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A time for retrospection

Dec 28, 2001

A NYSE panel recently fined a broker for allegedly buying worthless stocks on his customer's behalf in exchange for kickbacks. In India the second part sounds quite familiar but very unfortunately the first part does not. It is not that the markets in the west are completely honest, but watching the guilty being brought to book instills some kind of faith in the minds of the retail investors. What is there for the retail investor in India to place his trust on? The Unit Trust of India?

The whole affair of UTI's 'dubious investments' has taken a back seat in minds of the people and the press. Probably feeling is that the market has already been hit and it is all over. But unfortunately the economic consequences are far reaching. This is because events like these scare the small investor away from the stock markets. This could be the reason that even after 130 year of having stock exchanges, the number of investors is just 19 m from a population of 1 bn (1.9%). And interestingly the 'small investor' is very critical for the growth of the economy.

The developed economies have not grown miraculously. These economies have grown because the household savings were properly channelised and made available to various sectors like manufacturing. These industries were able to efficiently utilize the money and give handsome returns to the investors.

India bleeding
Particulars* IDBI ICICI IFCI
Net NPAs as a % of loan portfolio 14.2% 5.2% 20.0%
* Numbers as on March 2001

Among the 'channels' between the 'savers' and the industries are the stock markets and the financial institutions. In India both the channels have disappointed to a certain extent. At one end, banks and financials institutions have very effectively utilized their resources to generate NPAs (non performing assets) and at the other end, the there has been a saga of stock market scams. Today we have reached a situation where FIs & banks are apprehensive about giving credit and the small investor is shying away from the stock markets. This could mean that access to capital is likely to be more difficult for entrepreneurs in the times to come.

Stock markets: A glorious past?
Year Event
1992 Securities Scam
1993-1996 The IPO Bubble
1995 CRB scam
1995 Plantation companies scam
1999 Mutual fund disaster
1998 BPL, Videocon and Sterlite price rigging
2001 K-10/UTI/Cyberspace Infosys scam

For a country that needs to support 16% of the worlds populations with just 2.4% of the land area this is certainly not good news. India desperately needs to grow and the entrepreneurs will have to be the countries growth engine. Banks and FIs have never been known to give money to ideas, they generally opt for established businesses. Therefore, these ideas will look forward to the 'small investors' but if the scams continue to repeat they might just not find any small investors.

This makes the job of the SEBI very critical. From being a watch dog that merely watches it will have to be more active. The faith in the markets has to be established before anything else. However, SEBI can not be blamed for all the small investors woes. Time and again people give into 'hot tips'. You as an investor need to be more cautious. After all it is your money at stake. Do not try to make 'most of the rally' but try owning sound businesses.

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