sharp expansion between 1991-95. This is the exact period when the primary market went through a mindless boom. Nearly 40 IPOs used to hit the market every week and lured investors through high voltage television advertising. New companies as well as existing ones with fanciful expansion plans picked up funds effortlessly. The removal of control over capital issues, coupled with rampant price rigging on the secondary market allowed them to do so at very high premia. The bubble burst coincided with the infamous MS Shoes case, shattering Pawan Sachdeva’s dream, as well as that of millions of investors.

Hundreds of companies which raised money during those days simply vanished with investors funds and the shares of existing companies issued at high premia are languishing at a substantial discount to their issue price. All this drama seems encapsulated by the survey in the bland finding that "the primary market expanded rapidly between 1991-95 and contracted thereafter". In fact, it says, 47 per cent of investor households entered the market in the 1991-96 period as compared to 17 per cent in the period after that. Would this not suggest severe disappointment with the equity market? There are no details.

Instead, the study seems to suggest that investors have no reason to be disenchanted with the primary market. On the contrary it reveals a high level of satisfaction with equity investment. Section 11 on the experience of investor households in applying for new issues says that – "57 per cent of the equity investor households did not apply for new issues" in the period 1993-98 (another 12 per cent applied and did not receive allotment). Does this mean that seasoned equity investors prudently stayed away from new issues during the years of primary market madness? This also runs counter to the general perception of investors rushing lemming like to invest in the primary market. The study goes on to say that "nearly three-quarter of the successful (i.e. those who were allotted shares) equity investor households in the primary market investments have found their investments to be gainful". If this is indeed true, the study should have explained the complete collapse of the IPO market for over three years and thephenomenon of vanishing companies which have made away with several thousand crores of investors’ money.

Even in the secondary market, it says that 63 per cent investors have gained from their investment in the 1995-98. The significance of mentioning this period and not making a direct comparison with the IPO book period is however unclear. Another mystifying finding is that investors have more complaints against brokers than issuers. Most complaints were about the lack of access to top brokers and paper related issues. These findings seem suspiciously out of date. Automation and a stricter disciplinary environment on stock exchanges have drastically reduced broker related problems. The frequent complaint about access to brokers had been largely addressed by the spread of the National Stock Exchange network and the BSE online trading system. Brokers are now more willing to handle smaller clients.

The study also suggests that issuer related problems are largely because of physical securities and would disappear with dematerialisation. In fact, this applies to broker related problems as well. Signature mismatches, which are one of the biggest causes of complaint against brokers, are substantially reduced because of dematerialisation. Having said this, the study also makes several observations which indicate a high level of dissatisfaction among equity investors. It says "equity investments have been found very unsafe by fairly significant number of households including investor households". In fact, "a very small per centage of household savings is channelised into the securities market", probably because of the risk perception. The study says that while over 12 million rural and urban households are likely to invest in the securities market during the next year, a majority of these (56 per cent among the urban investors and 72 per cent among rural investors) are unlikely to invest in equities. Itconcludes that "(t)his is indeed a matter of concern as it would amount to an expression of a lack of confidence by the existing investors on the equity market". This strongly worded finding is completely contrary to the high level of satisfaction expressed by investors and the non-serious nature of their complaints.

Another finding is that more households own mutual funds, especially units of the Unit Trust of India (UTI) than equity shares and debentures and as many as 93 per cent of unit holding households are in the salaried or self employed class. Clearly, the safety factor (as in a government owned mutual fund whose high level of safety has been further iterated by the Rs 4800 crore bail out in 1998) and the big tax breaks enjoyed by UTI alone were a major attraction. It would have been interesting to find out if units remained as attractive if these safety factors were eliminated. Given the exhaustiveness of the exercise, it is indeed a pity that largest ever investor survey leaves so many questions unanswered and unexplained.

Author’s email: suchetadalal@yahoo.com