If existing retail investors are wary of investing in stocks because they have burnt their fingers in the past, why not appeal to new ones through tax sops and electronic access?
This seems to be the thinking behind the Budget proposals intended to widen retail participation in capital markets.
The key proposal, to apply only to first-time investors with less than Rs 10 lakh income, is a 50 per cent deduction for direct investment in stocks upto Rs 50,000 through a new Rajiv Gandhi Equity Savings Scheme.
Now, given that most Indians plan their investments around tax sops and not really around their financial goals, this may well work.
First-time investors from now on may opt for this scheme instead of mutual funds, market-linked insurance products or IPOs.
Mutual funds to lose?
That is not necessarily a good thing. For one, first-time investors in equities would certainly be better off routing their money into professionally managed diversified funds run by mutual funds or insurers. These would be less risky than direct equity investments.
And two, if one ignores tax sops, it is not clear if the proposed Rajiv Gandhi Equity Savings Scheme will manage to deliver the market-beating return which the investor is basically looking for. That will depend on who will manage it and at what cost. If this scheme is to be Government-managed, its skills for managing equity portfolios are suspect.
Three, it is doubtful if tax sops of any kind can and should attract investors who don't have the stomach for risk into equity investments.
Sensible view
For all the fuss about retail participation, retail investors have been taking quite a sensible view of equity investments in the past two years.
They have stayed away from IPOs and trading activities while committing small sums regularly to mutual funds. For these risk-averse investors to return to the market, what is required is a sustained improvement in equity returns.
For much the same reasons, the proposals to simplify the IPO process or make them available through electronic platforms may do little to fix the basic problem of lack of confidence.
Making it compulsory for the top-listed companies to enable electronic voting on key proposals is a great move from a corporate governance perspective.
The postal ballot system has actually curtailed small investor participation in major company decisions. But this too is a measure that is unlikely to draw new investors into the market. Retail investors after all will value returns far more than the ability to shape corporate decisions.