The Indian financial services industry has witnessed a flurry of regulatory changes over the course of the last 12 months. At the heart of these changes is the single objective of enhancing retail investors’ participation in the capital markets, either directly or indirectly, by reducing costs, expanding reach, increasing accountability of manufacturers and advisers and ultimately increasing customer value proposition.
To begin with, the revised Direct Taxes Code (DTC) Bill will play a vital role in encouraging retail investment in the stock market by allowing tax exemption on long-term capital gains on the sale of listed shares. The individuals who fall in the 10% and 20% tax brackets will gain from low short-term capital gain tax (5% and 10%, respectively, against the current 15%). This will have a long-term positive impact on equity market volumes and depth. The changes in personal tax slabs will augment the disposable income by about Rs 15,000 crore in the hand of 30 million individual taxpayers, boosting savings and investments.
Unit-linked insurance plans in their new avatar have become more attractive. The proposal of having a separate sub-limit for a tax deduction of Rs 50,000 on life and health insurance premium in the DTC will also boost insurance penetration levels. Further, ban on entry loads on mutual funds and their listing on stock exchanges has served the dual purpose of increasing affordability and enhancing reach. Indian stock exchanges have over 200,000 terminals over 1,500 towns with a network of at least 17,000 brokers and 74,000 sub-brokers—a reach which no single entity can aspire to build. Enhancing use of stock exchange in the distribution of financial products will expand the reach and increase ease of buying and selling, encouraging higher retail participation.
The proposal to allow mobile trading is an equally important development. We have seen the success of online trading in India. Its share of trading on the National Stock Exchange (NSE) rose by 10 times to 20% in less than a decade. With the number of Internet subscribers at 81 million being merely 13% of mobile subscriber base of 629 million, in my view, mobile trading has immense growth potential. With the financial services firm upgrading its system to provide mobile trading facility, smart phones becoming increasingly affordable and 3G providing the required network capability, the vast pool of mobile users in the country can be tapped. Such leveraging of technology will lead to widening of the investor base in a cost-efficient manner.
Other regulatory moves, such as requirement of minimum 25% public shareholding in non-public sector units (PSU) listed companies and the proposal to enhance the investment limit of retail investors from Rs 1 lakh to Rs 2 lakh for a public issue are all driven by the same objective. In an excellent example of how a single entity can promote equity culture in India, Coal India Ltd, a state-owned entity which is coming up with an initial public offer, is helping its around 400,000 employees in opening demat accounts. This will augment the number of demat accounts in the country. To get things in perspective, the recently completed offers by Engineers India Ltd and Sutlej Jal Vidyut Nigam Ltd were subscribed by 170,000-190,000 retail investors. With many more PSU offers on the cards, disinvestment alone has immense potential to change the retail landscape.
In markets such as Korea and Taiwan, the retail institution is actually more powerful than foreigners. Taiwan’s retail investors are among the most active in the world and they contribute almost 70% of the local bourse’s trading activities. In Taiwan in 2008, 39.5% of the listed shares were held by domestic individuals against 12.2% by foreign institutional investors. Against this, the share of retail investors in India remains less than 8%. According to a report by the Swarup Committee, out of India’s 188 million investors holding financial assets in 2009, only eight million participate in the capital markets, directly or indirectly.
On average, Indian households invest their savings in excess of $65 billion annually in bank deposits. This can work wonders if gets directed to market-linked instruments. Unlike the US, where equities comprises 45% of households’ net financial wealth in 2007, in India it constitutes merely 10%. This is one of the factors resulting in low level of household net worth in India. In 2007, the average household net worth in India was $12,000 against $ 565,000 for the US ($477,277 in 2009).
The stock market rally in 1992 was mainly driven by liquidity as money got diverted from the debt market to the equity market; the rally in 1999 was driven by technology stocks and the one after 2004 was led by a surge in foreign inflows. What needs to be seen is whether all the above regulatory efforts resulting in lower intermediation costs, lower taxes, higher returns and easy access can really unlock the latent retail potential and give a push to retail participation in Indian equities. Can the Indian equity market see a rally driven by retail participation as witnessed by the markets in Korea or Taiwan.
With collaborated effort on the part of the regulators, manufacturers and advisers, India may see a retail revolution-led boom in equity markets. Such a progress will provide adequate stability and resilience to the Indian markets against uncertain foreign flows and also boost household’s net worth and drive the government’s inclusive growth and financial inclusion agenda.
Vikram Kotak is chief investment officer, Birla Sun Life Insurance Co. Ltd.
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