This is a wish list of a common investor, who has been in the market for over 30 years now and has invested in almost all instruments. Some of the items in this wish list are fiscal measures while others can be brought in as policy announcements.
Worldwide, mutual funds (MFs) are defined as a security that gives small investors an access to a well-diversified portfolio of capital market instruments, managed by professionals, protecting them from the hazards of direct uninformed investing. However, in India, the MF industry has been dominated by corporates and banks through money market products. Only 21% of total AUM is retail money and only about 25% is in equity. MFs are obsessed with AUMs for ranking purposes, and thus expend disproportionately large energies on the corporates, to the detriment of small investors, bearing the brunt of expenses.
There is a need to create tax disincentives preventing corporate money from being invested into MFs, and have incentives for retail to use MFs, which should be their only route. There is also a need to educate that direct exposure is more prone to risk. Time has come to launch a national financial literacy mission to make people understand their options and financial needs at different life stages.
Divestments should be done only to the retail investors. Household savings of millions of retail investors would thus be brought in; despite rising savings, less than 5% of household savings are currently invested in the capital market and worse, in a country of over 100 crore, we have just about 1 crore equity investors. An only retail policy, with Rs 1 lakh maximum allotment, will have a major positive impact; a wide investor base reduces post-listing selling pressure.
IPOs should be made at reasonable prices and FPOs at a discount of at least 10% to the market price. While this will not maximise returns for the government, it would ensure that the wealth created by public enterprises through domestic public resources shall be shared rightfully only with the public (and not FIIs).
Furthermore, only the fixed price route should be used as the retail investors are ill-equipped for bookbuilding. The issues should be staggered, learning from the fiasco of 2004. Allotments should also be allowed in physical mode thus saving the investors from the hassles of opening demat accounts and from custodial charges. Dematting may be made compulsory only for selling.
Would anyone believe that in the past 9 years, a meagre 3.5% of the total capital was offered to the small investors in IPOs? This is because most companies are now allowed to offer only 10% of their capital through an IPO and only 35% of that is earmarked for the retail investors. This is lip service to the small investors in one breath, we bemoan that household savings are not moving into the capital market; in another, we have policies that would not let that money move! There is a need to increase minimum public offer.
New Pension System has the potential of providing financial security to millions of Indians in their retirement years. For this to happen, it is critical that it is moved immediately from an EET structure to an EEE one i.e. tax exempt at all three stages investment, vesting and exit.
RBI has maintained that we should do away with Participatory Notes (PNs). The government however maintains that these are good in the overall interest of our economy. To ensure good quality money, which shall also bring sanity to the market, it is time we did away with PNs.
Equity, we were always told, is a long term instrument. Day trading, however, now dominates with over 75% of daily trades in the cash segment squared off on the same day itself. These investors are pure gamblers, with no interest or knowledge of companies, industry or economy. Day trading needs to be disincentivised, to provide stability to the market.
There is presently a demand for removal of the Securities Transaction Tax. In fact, what needs to be done is precisely the opposite, i.e. enhancing/amending this tax. The STT should be levied only on sell transactions, with a very low rate for delivery-based transactions and a much higher rate for day trades. Furthermore, short term capital gains tax should be increased to encourage long-term money.
Special tax rebate should be made available on investment in infrastructure bonds floated by any infrastructure /infrastructure finance company. The limit on amount available for rebate should be at least Rs 2 lakh. This would bring in more money into infrastructure projects, a priority sector of the government.
Better policies and greater reservations are required for the domestic investors-retail, mutual funds, insurance companies, pension fund managers and banks. Domestic investors are more stable, take a long term view and are not deal focused.