Sunday, August 31, 2014

Stock Markets for the Masses of India in a De-risked Manner: The Concept of Social Stock Investment and Trading Corporation of India

There was an interesting article in the Business Standard of August 29, 2014 that those who invested their savings a year ago in three blue chip stocks of India would have seen their net worth double effortlessly by today. These three stocks, Axis Bank, Maruti Suzuki and L&T belong to three different sectors, banking, automobiles and capital goods. Interestingly, four blue chip companies Reliance Industries, Tata Power, ITC and Infosys which belong to four other sectors oil & gas, power, FMCG and IT provided no more than 20 percent growth. All the 7 companies are leaders and blue chips in their sectors but the diversity in growth in market capitalization has been remarkable. A deeper dive in each sector and across sectors reveals that several firms that qualify as blue chip companies have demonstrated similar divergent rates of growth.

Neither is it easy to hypothesize that sector outlook has a greater say than company’s outlook in driving a company’s market capitalization. A study of each sector demonstrates that there is a high variability in the performance and market capitalization of various firms in each sector. This applies to defensive sectors like pharma, forex driven sectors like IT, consumer based sectors like FMCG, economy based sectors like automobiles, metals and infrastructure, to quote a few. Over and above, governance issues in companies tend to convert high growth stocks into either highly volatile or free fall stocks, just in a matter of days. Managing the excitements and pitfalls of Indian stock markets has become a frighteningly hazardous exercise for the retail investors who put their hard earned savings into the stock market with expectations of high growth.
Virtual Reality
Stock market has been the most innovative financial forum that has been established by the business ever. It is the only forum that brings the companies and investors face to face based on goals and performance on one hand and expectations and resources on the other. For the company, it offers a foundation to build market capitalization to attract risk capital into the shareholding structure at the right time and at the right price. For the investors, it offers a forum to participate in industrial growth based on their understanding of the sectors and companies. Over time, with the evolution of mutual funds, emergence of high net worth investors and entry of domestic and foreign investment houses, the domestic small retail investor has become marginalized. Expectations have turned virtual while volatility has become real for the small investor.   
Over the last several years, the level of independent analyses that are available on Indian companies has grown manifold. The number of business papers and investor forums has also grown substantially. With availability of software, minute by minute tracking of individual stocks and highs and lows as well as volumes is available at the click of a mouse to individuals. For those who want to rely on knowledgeable advisors, portfolio managers have emerged. Yet, there is no clarity  if all of these serve to provide greater assurance or insurance to the retail investors. There is no hard research on how and to what extent the stock markets benefit the small retail investors. There is no research on the benefits of investing through mutual funds vis-à-vis direct investments. There is also lack of clarity if the scores of analyst reports that are available are of any help for the retail investor.     
Managing expectations
Over the last several years, many steps have been taken by the Securities and Exchanges Board of India (SEBI) and the Bourses (Stock Exchanges) to protect the investors. These steps focus on improved corporate governance, better regulations for initial and follow-on public offers as well as other equity and debenture issues, more evolved systems for mutual funds, foreign institutional investors (FIIs), circuit filters on regular and volatile stocks, greater oversight on insider trading and operator driven trading, wider public information campaigns and so on. That said, the small domestic investor continues to be vulnerable. Highly capitalized and leveraged companies in high market capitalization mode have seen their stock prices collapse by 40 to 50 times in just matter of days, with no understanding or clarity on what would it take to recover, and when as well as to what level. While such cases may be attributed to tainted stocks or misgoverned companies, it is clear that such companies continue to beat the elaborate financial and securities systems. Even well governed companies are induced to focus on the short term quarterly profitability than on long term sustainability.
Over and above the above, Indian stock markets have become coupled with global economic developments on one hand  and the movements of funds by FIIs and other global investors across countries based on their needs and perceptions. These two factors, including global geopolitical risks, make the Indian stock markets a slippery ground waiting for the unexpected to happen.  Public information campaigns advise the investors to be watchful. However, given the variety of investment options for several hundreds of stocks, the daily masthead news on exuberant appreciation as well as unstoppable collapse of stock prices, lack of knowledge and time on the part of small investors, such well merited advice can only moderate expectations but not prudentially manage them. Clearly, in a growing economy like ours it is important to have healthy and vibrant capital markets with as much investor participation as possible. This blog post suggests some unique ways to manage the all-round expectations with focus on productive wealth generation as opposed to wasteful wealth circulation.  
BRL, like BPL
All said and done, India is committed to an egalitarian society. The several schemes that successive governments have initiated such as ration card systems, subsidized food systems, rural employment schemes, subsidized transport fares, price and tariff regulations and several others seek to help the people below the poverty line (BPL) cope with the stress caused by unemployment and underemployment on one hand and scarcities and inflation in factors of living. Irrespective of party ideology, all leaders and governments in power have endeavored to be creative on this score. While skeptics may dismiss them as populist schemes, it cannot be denied that they help the people in the BPL category.  Inclusive development is the sine qua non of a stable democracy. The latest policy initiative by the Prime Minister of India, Shri Narendra Modi, the Pradhan Mantri Jan-Dhan Yojana (PMJDY) is an innovative and bold step for universal financial inclusion. With a target of opening bank accounts for 7.5 crore families in a year, PMJDY comes as a package of more than account opening. It also offers RuPay debit card, Rs 1 lakh accident insurance cover and Rs 30,000 life insurance cover for accounts opened before January 26, 2015.
Taking a cue from this, this blog post proposes Below the Risk Level (BRL) as a foundation concept for universal capital market investment. Unlike the BPL and PMJDY schemes that reach people directly and are intended to protect the people, any move to make the common man participate in the stock markets directly has the potential of destroying the meager wealth. A risk-proof plan for inducting the BPL population into the capital markets with the assurance of long term capital appreciation would be ideal but has to be carefully developed. Fundamental to that strategy would be the definition of BRL concept. The BRL concept should provide a definitional basis to identify the section of the population that should qualify for participation in the universal capital market scheme. An easy way to kick-start the concept is to define BRL population as those earning a multiple, say up to 10 times, of the BPL earnings level. Such BRL population should be linked to special bank and DMat accounts under the PMJDY.  
Social Stock Investment and Trading Corporation

Social Stock Investment and Trading Corporation of India Limited (SSITC) will be a wholly owned enterprise of the Government of India with a corpus contributed by the Government of India. The corpus would be say Rs 20, 000 (X) multiplied by twice the number of BRL accounts. All those who open the PMJDY accounts and qualify as BRL members would be provided a stock holding of Rs 20,000 in the SSITC, free of cost. The balance corpus would be used by SSITC to invest in Indian companies and trade on them. SSTIL would act as the umbrella stock investment and trading company for all the BRL members. The stocks issued for a BRL member would have a lock-in period of 5 years. At the end of the 5 years, the holding can be sold in part or full but only to another BRL member or to SSITC itself. If the holder sells the holding and the value of the holding increases by more than 1.5 times (base plus appreciation), SSITC would retain the excess over the 1.5X amount and return the 1.5X amount to the holder. The shares of the SSITC would be traded in the National Stock Exchange.
The financial burden on the Government of creating the corpus for SSITC may be reduced by making contributions to SSITC an admissible activity under the Corporate Social Responsibility rules under the New Companies Act 2013. SSITC as an investment arm of the society, for the society and by the society can do wonders in terms of bringing the stock markets within the reach of the masses in a risk free manner. It would be risk free because the original investment is a government subsidy on one hand, and is managed by SSITC as a professional organization on the other. As the SSITC holders get to know the value of their holdings through periodic newsletters, they would be encouraged to invest their savings as additional contributions in SSITC. Such contributions would not have any restrictions of sale, lock-in or retention of excess value appreciation. There would be an expert professional management team to oversee and run the day to day operations of SSITC. Obviously, a lot more thinking and strategizing would need to happen before the SSITC concept can be finalized, including how to consider members who graduate above the BRL.
Markets for masses
India’s two top bourses, NSE and BSE have an average daily turnover of Rs 376,391 crore (August 2014 data) comprising both Cash and Futures & Options segments. It would be tragic if most of the massive trade were to be in the categories of wealth circulation, with wealth erosion for the unwary, completely skirting the masses who do not know the outlines of the stock markets. The SSITC concept with its social objectives can not only bring the stock markets to the masses of India in a risk free manner but also act as stabilizing ballast for the choppy and deep waters of the stock markets. It is hoped that the proposal of bringing the stock markets to the masses of India through the Social Stock Investment and Trading Corporation of India would bear fruition sooner than later.
Posted by Dr CB Rao on August 31, 2014                                   


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