The participation in IPOs is encouraging but rising bank deposits show that the wounds of previous scams are still green

Anup Bagchi, CEO, ICICIDirect

The general perception in the market is that the stock market rally is led by institutional players -- primarily foreign institutional investors.

Broadly, the impression is that FII-led buying is what is driving the markets and sustaining the bull-run over the last seven months. The flip side of the impression is that there is low participation from retail investors.

While there is no doubting the FIIs have generously fuelled liquidity on the bourses and the resultant rally, the retail investor is certainly back in the market.

Retail investor participation largely depends on two factors: investors' interest in the market, and their ability to transact in the market in a fair, transparent and hassle-free manner.

Retail interest in the market is evident with the recent bouquet of initial public offerings, which saw substantial retail participation.

At ICICIDirect, more than 20,000 retail applications for IPOs were submitted online. On the other hand, there is a sudden spurt in the number of dematerialisation requests, which has gone up almost three times in the past six months.

Retail investors are not only putting in fresh funds but also seeing the current rally as a good opportunity to exit. The growth in the number of delivery instructions processed by depository participants is also a firm indicator of the good participation by retail investors.

Since the market volumes have gone up substantially in the derivative segment of the markets -- where retail participation may be low -- we may wrongly perceive that the overall retail participation is low.

Interest in the delivery trades is booming. A very potent indication of this is the rally in mid-cap stocks -- while most of the attention has been focused on the movement and gains in the gauges like the Bombay Stock Exchange's Sensex and National Stock Exchange's Nifty, indices such as the BSE 100 and 200 have outperformed the narrow indices.

This has been possible to a large extent by the retail inflow into mid-cap stocks, which they perceive to be affordable at one level and good value on the other.

With trading terminals available all over the country and online trading reaching out to even the remote corners, retails investors are far more in control of their investments in equities than ever before.

This puts the power of hassle-free trading in their hands and gives them a comfort level with the markets.

Investors are now more informed while taking investment decisions thanks to online trading sites, disclosure norms and the extensive media coverage of almost all stocks.

They can access market and company information easily, and then exercise their own judgement while investing.

Having burnt their fingers in the past booms -- when they relied solely on tips from brokers or from acquaintances, which led them into investing in non-quality stocks, which they unfortunately lived to regret -- retail investors are on the defensive now.

Hence, their participation in the overall number of stocks may be low since they are focusing on a fewer stocks. However, they are churning their portfolios actively now.

Our interaction with retail investors has revealed that they are more afraid of losing money to intermediaries than losing it in the market.

This means two things: that their lack of faith in traditional market intermediaries, such as sub-brokers in the interior towns, has to be addressed; and if the overall market system is seen to be fair, investors will keep coming in, irrespective of market fluctuations.

All that is required is that the investor should not feel cheated or short-changed. Both the regulator and the intermediaries have to ensure fair play to keep retail investors' interest alive and growing. Institutional intermediaries are helping instill the confidence.

Prithvi Haldea, Managing Director, PRIME Database

Let me first understand who the retail investor is, what is his number and profile. In market parlance, anyone who is not an institutional investor (FIIs, mutual funds and so on) is a retail investor.

A retail investor, in my opinion, is the "man on the street"; in the true sense of the term, it does not, and should not, include several significant investing classes: the corporate sector; brokers who, beside their intermediation function, take up huge proprietary positions; private companies that are often fronts of the operators; high-net-worth investors who are individuals but trade more on the lines of institutional investors; and above all, promoters who are the dominant players in the market today, all of whom I group as the elite class.

We have no clue about the profile of retail investors, not only of their number, but also of their share in the total number of trades and in total volume, as also the frequency of trading.

In fact, the data available on their numbers is misleading. According to the last Sebi-NCAER survey, there were 1.9 crore (19 million) investors. However, the maximum number of active investors, as represented by the depository accounts, is 48 lakh (4.9 million) and even here the real number would be lower as there are innumerable multiple/inactive accounts.

Some may cite the growth in the number of accounts at the two depositories to argue for an increasing participation of retail investors.

True, the total accounts today stand at 48.02 lakh (4.8 million), having grown rapidly from 40.13 lakh (4 million) in March 2003. However, this huge increase is courtesy the large number of initial public offering applicants; between April and October 2003, just three banks and Maruti attracted a mind-boggling 22.87 lakh (2.28 million) applications.

Most accretions as such are on this account.

In my view, only the "man on the street" is a retail investor and he has, at least as of now, not returned to the market in any big way. If at all, the smarter ones have liquidated their holdings at good prices.

Despite the sustained rally, the rising bank deposits and small savings are proof that the wounds of the scams since the early 1990s are still green. Even through mutual funds, participation has been minimal. The market is still dominated by the FIIs and the elite class.

If the retail investor is not in the market, I am only happy for him. Fortunately, he today accepts that he understands neither the corporate sector nor the economy and that it is unwise to be in such a place, more so when the regulatory redressal is slow or inadequate.

The surge in volumes can be ascribed primarily to the rising preference for day trading. Over 75 per cent of the total trades are in this form, which is akin to gambling and not investing.

What is, however, unnerving is the huge price increase in scores of penny stocks, without a corresponding change in fundamentals. When a sector is doing well, retail investors fall into the trap of picking up the least known companies. Small investors most often chase price and not value.

The ground realities may change, bringing in hordes of retail investors. For one, the feel-good sentiment on account of several strong counts is being oversold.

The huge price rises that can't be explained by fundamentals are being attributed to sentiments. When the market crashes tomorrow, we will not be short of a long list of plausible reasons.

For another, there is an increasing perception that the Securities and Exchange Board of India is doing a much better job this time in monitoring and surveillance.

But how long can one hold back greed? A herd mentality may soon take over. Most retail investors are already regretting not having entered the market at the beginning of the rally and when courage and greed take over, most scrips would be trading at high levels.

One area where they are definitely participating in a big way is the primary market. A few more good IPOs may rekindle the interest of more investors. Divestment of public sector undertakings through the IPO route may, in fact, hold the key.

Can we assess the extent of retail participation only by a gut feeling? Without authentic data, the picture will remain hazy. This is dangerous as even a small loss to the large body of retail investors may cause unwarranted panic.

It is time that data on retail investors is made public. As all trades are now electronic and are captured by the depositories, this should not be a tough job.