New Initiatives To Boost Retail Participation

While a number of initiatives are being taken by the government to attract retail investors to the markets, investors need to enhance their awareness before diving into the markets, says Hemant Rustagi

The two most important asset classes for investors are equity and debt. While equity should ideally be included in the portfolio for achieving long-term goals, debt investments are apt for short and medium-term goals. Despite the fact that equity is potentially the best asset class for building wealth over time, the retail participation in the stock market has been abysmally low. Similarly, although debt investments are the mainstay of most retail investors, the secondary debt market remains an unchartered territory for them. 

In the recent times, a conscious effort is being made to change this scenario. Realising the importance of increased retail participation in both these markets, a couple of initiatives have been announced. While the Rajiv Gandhi Equity Savings Scheme (RGESS) was announced by the finance minister in the Union budget 2012 to spread equity culture in the country, a dedicated debt segment has been announced and will be launched by the stock exchanges to deepen the debt market soon. Let us analyse these initiatives and see how much difference they can make to retail participation in both these markets.

RGESS: This scheme allows a first time investor with an annual gross total income of Rs 12 lakh ( Rs10 lakh for the year 2012-13) to invest up to Rs 50000 in the stocks that are a part of the indices like BSE 100, CNX 100, equity shares of PSUs which are categorised as Maharatna, Navratna or Miniratna, units of exchange traded funds (ETFs) of mutual funds with RGESS eligible securities as underlying and IPOs of public sector companies in which the government holds at least 50 per cent stake and whose annual turnover is not less than Rs 4000 crore. An investment in RGESS allows investors to claim a tax exemption on 50 per cent of the investment under Section 80 CCG as per the applicable tax rate. 

The first time investor in the securities market has been described as someone who either doesn’t have a demat account or if he already has one, no transaction should have been made in it. As announced in the union budget 2013, an investor can now invest and claim tax exemption for three years.

Although the scheme was launched to provide impetus to retail participation in the stock market, the response to it during 2012-13 was lukewarm. The complexities in the structure of the scheme, low tax rebate and the mandatory requirement of opening a demat account kept investors away, thus making it a clear case of missed opportunity. Instead, a simple structure and a broader eligibility criterion could have given the desired results. 

Dedicated Debt Segment: This is certainly one of the major initiatives to deepen India’s debt market. Although various attempts made in this direction in the past have proved to be unsuccessful, this one has the potential to make a difference. Considering that banks and insurance companies, which are big players in both the corporate debt as well as the government securities segments, have been allowed to participate in it, liquidity is likely to get a boost. One of the major objectives of this initiative is also to provide an opportunity to small investors to participate in the debt market in a transparent manner.

There are a couple of reasons for low retail participation in the debt market. First, investors often find it quite complicated to transact in the debt market. Second, low liquidity in the debt market discourages them from participating in it. However, this move will help retail investors to trade in publicly issued debt securities through registered trading members in an easier manner. The dedicated debt segment will list all the securities it will deal in and offer screen based trading for order matching and quotes.

Although the introduction of the dedicated debt segment is a good news for retail investors looking to participate in the debt market, they will need to improve their awareness level before taking the plunge as this market is quite complex. Besides, the improvement in the volume and the resultant liquidity will take time. Moreover, considering the inverse relationship between interest rates and bond prices, direct investment by retail investors can be tricky.

Therefore, for retail investors the starting point should ideally be debt funds of mutual funds as they provide diversification by investing in a number of corporate debt as well as government securities without compromising on liquidity. Another advantage of investing through debt funds is that investors have to follow one price i.e. the NAV of the fund rather than market prices of a number of securities. Once investors become familiar with the nuances of debt market investing, we can expect increased retail participation. However, it is likely to be a slow process.

Hemant Rustagi
CEO, Wiseinvest Advisors