Wasted efforts

Sebi has not done enough to fix capital markets

The market regulator, the Securities and Exchange Board of India, or Sebi, has a key role to play in ensuring that a larger proportion of household savings are channelled into investments. Yet Sebi has taken only tentative steps in this regard. Household savings account for over 23 per cent of GDP and over 72 per cent of all national savings. But only five per cent of household savings (about 1.2 per cent of GDP) are in shares and debentures. And most of this is parked in low-yield assets like bank deposits, insurance and post office savings. Even at the bull market peak of 2007-08, households never held more than seven per cent of savings in equity. This must change if future growth and investment projections are to be met. 

In July 2011, Sebi commissioned the National Council of Applied Economic Research to conduct a survey on household savings. The survey estimated that, out of India’s 227 million households, just 24.5 million invest in equity, debt, mutual funds and derivatives. About 40 per cent of the households that did not invest were of the view that they lacked sufficient information and that markets were not transparent. This perception was seen across all income groups. Even in more educated, high-income groups, where risk tolerance was higher, a large proportion of respondents felt equity was unsafe. Risk aversion led to a net outflow of household savings from mutual funds in 2011-12. The primary market was also hit, as issues struggled to meet retail subscription quotas. Initial public offers, or IPOs, raised only Rs 12,857 crore in 2011-12, compared to Rs 58,157 crore in 2010-11.

This cannot be attributed purely to poor market conditions. The fact is that Sebi has failed to build public confidence in the markets, after there were too many scams over the years. Investors still see the IPO book-building process, for example, as non-transparent, despite all the fine-tuning. Mutual funds are believed to yield low returns. Trustworthy financial information is scarce. There’s a general lack of faith in corporate governance. The latter factor also affects the corporate bond market, which has near-zero retail participation. Apart from diagnosing and correcting lacunae in market processes, Sebi must also find ways to change the perceptions about itself. It is seen as a slow-moving, opaque institution, with a plethora of committees and sub-committees. It doesn’t seem to act decisively, even when it goes in the right direction. For example, the decision that insider trading and price manipulation charges would no longer be settled via consent orders won’t revive confidence, until and unless offenders receive punishment. In a more general way, all the norms and regulations of corporate governance must be more stringently and visibly imposed. Similarly, the recognition that mutual funds must penetrate small towns is welcome. But merely increasing the total expense ratio, as Sebi has done, will not serve this purpose. The long delay in implementing minimum public shareholdings of 25 per cent (10 per cent for PSUs) has also not helped to build public enthusiasm for the measure. It is to be hoped that Sebi will hold to the revised June 2013 deadline for this, despite pressures from the promoter lobby. Retail investors will willingly accept market-related risks only if they think they are getting a fair deal. It’s up to the regulator to deliver on this front.