How to keep India’s small investor hooked in a market with terrible mood swings

The transformation of Indian stock markets after liberalization has been interesting, with its share of setbacks and scams. But the tireless spirit of businesses and investors has seen the Sensex rise from 1,000 levels to 60,000 over the past three decades.

This period also saw the introduction of the NIFTY index in 1996 and its rise to prominence as the most popular financial product in India and the most actively traded contract in the world.

Indian stock markets have shaped many stories of wealth creation that appeal to investors, and yet there are enough stories of wealth destruction that call for caution. SEBI, as a regulator, has been successful in promoting market activity, while continuously improving and strengthening its market surveillance and regulatory apparatus, bringing transparency and reducing market manipulation and fraud.

The regulator has worked tirelessly to increase the participation of retail investors, both to provide them with new options to deploy their savings, and also to mobilize capital from small investors for investment.

In countries like the United States, where the culture of equities is well developed and the participation of retail investors in the stock markets is high, the main challenge facing the regulator is the rather uninformed and irrational behavior of these investors. . India, however, has not seen the same type of retail investor involvement.

To attract retail investors to stock markets and guide them towards safer equity investments, the Rajiv Gandhi Equity Savings Scheme (RGESS) was introduced in the 2012-2013 budget.

The RGESS aimed to improve the depth of domestic equity markets by broadening the retail investor base, leading to financial stability and financial inclusion. Conceived as a first-time tax saving scheme for retail investors whose annual income is less than Rs 12 lakhs per annum, this scheme combined the dual purpose of encouraging individual investors to venture into the investment in stocks, while protecting their investments by limiting them to large stable investments. cap stocks and funds only, and with investment locks.

The scheme differed from the Equity Linked Savings Scheme (ELSS) because, in addition to indirect investments through mutual funds, it also provided for direct investments through equities.

However, this program has not gained much popularity among the targeted group of investors, with only around 20,000 demat accounts created till 2017 and low levels of investment made through them. This ultimately led to the program being discontinued after April 2018. To be fair to RGESS, it was a good program launched at the wrong time. The years immediately following the 2008 financial crisis were not good for investors. The NIFTY fell 6.5% between January 2008 and July 2013, and a sense of gloom prevailed over stock market performance. Eligibility constraints and investment controls built into the program further limited investor interest.

The performance of stock markets after the sharp drop in April 2020 was a different story altogether, and the sharp rise in share prices thereafter left investors who had not participated in these markets until now feeling the loss of power. great wealth creation. opportunity. As a result, 15 million new demat accounts were added in fiscal year 2020-21 and 30 million in fiscal year 2021-22. More than 15 million new demat accounts were added in the first half of 2022. The presence of discount online brokers has also encouraged this increase in demat accounts.

But many of the new retail investors, who were encouraged by the exceptional market returns after April 2020, are now facing market volatility and losses on their equity investments and stock market allocations. This hurts investor sentiment. However, the markets will not change in nature to accommodate new retail investors.

Now is a good time to set up an Equity Savings Program (ESS) for new equity investors. Most of the suggestions to boost retail investor participation revolved around the abolition of the Securities Transaction Tax (STT), which, with the increase in the number of investors and trading volumes in the market , generates huge revenue for the government.

An ESS will focus on tax relief only for new equity investors, thus not reducing the income generated by the STT.

At a time when retail investors show a tendency to start investing directly in equities, encouraging them to open trading accounts and supporting them during the first years of their entry into the stock markets will be very useful in boosting their confidence and create a stable population of retail investors.

An ESS is needed today to give new equity investors protected entry into the stock markets, while providing them with time-limited tax benefits to direct their savings towards equity investments.

Indian stock markets need strong retail participation to mitigate the risk of foreign outflows. The enthusiasm for opening demat accounts is evident, with their number crossing the 100 million mark at the end of August 2022.

It is now important to introduce these retail investors to the stock markets as well and ensure that their participation is not stifled due to volatile market conditions. An ESS at this stage will keep retail investors engaged and also prevent these novice investors from making the wrong investment choices early in their equity experience.