2021 retail investing boom has lessons

Since early June 2020, the stock market has been on a major bull run. We have had bull runs before, but these 18 months have been revolutionary in one aspect. It is the first time in almost three decades that the Indian retail investor has come to dominate trading on the Indian bourses. And there is a big irony and a lesson in that. After all, “reviving capital markets” and “increasing retail participation” have been the constant refrain of policymakers for decades, especially when the market is down in the dumps, usually due to a series of policy errors.

In the mid-1990s, not a day passed without policymakers addressing seminars or making public comments on the twin objectives of reviving markets and increasing retail participation. I had written in a column for this paper in 1995 that two weeks after D R Mehta took over as chairman of the Securities and Exchange Board of India (Sebi) he began to lament about how small investors had been pushed out of the market. In a conversation with me, he talked about a doctor friend from Jaipur who wanted to invest Rs 1 lakh through initial public offerings (IPOs) but hadn’t got any allotment of good stocks. He raised the issue again in a meeting with merchant bankers. Those days, policymakers worried endlessly about “poor retail participation”.

The main reason for this was inefficient market infrastructure and poor regulation. Prior to dematerialisation, the transfer of physical shares was very cumbersome. The abolition of control of capital issues removed all checks on IPOs, allowing a free for all. The IPO market peaked in February 1995 with the infamous price rigging and misstatements in the prospectus of MS Shoes. In January 1995, 145 equity issues opened for subscription. In one frenzied week in February that year, 78 companies went public, crowning a financial year of 1,400 issues, most of them small and shady companies that vanished with investors’ money. When you consider the period between 1998 and 2001, when only 219 companies went public, you begin to see the farce of the 1994-95 IPO boom. The regulation of the primary and secondary markets was so lax that just about anybody could raise money with false statements and rigged-up prices in the thriving pre-IPO grey market. Sebi refused to act despite many of us pointing this out.

“Poor retail participation” became endemic. There was no trust in the system. While the market went through a boom in 1999 and then again in 2003-07, retail participation refused to budge much. Retail quotas in IPOs were barely subscribed until recently. That apart, one of the reasons adduced for poor retail involvement directly in the stock markets was the rise of the mutual fund industry. The conventional wisdom was that retail investors should invest through the mutual fund route.

This endemic problem was solved by a pandemic. Covid-19 did what innumerable seminars on investor education could not do for over two and a half decades. In a snap, the sinister virus that brought the whole world to a halt and forced people to work from home turned into the fuel for new demat accounts. In the two decades till 2019-20, some 40.8 million demat accounts were opened. And in just 20 months after the 2020 lockdown, that figure had almost doubled to 74 million at the end of November 21. As Vladimir Ilyich Lenin said in a different context: “There are decades where nothing happens, and there are weeks where decades happen.”

Four factors were behind this retail boom: One, online sign-ups for broking and demat accounts; two, continuously booming capital markets in India and around the world; three, retail investors having more time, money, and the opportunity to trade as they were forced to stay at home; and four, for the first time an explosion of easy to consume information on stocks, including videos. The net effect was enormous. For the first time in decades, retail investors as a group came to dominate cash market trading — some 45 per cent in FY21. The share of foreign institutional investors and domestic institutional investors is down to single digits. In all this, there is a lesson. 

Policymakers often have a top-down approach to issues, engaging only with peers. This puts them out of touch with what is happening on the ground. For example, easy online account opening would have certainly increased retail participation much more even before the pandemic. To draw an analogy, savvy consumer internet marketing tries to remove all obstacles in users’ journey so that they can get to reach their goal with a minimum hitch. For instance, the big boom in retail algo trading is precisely because complex, discretionary, and emotional decisions based on trial and error, are taken out of trading.

This process of staying focused on the participants’ issues will be the most effective tool for any policymaking too — follow the journey of citizens, investors, and consumers, and, through continuous feedback, address their obstacles/fears. We can save all the time and money uselessly spent on seminars, papers, meetings, speeches, etc. I am not sure policymakers are even thinking along these lines. After all, by not bothering to talk to participants, they were clueless about the rise of retail algo and did not think of this needed oversight.

The writer is the editor of www.moneylife.in

Twitter: @Moneylifers