Retail investors: unsung heroes of the Indian capital market4 min read . Updated: 21 Oct 2015, 06:31 PM IST
Retail investors have played a vital role in keeping Indian companies on track
It’s not uncommon to find “professional" investors dismiss amateur" retail investors due to their inability to time the market correctly. I have some questions for such “gurus". Who buys when institutional investors panic and sell, like what happened in late-2008? Who sells when institutional investors become very confident and buy, as was in late-2010? That looks to me like very good timing for the fellow on the opposite side of the institutional trade.
Another sage piece of advice proffered is that retail investors should have a long holding period. But how many mutual fund portfolios have a turnover lower than their investor turnover?
India has many generations of retail investors as we have Asia’s oldest equity bourse. These investors, who for the most part are silent, do voice their opinions in the shareholder meetings and companies would be ill advised to not listen to them. Shareholder meetings in India are quite a lively affair and see a lot of intelligent questioning. For example, at one recent meeting, a retail investor asked: “How is it that over the past few years, the MD’s salary has grown faster than my dividends?" This question goes to the heart of optimum allocation of economic returns between labour and the provider of capital. It is easy to dismiss a shareholder who has 100 shares, but do remember that this is a significant part of his net worth and, hence, the question may not be entirely irrelevant.
Is it then a coincidence that India enjoys one of the highest returns on equity across the world? Smart Indian companies have realised the importance of equity capital and they treat their shareholders well. This is not true of many companies listed in other countries across the world.
Disclosure levels of listed Indian companies have increased exponentially over the past few years. Some heads of companies keep complaining about how burdensome these are. Such people are free to delist their companies and avoid the burden.
Listing on equity markets has many advantages—access to risk capital, free publicity and, most important, a robust feedback mechanism. If a firm wants to take advantage of these, then it should be prepared to behave responsibly and disclose appropriately.
Infosys Ltd is a classic example in this regard. Its disclosure levels have always been one of the most comprehensive. This has helped its stock trade at premium valuations for most of its listed life, given it access to cheap capital, helped it attract talent using employee stock options and, finally, given it market feedback to set right internal leadership challenges. Is it any wonder that this company has made India proud and succeeded in a competitive global world?
Corporate governance, which encompasses all such practices whereby information asymmetry is reduced between owners and managers, is not just a good thing to have. In a country like India where more than $300 billion of foreign capital is invested in equity markets, poor corporate governance can destroy investor confidence and ruin the country’s economy if these investors lose faith and pull their money out. It is imperative that we benchmark our corporate governance practices with the best in the world and then become even better. This will reduce the perceived risk of Indian equity markets.
Take Amazon.com, Inc. This company has barely made any profits over its listed lifetime. Yet it commands a market capitalisation higher than that of Walmart. Could Amazon have achieved this success if it were funded entirely by a bank? Equity capital is called risk or patient capital because it does not come with a coupon attached nor does it come with a maturity date. That gives enormous leeway for a business to take risks and thereby succeed. But all throughout the trust between the owner and the manager should not be broken. And trust is the outcome of good corporate governance.
Retail investors, therefore, have played a vital role in keeping Indian companies on track. By asking incisive questions that primarily relate to corporate governance—allocation of capital, governance practices, compensation practices, and more—retail investors are doing a service to the nation. Little wonder that in 14 of the past 16 years, foreign investors have been net investors in the country.
Our policymakers no longer have a choice. Being custodians to such large sums of foreign capital, they should keep their focus on keeping this trust intact.
Some of these changes can be made by allowing shareholder meetings to be held where the majority of shareholders reside, and benchmarking financial disclosure levels to those prevailing in the US (such as, 10K and 10Q financial statements).
Much has been said about how difficult it is to do business in India. The World Bank report that rates India at 142 out 189 on ‘Ease of doing business’, also rates India a high 7 out 189 in ‘Protection of minority investors,’ which is an acknowledgement of the efforts of our regulators and policymakers. Our aim should be to achieve the No.1 position, which will ensure availability of a large stream of cheap risk capital, helping India achieve its latent potential.
Huzaifa Husain is head-equities, PineBridge Investments India.