No place for the small, individual investor - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
No place for the small, individual investor A  A  A


In his book on globalisation, 'The World is Flat', Thomas Friedman points to several trends of a globalised world. One of these is greater institutionalisation of money. The share of corporate equity held by institutions (mutual funds) has gone from some 30% to over 70%, after globalisation, whilst that of individual shareholders has fallen from over 70% to under 30%. This growth of institutional money (mutual funds, pension funds, hedge funds etc) has made the fund management industry larger, in the US, than its banking industry. Since these funds hold over 70% of equity, the managements of the companies have to kow tow to them. The small, individual shareholders get short shrift.

The UK undertook, in mid '80s, a reform of capital markets which was called the Big Bang. One of the features of the Big Bang was that it did away with fixed brokerage, in favour of negotiated brokerage. Consequently, the large institutional customers negotiated very low brokerage rates, to compensate for which, the brokerage on retail transactions was raised, and went to over 6%. The brokerage houses themselves, which were, largely, mom and pop shops, altered to (or sold out to) a corporate structure, owned by large, institutional firms. With high transaction costs, and poorer personalised service offered by the mom and pop shops, individual investors decided to sell their portfolios and invest through mutual funds, thus creating the trend mentioned above.

A similar thing is happening here, with two large institutional firms, India Infoline and HSBC, deciding to shut down their retail operations.

The institutionalisation of money has several, undesirable, ramifications not only for the retail investor but also for the way companies behave.

This human interest story describes the woes of tenants in the US housing market, after institutions (hedge funds, private equity groups) bought into US real estate, at depressed prices, as a business which depended on an annual rental income flow and possible appreciation. The tenants often find themselves unable to connect with the owners and are suffering in silence. It is the same with retail investors in an aseptic institutional environment.

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The pressure on management from institutional shareholders, eager for short term gains in order to earn their bonus, which is usually based on short term, relative performance, has often led them to neglect the long term interest of their business. It was this that led to the bankruptcy of Kodak, once synonymous with photography, when its management failed to see the dangers of digital photography to their business.

It could, perhaps, be similar pressure that has allowed some countries (Brazil) to accept GM (genetically modified) foods and others (Mexico) not. India is yet to decide. The effects of GM food entering the agricultural crop chain, with risks of cross pollination, and entering the human body, have not been fully studied. To appreciate the dangers of proceeding without analysing risks, just think that, prior to the global financial crisis of 2008, the three main rating agencies had given ratings, including AAA, to securitised mortgages. This encouraged individual investors to invest in them, causing a subsequent loss and a collapse of the bubble such ratings helped create. The rating agencies have later admitted they did not know how to rate securitised mortgages, as there was no history, but that did not prevent them from giving the ratings. The reason? Pressure on management for short term performance from institutional shareholders. Proceeding with GM foods on an improper understanding of the effects on the human body is far more fraught with danger.

Bill Joy, the co founder and former Chief Scientist of Sun Microsystems, had warned, many years ago, in an article in the Wired magazine, of the dangers of the emerging technologies of nanotechnology, biotechnology, genomics and robotics, which, he felt, were more dangerous than the old technologies of nuclear, biological and chemical weapons. The old technologies needed large, state funding and so could be better controlled. The new technologies require private funding (hedge funds, venture funds) and can be located in a garage, and thus difficult to control.

Some of these institutions now control assets under management larger than the GDP of several countries. The largest two, viz. Blackrock and State Street, control over $ 2 trillion each, which is higher than India's GDP. This size gives them considerable clout, even over national policies.

The growth of institutions has been aided by the QE (quantitative easing) programme of the US Fed ($85b. of Government Securities purchased each month by creating new money). The intention of the US Government was to provide liquidity for industry to invest and for consumers to spend. But there has been little investment and consumers have slowed down on spending, facing uncertainty over jobs and falling prices of assets. Much of this money has gone into assets like real estate (the purchase of homes for rent mentioned above) and stock and commodity markets. In India alone, they have pumped in Rs 13,500 crores in just 16 trading sessions, driving the stock market to new highs. New highs not fully supported by fundamentals.

Despite the QE programme, the US economy remains sluggish, and unemployment remains high (it is higher than the figures show because those who drop out of the race for job hunting are not shown as unemployed even though they are). The US has run out of cash and is in a quandary over whether to phase out the QE programme, called taper, as it has not delivered on growth, or to continue with it, fearing collapse.

There is speculation, according to this video that the US may be dipping into gold kept with it for safekeeping. Germany requested for its gold to be returned, which the US said it would do by 2020, and did not allow Germany to inspect all of it. Perhaps that may be the reason Angela Merkel's phone was bugged (and so was she). If this is true, it is scary. But probably, if countries like Germany (there are others) insist on having their gold returned, it may mean a rise in price for gold. That is probably why China is frentically buying gold; it bought over 2000 tonnes in the past two years. China is, sensibly, reducing its dependence on the US $. In sharp contrast to our own FM, who is wanting to increase our $ reserves to $ 300b. and is doing everything he can to bring down gold imports. Perhaps the Chinese leadership is working in national interest and the Indian one in party interest.

What our knowledgeable FM ought to do, instead, is to encourage a reduction in oil imports, which are higher than import of gold . One way is to mandate fuel efficiency standards for the auto industry, as the US did, immediately after the first OPEC oil shock, in the late 70s, and tighten the standards thereafter. For reasons not explained by logic, our successive Governments have shied away from this, and continue to do so! The Government has postponed the announcement of fuel efficiency norms by a year, and implementation by 2017 for no valid reason.

In corporate news of interest last week, the Government has asked Reliance Industries (RIL) to surrender 80% of the KG-D6 block, for not having stuck to the time frame to exploit it . One wonders whether the major commercially viable oil and gas finds fall within this 80% surrendered area or in the 20% area retained by RIL.

The NSEL (National Spot Exchange) scandal continues to make news, and the saga has been well explained in this article. The FMC was to decide, by end November, whether Jignesh Shah, the founder of the Financial Technologies group that owns NSEL, is a person deemed fit and proper to run them. Shah has pre-empted his anticipated ouster by resigning from the board of MCX, a commodity exchange.

The EOW must be commended for pursuing the absconding borrowers of NSEL who have defaulted. Under pressure the # 2 borrower has agreed to settle 80% of its dues over a 1 year period, secured by land and other assets. The bank accounts of Shah and Massey have been frozen, something that ought to have been done when the scandal first broke.

Whilst the EOW needs to be commended, the stance of the FM needs to be condemned. He continues to blithely maintain that the Exchange was an unregulated one and investors ought to have been careful in dealing with it. This is an 8 letter word that starts with b and ends with t! Does he mean to say that everyone dealing with any entity (bank, exchange, fund, post office, etc) has to examine all papers and permissions and to know the complete law on exactly how the body is to be notified and certified, and who its regulator is, before dealing with it? Are depositors, for example, required to meet the Chairmen of banks and to get them to explain why the bank is regulated and authorised, before making a deposit in it? Is he serious?

The NSEL as, indeed, the Financial Techonologies group, always relied on political and bureaucratic connections to give them credibility. The group of advisors were retired, and respected, ex-bureaucrats. The co promoter of NSEL was NAFED, a farmer co-operative, giving it an inconsequential stake. NAFED is now one of the defaulters of NSEL, an exchange co-promoted by it! What does Mr Chidambaram want to say about that?

What does he also have to say about which Minister in the Consumer Affairs Ministry gave NSEL certain exemptions in 2007? Why has no one talked about the core of the scandal viz. how it obtained exemptions and how it was kept unregulated or, if regulated, why regulation was so lax that it was allowed to keep its godowns unregistered and not to do due diligence of its borrowers. Will the EOW like to examine these issues? The CBI is examining the role of some officials in the Consumer Affairs Ministry. Why does the investigation need to be thus divided?

In the case of the other scandal, viz. Sahara, the founder, Subroto Roy, has been asked by the Supreme Court, to deposit with SEBI, deeds of property worth Rs 20,000 crores (some $ 30b.) upon penalty of restrictions on foreign travel.

It is time that people are made accountable for their actions and not allowed to use any political or other influence to escape. The electorate is quite fed up with the chalta hai attitude of corruption.

Last week the BSE-Sensex gained 513 points to end at 21,164 and the NSE-Nifty added 162 points to close at 6.307.

The rally is liquidity driven and in the hope, by foreign institutional investors, that a new Government would be able to quickly kick start an economy that is suffering from policy paralysis and ethical mildew. It is also based on the premise that the US Federal Reserve would not start the tapering of the QE programme.

But at some point in time the taper will start. And then something will hit the fan. Time, one believes, to tread cautiously and become light.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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8 Responses to "No place for the small, individual investor"
Nov 14, 2013
Dear Mr. Mulraj -
--- deeds of property worth Rs 20,000 crores (some $ 30b.)
--- upon penalty of restrictions on foreign travel

Penalty amount should be $3bn and NOT $30bn
K R V Raja
Nov 10, 2013
So what? Like 
Nov 10, 2013
Well written article. Every Public limited company must be forced to have at least 30% of its shares owned by retail Investors. Owners must not be allowed to BUY BACK this 30%, unless the interest of the company , decided impartially, needs such BUY BACK. Owner intere. Then only, entire India will truly participate in development process. All Laws should protect the interests of these retail investors. if their interests are protected at all stages of a company life - the company will truly be well-run. Like 
Nov 4, 2013
Obama may learn how to run an economy if he is listening to Angela's phone ! Like 
Borkar M.R.
Nov 3, 2013
(1) I use comments to fine tune my decision or buying/selling. Mostly buy recommendations r not used as I want to slowly reduce my equity investmnt.
(2)GM Food (seed) is not safe at this stage as, mentioned in the article history is too short to come to the conclusion that the GM Food is ABSOLUTELY SAFE.
I reommend all independent thinking citizens not to go for it. Will the Agri Minister/FM or for that matter all the leaders, including Gandhi family publicaly confirm that they are using only GM Food? There is another added danger now. It is reported in yesterday's paper (Eco.Times) that Babgladesh has permitted cultivation of Brinjals (GM) and that will come into India because officially n unofficically (smuggling route) u will not b able to stop it.
(3) What we r talking about national interest/party interest - The Netaj are working towards their individual interest. They all/mostly, have become GRABBERS. No Morals/scrupples. - Borkar
Nov 3, 2013
GMO is a very serious subject. Loose comments do not help anyone, least of all your readers.
Many countries incl the US have been consuming GM food for the last 17 years without any side effects or any illness.
Nov 2, 2013
I heard from a very reliable source that Jignesh Shah used to boast to his senior executives that he has "taken care of" the people in Delhi.This was long before the news of the scam broke.

Brokers stopping Retail ops.

Well,I'm one of the account holders of a firm you mentioned.Another significant reason for their demise is their lack of foresight and ignorance of the trends unfolding in the industry.
After the weak retail investors quit the scene,only die-hard traders were left with them and they continued to fleece them with their "full service" brokerage fees.
It didn't take long for some smart people to realize that there was a great business opportunity and they set up technology driven discount broker shops.
The traders realized that they could save almost 90% of the brokerage by trading through them as they didn't need the "full service"-(research.recommendations etc.)anyway as most of them do their own research and are tech savvy.
Many more of them will go the same way in the coming days to come if they fail to re-invent themselves.
Didn't DIGITAL corp's CEO famously say that "Personal Computers were only a passing fad"?
Don't read the roadsigns and you'll crash and burn
Prashant Vithaldas
Nov 1, 2013
Very well written article. It is sad to see that the entrepreneurship of the individual investor is lost to these institutional investors.
Your comments on fuel efficiency norms appreciated. request you to kindly go further by stating no major infrastructure projects on road should be allowed especially in cities. Money should be spent on mass transport system where the benefit goes to entire society and not to the selected few.
it is sad that FM is putting restrictions on gold imports.Smuggling of gold has increased lately. Our ministers are not aware of the ground reality. let the FM take a common man to open a bank account. Gold has always been a investment tool in the hands of poor.Not now but from generations. It is much more trade-able then the few items/thing he possesses.
Persons engaging in financial irregularity like NSEL should be treated on par with a mass murderer. They don't just wipe a person but wipe their whole family. Persons/ institutions/ regulators should not be spared.
It is sad that what work ministers/bureaucrats have to be doing to protect small investors have now have to be done by supreme courts. Unfortunate that there is just one supreme court in our country.
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