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D. Murali

THE Society for Capital Market Research & Development has big names such as Abad Ahmed, Chandra Mohan, Devendra Gupta, M. S. Verma, C. K. Hazari, D. H. Pai Panandiker, P. G. Mankad, N. K. Sengupa, Bodhishwar Rai, and Avinash Gandhi on its board. And it operates as a `think-tank', carrying out research about capital market. Findings of one such recent study are now in a useful book titled India's Stock Market & Household Investors 2001-04, by L. C. Gupta, Naveen Jain, and Utpal Choudhury.

"Market reform needs to go much beyond mechanisation of the trading processes," writes Abid Hussain, the Society's chairman, in his foreword that lists `three inter-related objectives'. These are: Strengthening the savers' confidence for better capital mobilisation; improving allocational efficiency of savings to improve the economy's productivity; and "ensuring that the returns from investment are shared fairly and not siphoned off by promoters of companies."

Gupta doesn't need introduction, for it was almost a decade and a half ago that he was asked to draw up the reform agenda for stock markets. His plan conceptualised the National Stock Exchange; SEBI was to be born a year later. "Stock market continues to show wild fluctuations, often unrelated to the real economy," wrote Gupta in a 1997 study; a remark that is valid even now.

In 2001 and 2002, the Society conducted an all-India survey of household investors to explore their preferences and strategies. More fundamentally, the study sought to find out why retail investors remained disenchanted with the market "despite tremendous visible progress" such as screen-based trading, demat system, and so on.

But why households? Because this sector accounts for 85-90 per cent of the gross domestic savings in the country; and about 50 per cent of this is in the form of financial saving. Yet "only around 2.5 per cent" flows into non-government corporate securities and mutual funds. Shockingly, this was around 10 per cent in the 1990s! A sign of the market's bad health, opines Gupta. To corroborate the shrinkage is a finding of an earlier survey conducted in 1997: that "the number of those who intended to sell their equity shareholdings in the next about one year exceeded the number who intended to buy equity shares."

The 2001-02 round had asked respondents to indicate their `single biggest worry' about the stock market. Top on chart was `too much price manipulation', and `too much volatility', with nearly 62 per cent of those surveyed mentioning either of these, across income-classes. However, volatility affected smaller investors more because they do not have as much staying power as the biggies "to tide over periods of market depression".

Third on the list of worries is `fraudulent company management', followed by concern over "insider trading, ineffectiveness of the regulatory authority and unfair practices of brokers". A dismal 18 per cent viewed our stock market as "a good place for long-term investment", while 44 per cent felt that bourses are where "a majority of people are likely to lose money". One in three said that the stock market was "suitable for knowledgeable investors only."

A separate chapter looks at investment preferences and notes that bank fixed deposits are the favourite, followed by Government small savings schemes. "A strong preference for the fixed-interest type of investments existed despite reduction in interest rates." However, rates have fallen further during the last couple of years, and the finding may need revalidation, as the authors too concede. Between equity and mutual funds, people seem to prefer the former. "The percentage of households owning mutual fund schemes has substantially come down after the winding up of UTI's US-64 scheme in 2003."

The mutual fund industry is "dependent too much on the crutches of tax concessions rather than on its own strength of expert fund management," say the authors. To add to MFs' problem, "There is a high level of ignorance among retail investors about capital market instruments other than equity shares."

Even those who chose MFs, banked on income schemes, rather than on equity and balanced schemes. Very few understood what index funds were; "even if they know what an index fund is, they are unable to form a judgment about the likely rate of return from an index fund."

A vast majority of market participants is disappointed with the depository system, opine the authors. The system evolved in the wrong way, they aver, for it was "designed mainly for frequent traders and speculators rather than for the mass of long-term investors." Day traders come in for flak throughout the book. "Most day-traders are what economists call `noise traders' who are not fully rational," is one of the parting shots. The high intra-day market volatility in our markets is due to "dominance of day-trading in both cash and futures markets," is the authors' diagnosis. Will Budget 2005 make a difference?

BookValue@TheHindu.co.in

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