AI-led Neo-banking in India: An Epoch in Indian Growth Story 21

How to keep the small investor in India hooked to a market with terrible mood swings

The demographics of the Indian stock markets have witnessed a stark change since the onset of COVID. The Indian investors have always been wary of the equity markets. They have preferred more traditional investments like bank deposits, gold and real estate. Not even schemes designed to channel retail savings into equity markets have had any impact on their hesitancy about this class of investments.

However, with the pandemic forcing millions to be homebound, India, like many other countries, has seen the reluctant retail investors checking out equity investing. trading boom has been fueled by pandemic-driven. The relentless stock market rally since March 2020 has drawn in more investors.

And technology, including the rise of cheap trading apps and social media—YouTube influencers, Twitter, and Telegram stock-tipping chat groups—has attracted hordes of day traders into discount brokers such as Zerodha Broking.

But unlike during previous retail investing booms, many of the new entrants live outside of Mumbai and New Delhi, the biggest cities. More than half of Angel Broking’s new customers in the quarter that ended in December were from smaller cities and towns, the firm says.

“The adoption of internet and online access is going deeper into the country,” says Peeyush Mittal, a co-manager of the Matthews India Fund in San Francisco. “What we hear from companies in the brokerage space is tier 2 and tier 3 city investors are more long term in their view of the market. Whenever the markets are down, they tend to put in more money compared to people in the biggest cities. ”

The number of demat accounts in India have crossed the 10-crore mark for the first time.

Following the trend of increasing Demat accounts, Dr. Niti Nandini Chatnani, professor in the department of finance at IIFT Delhi and a contributor for The Economic Times, lends us her insight on how recent small investors can be retained for a long time.

The transformation of the Indian stock markets post liberalization has been an interesting one, with its fair share of setbacks and scams. But the indefatigable spirit of businesses and investors has seen the Sensex go from 1,000 levels to 60,000 over the last three decades.

This time period also witnessed the introduction of the NIFTY index in 1996, and its rise to prominence as India’s most popular financial product, and the world’s most actively traded contract. The Indian stock markets have fashioned abundant stories of wealth creation that attract investors, and yet there are enough stories of wealth destruction that call for caution. SEBI, as the regulator, has successfully promoted market activity, while continually upgrading and reinforcing its market monitoring and regulatory apparatus, bringing in transparency and reducing market manipulation and fraud.

The regulator has relentlessly worked to increase retail investor participation, both to offer them new options to deploy their savings, and also to mobilize small investor capital for investment.

In countries such as the US, where the equity culture is well-developed and where retail investor participation in the stock markets is high, the major challenge faced by the regulator is the rather uninformed and irrational behavior of these investors. India, however, has not seen the same kind of retail investor involvement.

To bring in retail investors into the stock markets, and to guide them to safer equity investments, the Rajiv Gandhi Equity Savings Scheme (RGESS) was introduced in the budget of 2012-13.

The RGESS aimed to improve the depth of the domestic stock markets by widening the retail investor base, leading to financial stability and financial inclusion.

Designed as a tax-saving scheme for the firsttime retail investors with annual income below Rs 12 lakhs per year, this scheme combined the twin objectives of encouraging individual investors to step into equity investing, while protecting their investments by restricting them to stable large-cap stocks and funds only, and with investment lock-ins.

The scheme distinguished itself from the Equity Linked Savings Scheme (ELSS) as in addition to indirect investments through Mutual Funds, it also provided for direct investment through equities.

However, this scheme did not gain much traction with the targeted group of investors, with only about 20,000 demat accounts set up till 2017, and low levels of investment made through them. This ultimately led to the scheme being discontinued after April 2018. To be fair to RGESS, it was a good scheme launched at a bad time. The years immediately following the financial crisis of 2008 were not good for investors. The NIFTY went down by 6.5% between January 2008 and July 2013, and a sense of gloom prevailed over the performance of the stock market. The eligibility constraints and investment checks built into the scheme further limited investor interest.

The performance of the stock markets after the sharp fall in April 2020 has been a different story altogether, and the sharp surge in the stock prices thereafter has left investors who were not participating in these markets till now to feel the loss of a great wealth creation opportunity. As a result, 15 million new demat accounts were added in FY 2020-21, and 30 million in FY 2021-22. More than 15 million new demat accounts were added in the first half of 2022. The presence of discount online brokers has also encouraged this surge in demat accounts.

But many of the first time retail investors, who were encouraged by the exceptional returns from the markets post April 2020, are now facing market volatility, and losses in their equity investments and IPO allotments. This is hurting the investor sentiment. Markets will, nevertheless, not change their nature to accommodate new retail investors.

This is a good time to bring an Equity Saving Scheme (ESS) for first time equity investors. Most suggestions to boost retail investor have revolved around removal of the Securities Transaction Tax (STT), which, with increasing numbers of investors and trade volumes in the market, generates huge revenues for the government.

An ESS will focus on tax breaks only to first time equity investors, thereby not cutting into the revenues earned through STT.

At a time when retail investors are showing inclination to start direct equity investing, encouraging them to set up trading accounts, and handholding them through the first few years of their entry into the stock markets will be very helpful in building their confidence and creating a stable population of retail investors.