Retail – The New Royalty at the Bourses

Quietly, unobtrusively a significant change has been gathering momentum in the Indian economy over nearly the last 3 decades.  First it was the financial institutions, including banks, that have been gradually, but progressively shifting their focus from enterprises to retailers. In fact over the last decade, more and more banks have realized that an important aspect of risk management on the asset side of the balance sheet, is to adequately diversify their lending by providing retail consumers, quick and easy loans by harnessing tools like data analytics and online access. And as if in tandem, e-commerce has taken off beyond metros to regions hitherto not served or underserved, driving consumption and consumer finance. But when it comes to the capital markets, over the last three years, retail traders and investors have come to dominate the bourses. So much so, Finance Minister Nirmala Sitharaman has credited the retail investors for the market’s shock absorbing capacity. As Foreign Portfolio Investors (FPIs) have pulled out over $ 19 billion from stocks in the last six months, domestic investors have cushioned the fall by pumping in $ 20 billion. Over the last nearly 3 years, d-mat accounts have doubled to about 9 crores. Inflows into equity mutual funds have risen from Rs 1.1 lac crores to Rs 1.6 lac crores, with SIP flows going up by 34%. Individuals have also been investing through newer options such as exchange traded funds and curated portfolios. As if to provide further fillip to the retail investor’s dive into equities, the Company Law Committee has recommended, inter alia, issuance of fractional shares, restricted stock units and stock appreciation rights. This would enable retail investors to trade/invest in highly priced shares like MRF, Honeywell Automation and Page Industries, which hitherto were inaccessible to small investors. One more avenue that is now open to the retail investor is the new trading facility launched by BSE, through its subsidiary, India Inx, located at the International Financial Services Centre in Gujarat International Financial Tech (GIFT) city. Through this platform resident individuals can buy/sell foreign stocks, including the much sought after fractional shares of marquee US companies, within the limit under the Liberalised Remittance Scheme of the RBI, which at present is $250000/- in a financial year. The retail investor, it appears, is truly spoilt for choice.

Apart from the Finance Ministry, retail investor’s newfound appetite for direct exposure to equities through trading Platforms has not gone unnoticed by even the central bank of the country. RBI has now sought to increase retail participation in government securities by providing individual investors direct access to purchase/sell government paper through what is called RBI Retail Direct Gilt (RDG) account. RBI vide its notification dated 04.01.2022 has launched Retail Direct Portal which allows individual investors to directly invest in primary and secondary markets for government securities and bonds. The facility to buy/sell gilts on the secondary market is provided by the NDS-OM (Negotiated Dealing System – Order Matching) platform introduced by the RBI. India now is only the fourth country to provide such direct access to gilts, after Japan, US and Brazil. This initiative of RBI has not only widened the choice for retail investors but also has almost eliminated transaction costs as no intermediary will be required to transact business on the Retail Direct Portal. The minimum ticket size for the retail investor is a modest Rs 10000/- while it is Rs 5 crores for institutional investors. While the RBI has dressed up this initiative as one which seeks to increase retail participation in government securities and promote financial inclusion, the timing of it seems to have been prompted by a desire to widen the market for gilts and thus reduce, at least in the long run, cost of borrowing for a government which has a borrowing calendar of nearly 14 lac crores in FY 23. Well, one can not find fault with government’s debt manager, namely, RBI for wanting to contain borrowing costs for its principal. Whatever may be the intent of the central bank, the retail investor is now in a better position while dealing with banks, who given their reach and collective clout could take savers for granted with returns on deposits hardly covering prevailing inflation. Savers, particularly retirees, can now choose to invest in debt paper, the safest that the country can offer, with maturities of 30 days to 40 years. This will certainly wake up the insurers, who offer immediate annuities with return of purchase price, even to those above 60 years, with returns of around 5.5 to 5.8% per annum. With YTM (Yield To Maturity) ruling well over 7% for government securities with tenures of 10 years or more, senior citizens can now design bespoke annuity solutions far superior to those offered by insurers. And they don’t have to worry about default, even as liquidity is provided by the NDS-OM platform, should redemption of such investment be required to deal with any unforeseen emergency. Well before long, banks and insurance companies have to reckon with a formidable competitor in garnering retail funds. The competitor is none other than the central bank of the country which doubles up as debt manager of the government. But for the retail investor It is cause célèbre!

Unfortunately, no development, however promising, is without its challenges. While it is heartening to see the equity cult in India taking off despite the withdrawal of sops such As zero tax on equity gains, the retail rush into equity markets is also fraught with risks. A large number of first time investors who dipped their toes in the equity waters during covid induced “work-from-home” interval, are preferring direct stock bets to institutional route. Despite the surge in SIPs, domestic mutual funds at present own 7.4% of the outstanding stock on the NSE, compared to direct retail holding of 7.3%. Available data suggest that retail investors favour riskier small and mid-cap stocks, while institutions prefer large caps. Again in the highly leveraged derivative segment where turnover trebled in the last couple of years, retail investors account for third of the volumes. This suggests that many retail players are more inclined to punting on short term price fluctuations than building a portfolio of durable businesses. With the market’s vertical climb from February 2016 punctuated by just one big correction in March 2020, from which it swiftly recovered, investors who have joined the party recently have no experience of gut wrenching, protracted bear market. Equity products are touted based on their past performance. Hence the new investors who would have joined the retail bandwagon since 2019 at Nifty valuations of 25 to 50 times are likely to have unrealistic return expectations. As easy money policy which was powering asset prices, becomes a thing of the past, the new class of investors need to be made aware of the risk as they take the “do-it-yourself” route. It certainly is time to recall the 2000 and 2008 experience, when many investors, after being singed in the market correction, left the asset class for good. Alas! Those who do not learn from history are bound to repeat it!