The Hindu Business Line : `Cheese' has moved to MFs

In his path-breaking book `Who Moved My Cheese?' Spencer Johnson talked about two mice that lived in a maze and looked for cheese. One day, the mice find that the cheese has moved...

Similarly, in the maze of investment, the `cheese' has moved away from the retail brokers, according to Mr C. J. George, Managing Director, Geojit Financial Services Ltd. While the maze in Johnson's fable is a metaphor for the environment that we live in, and the cheese signifies success and happiness, the cheese that Mr George refers to is the business from retail investors, which is eluding the retail brokers. Because the cheese has moved from equities to mutual funds.

Mr George is a postgraduate in commerce and started his career as an analyst with Batlivala & Karani in 1983. He launched Geojit Financial Services in 1987. Today, Geojit has 400 offices in over 200 towns in the country, apart from Barjeel Geojit, a joint venture retail brokerage house in the UAE. Geojit was the first brokerage firm to start Internet trading in India and currently employs over 2,000 people. Recently, one of the leading banks in the world, BNP Paribas, took a 34 per cent stake in the company. Geojit was the first equities brokerage firm to get into commodities successfully. A Chartered Financial Planner, Mr George has undergone specialised training in the securities market, commodities market, merchant banking, and underwriting.

Here's his take on a few questions on the current investment scene from Business Line:

Was there ever `cheese' in the first place?

I have been in the thick of the Indian capital market for the last 22 years — actually, from 1984, the year in which V. P. Singh became Finance Minister in the Rajiv Gandhi Cabinet and ushered in a positive change towards liberalisation by systematically getting rid of the licence raj. Thereafter, we saw major activity in the capital market, which has been continuing despite occasional scams, bull-runs and subsequent crashes. Every time the market went up in the past, there has been a steady flow of new investors into the market, which was at its peak during the Harshad Mehta era.

In fact, the remarkable positive contributions of the Harshad Mehta scam were the introduction of major capital market reforms that resulted in the formation of the National Stock Exchange (NSE) and the National Securities Depository Ltd (NSDL), apart from the significant jump in investor population during the early 1990s. During every major jump in the market index, we noticed huge crowds in brokers' offices, be it for initial public offerings (IPOs) or equities. The `cheese' was very much evident. This was the trend up to 1999-2000, when there was a technology boom. However, these days, perhaps for the first time in the recorded history of the Indian capital market, there is a change in this trend.

What has changed?

The market has been doing very well consecutively for the last two years, which saw the benchmark market indices doubling in a short span from a relatively higher base. Yet, there is no significant crowd in brokers' offices and no great increase in the equity investor population. I am aware that the Internet has helped some investors but the total number is not growing.

Why? What are the reasons?

One reason for this lack of interest from the retail investor is the absence of opportunity in the IPO markets. More significant, perhaps, is the apathy of brokers and sub-brokers in IPOs. The community of brokers and sub-brokers together used to promote IPOs among new investors. Today, the commission from IPO allotment has come down to as low as 10 basis points, from 150 basis points in the past. This business does not make any economic sense to the intermediaries to promote equities and the whole market is taking a hit owing to that.

Another interesting reason is the way consolidation has taken place in the stock market in the brokerage segment. The regional exchange members played a major role in the past to develop the equity cult in India.

Due to the shakeout that happened in the sector, regional stock exchange members are out of business in the secondary market, which forced them to get out of the IPO market as well. It turned out to be not remunerative at all for them to remain in business.

Are people missing out by not investing in the market?

The India growth story is for real; it is alive and kicking. However, are ordinary people getting any direct benefit from this growth? The progress is reflected in the growth of the stock market indices. But since a vast majority is not investing in the market, the India growth story remains a newspaper/TV story for most of us.

The growth bypasses common people — workers, schoolteachers and farmers — and there is nobody to handhold them and tell them that the easy and practical way to directly benefit from the Indian economic boom is by investing in the capital market.

Do investors prefer the mutual fund route, instead?

One segment that is attracting retail investors is the mutual fund (MF) industry. The country has seen the entry of huge global organisations with unmatched financial muscle into this sector. These asset management companies are today hiring the best fund managers, the best marketing brains and the best sales people.

They are promoting MFs like FMCGs (fast moving consumer goods), using all the tricks that worked in that segment. As a result, when there was no one to promote equities and handhold retail investors, MFs appeared and changed the scenario upside down. Investors are flowing into MFs whereas they keep away from direct equity investment.

What ails the investment scene now?

The shakeout that happened in the broking segment resulted in disservice to the industry in two ways. One, it lost an intermediary at the last mile to canvass potential investors; the fall in IPO brokerage also is to be blamed for this. The other one is more pronounced and damaging to the growth of the market, which is the forced conversion of an investor into a trader by commission hungry brokers. Due to all these factors, one can easily observe that the `cheese' has moved from direct equities to MFs, clearly and definitely.

If all this is part of a grand design to keep the retail investors away from the market, one should wait and see the impact at a later stage. The role played by a few commercial banks and distributors is noteworthy, in addition to the aggressive mutual fund promotion efforts.

Unfortunately, there is a lot of wrong selling that is happening in this sector too. In one incident that I am reminded of, a sales associate of a bank went to a customer and told him that the bank has a new scheme that delivered 50 per cent returns the previous year.

The customer was unhappy that this was not told to him before and converted his fixed deposit to this `scheme' immediately. This is dangerous for banks and MFs in the long term.

What is the solution? How can the number of retail investors be increased?

The country today needs serious attempts to educate and promote retail investors, in whatever form they want to enter the market. Raising capital, through the IPO market, particularly for the small and medium companies, will remain a dream as long as we do not have infrastructure to promote individual investors.

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