Retail investors and the budget 1999: an agenda

Abstract

With the advent of SEBI, the regulatory philosophy has changed from merit (administered) to disclosure (market based). Since retail investors do not have expertise and resources to fully understand the disclosed information, they generally participate in the capital markets through mutual funds. In India, institutional accountability to investors has been dismal and the regulators have repeatedly failed to provide effective and timely remedies. Retail investors, though enthusiastic in the beginning, have lost faith in mutual funds because of many ugly episodes. Most of the investors savings are now going to assured and/or fixed income schemes and not to equity funds. Financial development institutions are in universal banking financing consumer loans and trading on interest spread rather than performing their basic role of converting deposits into risk capital and smoothening of maturity to fund long duration projects. Foreign Financial Institutions (FIIs) also have not contributed much of risk capital to the new projects; they are making money by fast churning their portfolios. Infrastructure and development-oriented projects are starved of funds. The government is concerned and wants to lure retail investors back to the market. Retail investors are the major (rather only) source of providing risk capital in the absence of effective financial intermediation. This paper is an attempt to offer some suggestions to bring retail investors back into the market.