BS Number Wise: A pandemic market phenomenon is beginning to reverse

And why it should worry you if live in certain parts of the country

A funny thing began to happen in the stock markets when Covid-19 first hit the country. Between fears of a prolonged bear market, swiftly followed by an almost unimpeded rise, was the addition of 25.6 million new investor accounts. And as new accounts were added, individual trading turnover began to move away from being the preserve of a few corners of the country to becoming more widespread. The share of the top ten districts fell to 37.1 per cent at its lowest since the pandemic began.

That trend now appears to be reversing. The share of the top ten districts in terms of individual cash turnover is now higher than was the average for the three months before India had its first case of Covid-19 in January 2020 (see chart 1).

There are two places which dominate this list. One is Mumbai with a share of over 13 per cent. The other is Delhi whose share is over 10 per cent.  In a way, the numbers are also representative of the regional concentration of equity culture in the country.

Western and northern India accounted for an average of 64.3 per cent of new investors in the three months leading up to January 2020. It is now 67.7 per cent in the last three months. Whenever there has been a shift in regional numbers, it has been in a way that hasn’t upset the dominance of the north and west. An increase in the share of the eastern region has come at the cost of a decrease in the share of southern investors (see chart 2).

Why does this matter? One could argue that ultimately it is a national market, wherever investors may choose to participate from. But the lack of participation reflects a lack of equity culture outside the top regions which goes beyond merely the addition of new investors or their trading turnover.

There is also a regional domination when it comes to where equity capital is delivered. Ultimately, the stock market is a source of risk capital. It puts investors who are willing to invest risk capital in touch with companies who want to put the money to use. Nearly 87 per cent of the equity fund raising that has happened since January 2020 has gone to companies in the western and the northern part of the country. Both eastern and central region companies have got less than one per cent of the Rs 1.5 trillion raised over a 19-month period (see chart 3).

This would essentially mean that any risk capital that is available, for example in eastern India, goes to companies in the already developed western and northern parts of the country. While many factors play a role in determining regional economic activity, the greater availability of risk capital can encourage more entrepreneurship in places that have historically lagged behind.

The Securities and Exchange Board of India has allowed mutual funds to charge higher amounts if they garner assets from beyond the top cities with some demonstrable success. Whether similar policies to inculcate an equity culture across regions may be worth debating, especially in terms of encouraging companies from such regions to tap the equity market. 

For the moment, the pandemic trend of lower concentration appears to have been entirely temporary.