:: OP-ED

If our small investors found Sensex sexy...

Paranjoy Guha Thakurta

Oct.26 : In recent times, movements in Indian stock-market indices have closely mirrored inflows of funds from foreign institutional investors (FIIs) and have become almost completely independent of decisions of domestic investors. The problem simply is that, by their very nature, FIIs are fair-weather friends and the money they bring in is often warm, if not piping hot. As past experience has indicated, FII money can move out as quickly as it comes in. The country’s capital markets will never acquire depth and maturity unless more ordinary citizens decide to park at least a part of their hard-earned savings in equity and debt instruments and not treat the stock exchanges as gambling dens.

Investments in equity shares and other financial instruments including mutual funds have varied between four per cent and 12 per cent of total household savings in the country over the last few years, according to Reserve Bank of India data. Various independent studies conducted to calculate the total number of investors in India show that their number is not more than 30 million or barely three per cent of the country’s total population. The total number of depository accounts is around 13 million. In other words, the vast majority of Indians preferred to park their savings in bank accounts, post offices, precious metals like gold and silver or real estate. When not stashed away in cupboards or under mattresses, many poor Indians (notably tribal women) wear their savings.

Not surprisingly then, despite the high-voltage publicity given to developments in stock-markets by pink dailies and business television channels, the Sensex — or the sensitive index of the stock exchange at Mumbai, comprising 30 of the most actively traded shares — is sexy for just a small section of Indians. We are, after all, a country in which the combined value of the assets of the top five billionaires (in US dollar terms) equals the aggregate wealth of the bottom 300 million Indians.

The Sensex took nearly two years to rise from 10,000 to 21,000 in early-January 2008. It then collapsed to below 10,000 nine months later in September and further to a three-year low below 8,000 on March 9. Thereafter, the index rose above 12,000 points in early-May 2009 — jumping sharply by 17 per cent on May 18 after the election results indicated that a stable government would be formed. The index crossed the 15,000 mark in July 2009 although the July 6 Budget was not welcomed by the markets. The Sensex is currently hovering around the 17,000 mark.

FIIs had pumped in close to $18 billion in calendar 2007 but withdrew nearly $15 billion out of this amount in the course of 2008 as Wall Street collapsed and the international economic recession set in. Just as the inflow of foreign funds had added to domestic money supply and fuelled inflationary expectations, the withdrawal of FII money last year put considerable pressure on the exchange rate of the rupee vis-à-vis the American greenback. Now, attracted by India’s growth prospects, FIIs have again returned and have invested over $12 billion in the country’s stock-markets between January and October this year.

An FII is an institution established or incorporated outside India that invests in securities in this country. A sub-account of an FII could include foreign corporate entities, institutions, individuals, funds or portfolios established outside the country (whether incorporated or not) on whose behalf investments are made by an FII. While FIIs have been allowed to invest in Indian securities from September 1992 onwards, the regulations governing the activities of FIIs were notified by the Securities and Exchange Board of India (Sebi) more than three years later, that is, in November 1995.

Till the end of 2003, there were barely 500-odd FIIs operating roughly 1,300 sub-accounts in India’s stock exchanges. At present, the total number of FIIs registered with the Sebi has more than trebled to around 1,700 and these investors operate close to 5,300 sub-accounts. The number of sub-accounts has gone up by over 50 per cent in the past one year with nearly 1,900 new sub-accounts getting registered in the last two years alone.

The purchase and sale decisions of FIIs are the only significant factors that determine the mood that prevails in the country’s stock-markets. Nothing else matters. Forget the small investor. Even those who run mutual funds, heads of large financial institutions or even many corporate captains passive witness the action in the bourses from the sidelines. In the past, the FIIs would often display a "herd mentality", buying or selling together. Over the years, among the FIIs, identifiable bulls and bears have emerged. Still, if one plots the net inflows of FIIs on a graph, its shape would closely resemble the pattern of a chart depicting the movements of the Sensex or the National Stock Exchange’s (NSE) Nifty index.

The shares of roughly 6,200 companies are listed on the NSE and the Bombay Stock Exchange. On any given working day, between one million and two million transactions take place. The daily trade in equity shares is around Rs 15,000 crores while trade in derivatives (in the futures and options segment) is three to four times higher. At present, there are online trading terminals in more than 450 cities and small towns scattered across the length and breadth of India. Despite this impressive network, the fact remains that most small investors in the country lack confidence in the ways of the stock-markets. Under the circumstances, given the passive role played by small investors, it is not surprising that FIIs are calling the shots.

One can understand why FIIs are so keen on investing in India. But the government has to do much more to make stock-market investments more attractive to ordinary Indians. In February 2003, a study conducted by Prime Database headed by Prithvi Haldea had pointed out that the small investor in India had been being grossly neglected, thanks largely to an unfriendly policy regime framed by apathetic officials. The situation continues. It is far simpler for an FII to invest in Indian stock-markets than it is for a citizen of the country.

In the 1990s, one would hear of paan-stall owners on Mumbai’s Dalal Street playing the markets. But where is the small investor today? Having burnt his/her fingers more than once, individual investors belonging to the middle-class remain rather disillusioned about the stock-markets.

Paranjoy Guha Thakurta is an educator and commentator