Small Is Beautiful
Stock market scenario in 1990’s
- Multibagger stocks to the extent of 30X.
- People enjoyed the fruits of liberalization.
- Only 6 pages offer documents against 500 pages now.
- Almost all issues aimed at retail investors Vs 50% reserved today for QIB.
Scandals of the early 1990’s prompted SEBI to initiate a cleanup of stock market practices. The most critical of these measures was the dematerialisation of shares. This development curbed a range of malpractices which hinged on duping investors with forged share certificates. Unfortunately, these positive regulatory changes had a massive adverse impact on retail inflows into the stock market over the next 20 years. For two decades after this momentous change, Indian investors routed their black money savings away from the stock markets towards real estate and gold.
Rental yields in India's residential property market are now among the lowest in Asia, pointing to significant overvaluation.
Retail investors return to stock market
There has been a trend reversal in investors’ choice of asset classes since 2015, the year in which the NDA launched its multi-pronged attack on black money.
Steps taken by NDA to reduce black money:
- Moving India’s subsidy and benefits system to Direct Benefit Transfer i.e., the direct transfer of 4% of GDP from government bank accounts to recipient bank accounts and thus, significantly reducing the amount of black money stolen by civil servants and politicians.
- Demonetisation of 86% of the country's total currency in circulation. This resulted in the forced deposit of over ₹15 lakh crore into the banking system of which a sizable proportion is likely to have been black money.
- The Real Estate Regulatory Act (RERA)- RERA imposes a range of rules and obligations on the builders, aimed at increasing transparency and accountability. For example, Developers have to put 70% of the funds collected from buyers in a separate account to meet the construction cost of a project.
- Goods and services tax (GST)- This increased tax compliance across the country. In the post GST world, the buyer of any goods/services pays GST at the point of purchase and then gets input tax credit when he reports his expenses. In such a world, if any buyer does not support his purchases,he fails to get the input tax credit and therefore, ends up with a higher effective tax burden.
Left with no better choices, affluent investors are rediscovering the delights of the stock market. The annual run-rate of gross inflows from retail investors in India has risen from ₹48,154 crore (US$ 7.5bn) in FY14 to ₹2.5 lakh crore (US$ 39bn) in FY17, an annualized growth rate of 73 per cent. More generally, net inflows from retail investors to all types of mutual funds have risen from ₹54,083 crore (US$ 8.5bn) in FY14 to ₹3.4 lakh crore (US$ 53.7bn) in FY17, an annualized growth rate of 85 per cent.
The active diversion of savings from the physical form towards the financial form has increased the corpus of bank deposits, bonds outstanding and market cap of the market.