Despite the benchmark Sensex crossing 20,000, existing market infrastructure fails to include most Indians, finds an MCX-SX study, underlining the need for more competition and fresh thinking on market penetration and market development

While the market indices are headed for new highs and foreigners are pouring in billions of dollars into India, an investor survey conducted by MCX Stock Exchange (MCX-SX) has found that only 1.4% of the population directly invests in the markets. Also, only 18% of the urban, informed segment directly invests in equities, the study found.

The MCX-SX and Nielsen survey, titled 'Indian Equity Investors Survey 2010', is the first major Indian equity market survey, post the market meltdown of 2008. The survey polled 1,207 current and potential retail investors from 12 cities across all geographic zones and levels of development, ages and occupation; 60 corporates, including banks and financial institutions, from the four metros and 120 SMEs from clusters in 12 cities throughout India.   

While the volumes on the National Stock Exchange have surged to Rs100,000 crore a day, the survey pointed out that 50% of the retail (individual) investors, 27% of the small and medium enterprises (SMEs) and 11% of the corporate respondents are yet to be approached by a broker or investment advisor. Businessmen were the most-approached segment by brokers and investment advisors. However, 57% of defence personnel, 57% of students and 51% of salaried personnel have never been approached for investing in equities, the survey said.

Domestic retail investors remain disengaged from the market because institutions such as stock exchanges and the regulator have failed to develop the market.

It may be recalled that minister of state for finance Namo Narain Meena recently told Parliament that 50% of the cash market transactions came from just 451 investors, out of which 156 were proprietary traders. About 50% of the total trading on the National Stock Exchange (NSE) in the derivatives segment came from just 106 investors of which again 58 were proprietary traders.

While the NSE had tried to change the interpretation of this data (yes, the government data was provided by the exchange), multiple surveys show that India's investor population is indeed far below than what is assumed.

Consistent with this picture of investor apathy, over the past 14 months to September, the total outflow from equity mutual funds has been as much as Rs21,731 crore. As per data released by the Association of Mutual Funds in India (AMFI), Rs7,281 crore was pulled out of equity schemes, including equity-linked tax schemes in September alone. Although the Sensex has crossed the 20,000 mark, the main reason behind this surge is inflows by foreign institutional investors (FIIs). During the second quarter to end-September, FIIs infused almost $12 billion into Indian equity markets, taking their total inflows to $14 billion for the first six months of FY11. At the same time, domestic institutional investors turned sellers. During Q2, domestic investor sales were at around Rs23,800 crore or $5 billion.

Across the country, 56% of those surveyed said that lack of information about investing was a major barrier to participating in the market. Additionally, 47% of those surveyed have no knowledge of where to buy equity, mutual funds or ULIPs. Even institutional investors like SMEs (42%) and corporates (32%) conveyed lack of information about investing as a major barrier to participating in capital markets.

Trading and investing is concentrated in certain regions and cities. About 80% of the turnover in India continues to come from the top five cities. In 2001-2002, there were 21 regional stock exchanges across India in addition to two national level exchanges. Of these 23 exchanges, 16 exchanges used to conduct active transactions in 2001. However, in 2008-09, the active exchanges had been reduced to four. While the NSE contributes about 92.5% in the total turnover across the country, the share of Bombay Stock Exchange (BSE) and Calcutta Stock Exchange comes at 7.48% and 0.0026%, respectively. Uttar Pradesh Stock Exchange has a share of just 0.0006% in the total turnover, as of 2008-2009.

According to the survey, about 80% of retail respondents believed the stock market industry would benefit from competition. Similarly, 68% of the respondents perceive that more competition in exchanges will lead to investors receiving better services and 57% of respondents feel that competition will lead to lower cost of participation.

The survey found out that among the respondents, mobile telephony has emerged as a preferred channel that would give the respondents greater access to the markets. It said that a majority (56%) of the retail respondents surveyed preferred mobile telephony as the preferred channel that would improve their access to the market. This was followed by the Internet (31%) and bank cross-selling (19%). This preference for mobile telephony is reinforced strongly across zones and tiers, with 83% of the west and 65% of Tier II cities expressing strong demand for it as a key enabler.

Although everyone has been talking about financial inclusion and so on, it is often the lack of knowledge that keeps people away from participating in the markets. According to the survey, 94% of retail respondents surveyed confirmed that they would attend market-oriented training programmes in finance, if offered in their vicinity.