In India, out of a population of approximately 123 crores, only a meager 2.25 crores (approx) dabble in stocks. A general sweeping assumption would be that the stock markets are not meant for people with a limited risk appetite. But when we scrape the bottom, a whole new scenario emerges. In the larger scheme of things, people keep a safe distance from stocks because of the legal and corporate pitfalls that arise from loopholes in the system.
For an average middle class Indian, savings is all about securing the future through 2 essential investments- gold and real estate. A roof over the head and freedom from the rigmarole of rent paying is any average man’s dream. And the infatuation of Indians with amassing gold lies in their cultural roots. Most of the savings of a salaried man are parked in gold which is imperative for marriage purposes. When thinking about investment, most Indians shy away from investing in stocks. The fear is often deep-rooted and stems from uncertainty and half baked knowledge. Additional income also comes from interests from fixed deposits in banks. But in a country struggling to battle inflation, the income from interests is often negated by rise in overall prices. Hence the income is not surplus after all, it is simply a maintenance of a person’s purchasing power. For example, if bank interest on a sum of Rs 1 lakh is Rs 9000 and inflation is at 9%, then the income and expenditure are evened out.
The RBI feels that the reason behind this limited mindset is a mistrust of government officials and their inability to control inflation. The average Indian’s mental block to stock markets can be attributed to corporate misgovernance and the fleecing of investors by financial intermediaries. Besides even though the stock markets have given impressive returns in the past, it has been observed that even though the large cap stocks performed well, the overall performance of the mid cap and small cap stocks were erratic. With the volatility, uncertainty and the hairpin bends that stock markets always take, the safe-playing masses prefer to steer clear of cash equities.
But the benefits of long term investing cannot be undermined and the government is beginning to sit up and take notice of this scenario. SEBI has been empowered considerably and risk surveillance systems have been put in place to increase credibility in the equity markets. However on the flip side, even though SEBI is adopting risk management actions, there is still a certain amount of manipulation and lack of liquidity in equity markets.
Actions already taken by the government to improve the investment climate in India include the establishment of SEBI, depository of shares, screen based trading, clearing corporations, settlement guarantee fund, rolling settlements, disclosure rules for companies among other things.
Strong laws for corporate governance along with steps to safeguard public sentiment can go a long way in turning the tide. Occurrences like the Saradha scam in Bengal or the infamous Satyam scam can only be contained by strong foolproof tabs on corporate malpractices and corruption. The saradha scam exposed the chit fund farce that was being played out in rural Bengal where lakhs of people invested their hard earned savings and consequently lost every penny in the bargain. And finally a control on inflation is also necessary so that the investors get to see some real returns as opposed to a mere balancing out of income and added expenditures.