11-04-2007, 10:42 PM
THINKING ALOUD The myth of the small investor
Sudheendra KulkarniPosted online: Sunday, November 04, 2007 at 0000 hrs
Inclusive growth. Thatâs the mantra that Dr Manmohan Singh, Sonia Gandhi, P. Chidambaram and Dr Montek Singh Ahluwalia have chanted since the UPA government came into being in May 2004, even as they presided over the most exclusive growth that the country has ever witnessed.
They would do well to let the country know how inclusive has been the growth as measured by that index of wealth creation, the Sensex, which last week made an Indian the worldâs richest man.
âYeh toh limited logon ki Diwali hai,â is how a journalist friend of mine, who works for a business channel, described it when I asked him if the base of beneficiaries of the recent stock market boom was getting broad-based. With Diwali approaching, the Sensex crossed the 20,000 mark last week, up from 15,000 only four months ago. âThis growth story is meant exclusively for the big guys,â he commented. âIt has a No Entry sign for small investors.â
To know more, I turned to another eminent business journalist, Rajrishi Singhal, consulting editor of The Economic Times. He drew my attention to his recent article (âDecoding the myth of the small investorâ, ET, Sept 21), in which he writes: âThe unpleasant truth is that the system abhors smallness. The financial markets have turned out to be a modern-day factory for the manufacture of myths. Some myths are created to keep a section of society happy. The small investor is one such myth. It is the product of some fertile imagination harnessed to keep society lulled in the belief that there is great concern for the small investor. Nothing could be further from the truth. The whole market microstructure is designed to keep out the small guy from this exclusive club.â
As proof, he says that only 72 lakh people, just over two per cent of the total working population of 32.1 crore in the18-59 age group, invest in stocks, either directly or through mutual funds. In other words, it is not just the crores of Indiaâs poor â farm labourers, construction-site workers, roadside vendors etc â who are excluded from Dalal Streetâs Diwali celebrations. Even our burgeoning middle-class has nearly no share in its rapidly expanding cake. Mutual funds, which are meant to enable retail investors to invest in stocks indirectly, have been of little help. Over 60 per cent of subscriptions of mutual funds still come from corporates. Almost 80 per cent of retail subscriptions in mutual funds come only from three or four metros. Some growth funds have only two or three big investors.
Last week, a leading daily, celebrating the Sensexâs flight to 20,000, told its readers: âIf you had invested Rs 1 lakh in any of these stocks on February 7, 2006, when the Sensex was at 10,000, you would have made ...â Then, listing BSEâs 30 index-driving scrips, it said that a Rs 1 lakh investment then in Mukesh Ambaniâs RIL would be worth Rs 3.9 lakh today, in Anil Ambaniâs REL would be worth Rs 2.89 lakh now, and so on. However, hereâs the stark truth: anyone who has only a lakh to invest will hardly be able to buy the shares in any of the top 30 companies.
Anomalies abound in Indiaâs capital markets. On the one hand, foreign investors, convinced about Indiaâs long-term growth potential, are pouring money. But the markets are very illiquid. Of the 7,834 listed scrips, there is hardly any trading in more than half of them. For the shares of many companies, there are no takers at any price. Most of the coveted shares belong to companies that are family-controlled, where manipulations by promoters are rampant. The so-called independent directors on the boards of these companies, whose remunerations and perks have become immensely more attractive than before, routinely turn a blind eye when promoters enrich themselves at the cost of small investors. Above all, potential small investors fear the stock market, believing it to be speculative and unsafe. They prefer to invest in gold or real estate. Small and medium companies, which can perform well and reward the investors handsomely, are hobbled by infrastructural bottlenecks, made worse by governmental corruption, red-tapism and harassment.
The UPA, in its common minimum programme, had promised: âInterests of small investors will be protected and they will be given new avenues for safe investment of their savings . . . strictest action will be taken against market manipulators.â
The promise remains on paper. Instead, the government has allowed inclusive growth of a very different kind. Indiaâs super-rich are now getting included in the elite club of the worldâs mega-rich. So much so that, during the Sensexâs ascent from 10K to 20K in just 21 months, the family wealth of Mukesh Ambani rose from Rs 60,391 crore to Rs 2,27,690 crore, making him the worldâs richest man. His younger brother Anil Ambani increased his wealth from Rs 34,249 crore to Rs 1,52,600 crore in the same period. Thousands of crores were added to the wealth of other Indian kubers as well.
But letâs remember: last week also saw tens of thousands of poor villagers, many of them with bare feet, marching to the national capital to highlight their demand for land and livelihood. For how much longer can we keep them excluded from Indiaâs growth story?
Sudheendra KulkarniPosted online: Sunday, November 04, 2007 at 0000 hrs
Inclusive growth. Thatâs the mantra that Dr Manmohan Singh, Sonia Gandhi, P. Chidambaram and Dr Montek Singh Ahluwalia have chanted since the UPA government came into being in May 2004, even as they presided over the most exclusive growth that the country has ever witnessed.
They would do well to let the country know how inclusive has been the growth as measured by that index of wealth creation, the Sensex, which last week made an Indian the worldâs richest man.
âYeh toh limited logon ki Diwali hai,â is how a journalist friend of mine, who works for a business channel, described it when I asked him if the base of beneficiaries of the recent stock market boom was getting broad-based. With Diwali approaching, the Sensex crossed the 20,000 mark last week, up from 15,000 only four months ago. âThis growth story is meant exclusively for the big guys,â he commented. âIt has a No Entry sign for small investors.â
To know more, I turned to another eminent business journalist, Rajrishi Singhal, consulting editor of The Economic Times. He drew my attention to his recent article (âDecoding the myth of the small investorâ, ET, Sept 21), in which he writes: âThe unpleasant truth is that the system abhors smallness. The financial markets have turned out to be a modern-day factory for the manufacture of myths. Some myths are created to keep a section of society happy. The small investor is one such myth. It is the product of some fertile imagination harnessed to keep society lulled in the belief that there is great concern for the small investor. Nothing could be further from the truth. The whole market microstructure is designed to keep out the small guy from this exclusive club.â
As proof, he says that only 72 lakh people, just over two per cent of the total working population of 32.1 crore in the18-59 age group, invest in stocks, either directly or through mutual funds. In other words, it is not just the crores of Indiaâs poor â farm labourers, construction-site workers, roadside vendors etc â who are excluded from Dalal Streetâs Diwali celebrations. Even our burgeoning middle-class has nearly no share in its rapidly expanding cake. Mutual funds, which are meant to enable retail investors to invest in stocks indirectly, have been of little help. Over 60 per cent of subscriptions of mutual funds still come from corporates. Almost 80 per cent of retail subscriptions in mutual funds come only from three or four metros. Some growth funds have only two or three big investors.
Last week, a leading daily, celebrating the Sensexâs flight to 20,000, told its readers: âIf you had invested Rs 1 lakh in any of these stocks on February 7, 2006, when the Sensex was at 10,000, you would have made ...â Then, listing BSEâs 30 index-driving scrips, it said that a Rs 1 lakh investment then in Mukesh Ambaniâs RIL would be worth Rs 3.9 lakh today, in Anil Ambaniâs REL would be worth Rs 2.89 lakh now, and so on. However, hereâs the stark truth: anyone who has only a lakh to invest will hardly be able to buy the shares in any of the top 30 companies.
Anomalies abound in Indiaâs capital markets. On the one hand, foreign investors, convinced about Indiaâs long-term growth potential, are pouring money. But the markets are very illiquid. Of the 7,834 listed scrips, there is hardly any trading in more than half of them. For the shares of many companies, there are no takers at any price. Most of the coveted shares belong to companies that are family-controlled, where manipulations by promoters are rampant. The so-called independent directors on the boards of these companies, whose remunerations and perks have become immensely more attractive than before, routinely turn a blind eye when promoters enrich themselves at the cost of small investors. Above all, potential small investors fear the stock market, believing it to be speculative and unsafe. They prefer to invest in gold or real estate. Small and medium companies, which can perform well and reward the investors handsomely, are hobbled by infrastructural bottlenecks, made worse by governmental corruption, red-tapism and harassment.
The UPA, in its common minimum programme, had promised: âInterests of small investors will be protected and they will be given new avenues for safe investment of their savings . . . strictest action will be taken against market manipulators.â
The promise remains on paper. Instead, the government has allowed inclusive growth of a very different kind. Indiaâs super-rich are now getting included in the elite club of the worldâs mega-rich. So much so that, during the Sensexâs ascent from 10K to 20K in just 21 months, the family wealth of Mukesh Ambani rose from Rs 60,391 crore to Rs 2,27,690 crore, making him the worldâs richest man. His younger brother Anil Ambani increased his wealth from Rs 34,249 crore to Rs 1,52,600 crore in the same period. Thousands of crores were added to the wealth of other Indian kubers as well.
But letâs remember: last week also saw tens of thousands of poor villagers, many of them with bare feet, marching to the national capital to highlight their demand for land and livelihood. For how much longer can we keep them excluded from Indiaâs growth story?