The retired “aunty” or “uncle”, India’s retail investor, is important to India’s long-term growth story. The portion of India’s household savings that gets channelled into stock or bond markets currently fluctuates between 2% at worst (in 2008-09) and only 12% at best (in 2007-08). If India has to grow faster, it needs more investment, which demands that more savings, more investors, be brought to the market.
This challenge, getting retail investors to participate, has been evident to policymakers. If the problem is indeed that of trust, the Securities and Exchange Board of India’s (Sebi) campaign in the past year to inject transparency into, say, unit-linked insurance plans may be in the right direction. Is there a new challenge here: What happens when policymakers take this direction to an extreme, and make the aunty or uncle out to be a holy cow for policy?
Consider that, this year, the government couched its disinvestments as a fillip for the ordinary Indian who can finally own stock in a handsome public sector firm. And last week, Sebi suggested doubling the limit for retail bids in initial public offerings (IPOs), couching it as a protection against inflation. Retail investors are already special enough to be allotted a 35% quota in all share sales.
But will this idea help the retail investor? Prithvi Haldea, who runs a market database, told this newspaper last week that during the stock market highs of 2007, 75% of retail investors bid an average of Rs50,000 at IPOs. So Sebi’s idea to redefine the retail investor as one who bids up to Rs2 lakh, instead of Rs1 lakh, only helps the government get more out of disinvestments: Fudge the definition, attract richer folks who can spend more than your usual aunty, and rake in the cash.
It’s time to ask whether the 35% quota, in place for a decade, helps either. If the idea is to encourage retail participation, then why is the retail investor only allowed to bid after bigger players are done? And if the idea is to protect him from price discovery complications, why is he then allowed into the primary market, with all its information asymmetries, in the first place? Such situations might convince him to turn speculator. An open auction, without quotas, could work much better.
Tweaking processes, and even prices, to benefit this aam aadmi can prove counterproductive over time. It won’t be surprising if markets naturally become more institutionalized, as India’s retired uncles and aunties invest through, say, mutual funds. The best policymakers should do in this scenario is keep the market transparent and well-regulated and hope that the investor will come to it. They can’t bring the market to the investor.
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