Make capital out of Capital Market

Make Capital out of Capital Market. Do not allow Dalal Street go the Wall Street Way

The capital market which has undergone sea changes under the initiative of SEBI over a period has been unfortunately turning out to be a den for speculation and gambling keeping away the retailers from investing and helping the capital formation very vitally needed for reviving the sagging economy. The financial savings of the households have, of late, been registering a sharp decline and the investments in physical assets have been on the increase contributing nothing to the GDP growth. For want of adequate resources, the development of infrastructure has lagged behind and the confidence in the whole gamut of savings, investment and production has shattered. The household savings in financial assets have come down sharply over a period. Retailers’ investment in capital market is insignificant if not negligible. The trend in resources mobilized over a three year period by the Corporate Sector can be gauged from the following table.

Total Resources mobilized by Corporate Sector                                             Amount in Rs crores)              

Year	Equity Issues	Debt Issues	Total Resources
2010-2011	1,14,466	2,28,236	3,42,702
2011-2012	40,729	2,96,868	3,37,597
2012-2013	78,408	3,78,444	4,56,852
2013-2014	73,394	3,18,436	3,91,830

Source: SEBI bulletin May 2014

The capital market which should reflect the strength of the economy in fact reflects predominantly the speculative tendencies based on the sentiments of a few market participants. Unfortunately the FIIS have more say in the capital market than the domestic players and they dictate the terms and conditions. The fundamentals of the economy which should be the yardstick to influence the market have been relegated to the background and the movement of indices is only reflective of movement of inflows of speculative funds of FIIS. The macro economic factors like the fiscal deficit, current account deficit, the GDP growth, inflation, value of the rupee, industrial and agricultural production etc are all weak and by any stretch of imagination one cannot explain  as to how the market indices are getting strong day by day other than by the speculative instincts. No doubt the change of the non performing Government and expectation of high Governance standards from the new set up partly account for rise in index, but it is too early to sit on judgment on Government's performance. This speculative trend seen in the capital market needs to be reversed and this is possible only if domestic institutions and corporates strengthen their resource base by tapping the domestic savings through attractive financial products including equities and bonds.

It is the best opportune moment for the new government to come out with some innovative ideas and facilities to enhance, convert and divert the household savings into investments in capital market. The investments in shares through IPOs have turned out to be a very bad experience for retailers during the last decade because of high and greedy pricing of the issues and they have burnt their fingers forcing them to go out of the market and seeking greener pastures elsewhere. Persisting high inflation has added fuel to fire. Gold and real estate have attracted huge investments over a period depleting the savings in banks and investments all around. The Rajiv Gandhi equity investment scheme introduced by the then Government offering tax exemption up to Rs 50000 investments in equity to attract retailers into the capital market has not gone well with the investors and this needs to be scrapped totally or modified drastically. Expecting people in small cities and suburbs who have absolutely no knowledge of shares and for whom having a bank account itself is a herculean task in these days of banks' insistence of KYC without understanding its' relevance, to invest in equities and that too through a demat account which is compulsory to hold the equity investment is simply unrealistic and if not totally utopian. When the Financial Inclusion particularly banking inclusion has not taken off very well, the expectation of the Government to attract savers particularly those from middle income and lower income class to equity market is unintelligible and unrealistic.     

To make the capital market a place for large savings, SEBI has to necessarily ensure that the share of retailers get augmented considerably keeping an obligatory minimum of 25% of the paid up capital of all listed companies. The companies that have exceeded this minimum and have been having more than 50% should get some special recognition from the Government and incentives. Till the Companies reach 25% of retail ownership, there should not be any STT for first time buyers of shares of these companies. To avoid undue speculation in the market, the SEBI can think of introducing loyalty bonus for retention of shares by individuals for more than a prescribed minimum period. STT can also be suitably modified to prevent speculation both on buying and selling. STT can be different for FIIS and domestic players in the market. Similarly STT can also vary for institutions and individuals. Different slabs can also be thought of for levying STT on purchases and sales. With proper modification and intelligent marketing, this can emerge as a regulatory tool to attract small savers to capital market, contain speculation in the market, mobilize maximum savings towards capital formation and enhance optimum revenues to the Government.

Corporates declaring dividends and bonus shares at regular intervals need to be incentivized. Similarly Corporates raising resources from rural and semi urban areas can also be given some tax concessions or some incentives. This will give a boost to tap household savings from these places. Domestic financial and other institutions investing in capital market and raising resources from capital market have to be facilitated with suitable products and processes   to get in and get out of the market and there should be in place effective regulation and supervision with adequate checks and balances to prevent frauds and irregularities.

The capital market is the best source of raising resources for the Government at this critical juncture and the money locked in the form of gold, real estate, hard cash and otherwise also can be easily tapped   with proper reforms in the form of policies, products and processes. Readiness on the part of the authorities is all that matters. A healthy and vibrant capital market supported by sound and proactive administration, regulation and supervision can change the economy into a most promising and prosperous one fulfilling the aspirations of the new Government and the people of this great nation.

Dr.T.V.Gopalakrishnan 

(This article has been sent to MOF for consideration in the ensuing budget).