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The Rediff Money Special/ The SEBI-NCAER investor survey

'92 per cent of all Indian households are non-investor households'

To gauge the impact of the growth of the securities market on households during the 1990s and to analyse the quality of its growth, the Securities and Exchange Board of India requested the National Council of Applied Economic Research to conduct a comprehensive survey of Indian investor households. The sheer size and breadth of the sample makes the survey the most comprehensive survey of Indian investors in equity shares till date. We reproduce an executive summary in the public interest.

An important feature of the securities market is the depth and breadth of public participation in the market. Millions of households and individual investors provide a pool of capital and a diversity of decision-making that creates liquidity in the market and makes it dynamic. Thus, the number of households and individual stock holders are the two most commonly cited summary statistics denoting the breadth of stock ownership in the population. These two statistics are useful tools for understanding the changes that take place in the equity market and for policy formulation. It is therefore important to estimate these statistics to assess the growth of the securities market.

The securities market in India has grown dramatically in the 1990s and this has led to the expansion of direct equity ownership in the country. A large number of households have also indirectly owned equity shares and debentures through their participation in mutual funds. To help gauge the impact of the growth of the securities market on households during the 1990s and to analyse the quality of its growth, the Securities and Exchange Board of India had requested the National Council of Applied Economic Research to conduct a comprehensive survey of Indian investor households. The objectives of the survey were to:

*Estimate the number of households and the population of individual investors who have invested in the equity market directly or indirectly through mutual funds.

*Draw a profile of the households and investors and describe their demographic, economic, financial, and equity ownership characteristics.

*Understand their investment preferences for equity as well as other savings instruments available in the market, their perceptions about market risks, their expectations from the market, the nature of their grievances and difficulties.

*Estimate the number of households which have refrained from investing in the equity market, describe their demographic characteristics and analyse the reasons for their reluctance to invest in equity.

The unit of observation and analysis of this survey is the household. The survey is based on a sample of 300,000 geographically dispersed rural and urban households, out of which a sample of 25,000 households was chosen for detailed canvassing by field staff through a pre-tested questionnaire. One of the key features of the survey is that the sample has been taken from a wide cross-section of households in the country with the objective of enhancing the precision of the estimates.

The field survey was conducted between January-March 1999. The responses of the households bring out the sum total of their experiences in investing in the securities market during the 1990s and the findings impound the cumulative impact of market development during that period. The sheer size and breadth of the sample makes the survey the most comprehensive survey of Indian investors in equity shares till date. Indeed, this is the first time that an investor survey of this scale and magnitude has been attempted.

Since October 1999, much after the survey was conducted, there was an upswing in the market which came hand-in-hand with the growth in the attractiveness of the stocks of knowledge-based industries. The two consecutive Union Budgets for the years 1999-2000 and 2000-2001 had provided certain tax benefits for mutual funds; the government and SEBI also gave the knowledge-based industries certain additional relief. These factors coupled with the buoyancy of the market enhanced the interest of households in mutual funds, which in turn fed into the buoyancy of the market, sustaining the trends.

The trend was reversed by April 2000. These post-survey developments are likely to have an influence on the investment pattern and investment behaviour of households. Behavioural trends usually take time to stabilise; besides, the sustainability of the present market trend over a longer period also needs to be seen. It would therefore be somewhat premature to immediately attempt to measure the impact of the aforementioned developments on investor population. A survey similar to the present one needs to be conducted a few years hence, to better assess the impact.

The Perspective

The markets were transformed in the 1990s. The Nineties was the decade of reforms of the Indian economy. It was the period of the transformation of the Indian securities market. It was the age of the emergence of the securities market from the backwaters into the mainstream of the Indian financial system. The process of change of the securities market had actually begun in the 1980s and its role in the economy had been growing since then, but it was during the 1990s that the process really accelerated.

The financial sector reforms and the securities market reforms, especially the free pricing regime which followed the abolition of the Controller of Capital Issues Act in 1992, seem to have encouraged corporates to rely on the securities market and substitute one source of long-term funds with another. This was evidenced by a significant increase in the number and diversity of issuers accessing the securities market and in the amount of capital raised from the market.

The market also became more institutional in character with the presence of foreign institutional investors and an increase in the number of domestic mutual funds. These two classes of institutional investors began to exercise an important influence on market behaviour.

Mutual funds as an investment vehicle helped spread of the equity cult among households and individual investors. Embracing of new technology redefined the stock exchanges in the country as elsewhere, and made the geographical location of a stock exchange irrelevant.

Automation of trading in the stock exchanges brought in several changes. It helped improve the level of transparency, reduced spreads and lowered transaction costs. It also allowed for the expansion of the stock exchanges through the spread of trading terminals in cities and towns in the country and brought stock exchanges closer to investors.

Automation of the stock exchanges and modernisation of the infrastructure of the stock exchanges also made shortening of the trading cycles possible. Along with the changes in the market microstructure, the risk containment measures, which included setting up of clearing houses, clearing guarantee corporations and trade guarantee funds by the stock exchanges, strict and enforceable margins and exposure norms for brokers, significantly improved the safety of the market. It provided for the smooth and efficient settlement of trade and protected the market from settlement failures.

These changes were the outcome mainly of economic reforms, macro-economic changes and regulations for the securities market. Both internal and external liberalisation measures, undertaken as a part of the economic and financial sector reforms, and the more liberal general economic ethos created by the reform process, resulted in the freedom for private enterprise and competition.

The flagship of the government's reforms, SEBI had an important role to play in inducing the change in the marketplace. Established in 1992 as the apex, statutory regulatory body for the securities market, with the express mandate of investor protection, development and market regulation, it was able to put in place in a very short period of time, a credible regulatory structure for the securities for the first time.

SEBI thus became the prime catalyst for market development, bringing about far reaching changes in market practices, introducing changes in market practices, introducing international best practices and procedures and modernising the market infrastructure taking advantage of technology and enforcing regulations.

While the free pricing regime enabled issuers to freely access the market and enabled a flurry of activities in the primary market which attracted a large number of households to invest in equity issues, there were also a plethora of poor quality public issues both at par and at premium. These issues saw a rapid decline in valuations on the stock market when trading commenced and there was a substantial loss of wealth of the households who had invested in them.

By 1995-96 there was worrisome erosion of investor confidence and investors turned away from direct investment in equity shares to safer fixed income instruments and bank deposits. Primary market activity diminished significantly and the market remained dull till about the third quarter of 1999. The high interest rates prevailing since 1995-96 further encouraged this trend.

There were important structural changes in the pattern of financial saving, matching the changes in the financial sector. The interest rate structure, which had changed significantly since 1992-93 played a role in inducing the structural shifts in household saving in financial assets.

When the market was in a bearish trend, the interest rates were high and the confidence of investors on the securities market had waned considerably. Investors opted for fixed income investments, which were providing higher returns owing to the high interest rates prevailing during the period.

The investment preferences of the households, the investment behaviour, pattern of household savings and the number of households investing in the securities market during the 1990s were influenced by the cumulative impact of all these factors.

The Estimates

Estimates of investor households and individual investors (direct ownership):

An estimated 12.8 million, or nearly 8 per cent, of all Indian households representing 19 million individuals had directly invested in equity shares or debentures or both as at the end of the financial year 1998-99.

Estimates of unit owning households and individuals unit holders of mutual funds (indirect ownership):

An estimated 15 million or nearly nine per cent of all households have invested in units of mutual funds, many of which could be investor households. There is likely to be at least 23 million unit holders in mutual funds.

More households own mutual funds than equity share and debentures:

The number of households owning units of mutual funds is more than the investor households which have investments in shares and debentures. The existence of such a large number of unit holders is a measure of the growth of mutual funds.

The number of equity investor households and equity investors far exceed debenture owning households and debenture holders:

Of the 12.8 million investor households, 12.1 million, or seven per cent of all households representing approximately 18 million individual investors, owned equity shares and only 3.7 million households, or one per cent, representing about five million investors, owned debentures. The bulk of the debenture-owning households are also equity investor households.

Households hardly differ in their risk perception of equity shares and debentures:

It is important for corporates to note that households have hardly differed in the risk perception of equity shares and debentures; this runs contrary to theory and expectations.

Ownership of equity shares and debentures by households and individuals on the rise:

Comparison of estimates of investor households available from the Survey of Household Financial Assets conducted by NCAER at an all India level in December 1986, and the present survey shows that the investor households have increased at a compounded growth rate of 22 per cent between 1985-86 and 1998-99. Interestingly, the rural investor households have increased at a compounded growth rate of 30 per cent compared to 19 per cent for urban investor households.

Growth of investor households have been faster between 1991-92 and 1998-99 than between 1985-86 and 1991-92:

Comparison of the estimates of investor households available from the SOFA in 1986, with those available from a survey conducted by SEBI in 1991-92 and the present survey shows a sharper rise in investor households between the period 1991-92 and 1998-99 than between 1985-86 and 1991-92.

More number of investor households became equity share owners after 1991 than prior to 1991:

About 36 per cent of the investor households became investors in equity shares prior to 1991, while the majority of the investor households entered the market after 1991. The growth of the investor households in the 1990s is commensurate with the growth of the securities market in the decade.

The growth pattern of the investor households reflects the pattern of expansion of the market and is consistent with the findings of the earlier surveys:

The primary market expanded rapidly between 1991-95 and contracted thereafter. This explains why about 47 per cent of the investor households entered the market between 1991-92 and 1995-96 and a far proportion of number 17 per cent entered the market thereafter.

Despite this growth, only a fringe of Indian households have direct investments in equity shares, or debentures or both:

More than 156 million, or 92 per cent, of all Indian households were non-investor households who did not have any investment in these instruments.

Some of the developed markets have a larger population of investors:

In the US for example, according to a survey conducted by the Investment Company Institute in 1999, 48.2 per cent of the households own equities, directly or indirectly through mutual funds, of which 53 per cent, ie 25 per cent of all US households directly own equity. There is therefore a long way to go for the Indian markets. A majority of the investor households in the US own equities indirectly through mutual funds as in the case with the Indian market.

The percentage of households owning equity shares or debentures or both is substantially higher in urban areas than in rural areas: Of the 48 million urban households, an estimated 8.8 million households, or 18 per cent, representing approximately 13 million urban investors owned equity shares or debentures or both. Of the 121 million rural households, only about four million households, or three per cent, representing nearly six million rural investors owned these instruments.

Reforms, regulatory framework provided by SEBI and macroeconomic changes were responsible for the growth of the market:

Following the reforms which began in June 1991, liberalisation in industry, trade, taxation and financial sector had given the impetus to the growth of the capital market. The liberalisation in private investments, the structural change in the market accompanied by the regulatory environment provided by SEBI for investor protection and development of the market enabled increasingly large number of companies to access the capital market.

The growing investment expectations of the households arising from the above factors, the high growth of the economy accompanied by increase in savings rate and greater investor confidence provided the regulatory environment attracted a large number of investors into the market.

The Risk Perception

Investor households diversify their investment portfolio to balance risks:

It is the need of the investors to balance the risks in investment with return and liquidity that lead them to diversify their investment portfolio depending on the level of income of the households.

For households, safety and liquidity i.e. reliability, are the primary considerations which determine the choice of an asset:

Graded on a on a four-point scale of risk perception namely: very safe, reasonably safe, somewhat safe and risky, the eight financial instruments surveyed excluding the instruments perceived as risk free, such as contractual savings, NSC, LIC policy etc. could be classified into four broad categories perceptions -- bank fixed deposits, gold, UTI and other mutual funds and the remaining instruments viz, company deposits, equity shares, debentures, chit funds.

From the point of view of safety, bank fixed deposit stands apart from the rest of the instruments:

About 65 per cent of all households and 76 per cent of the investor households have graded bank fixed deposits as being very safe and only about 14 per cent of all households did not have any opinion about the risk of bank fixed deposits. Interestingly, only 30 per cent of all households and 37 per cent of the investor households have regarded gold as very safe and 31 per cent of all households and 15 per cent of the investor households had no opinion about the risk in investment in gold.

Investor households are aware of risks in investing in equity shares:

Equity shares have been found to be very unsafe by a fairly significant number of households, including investor households. This would imply awareness of the investor households about risks associated with investment in equity.

Attractiveness of NBFCs on the decline:

Among other forms of fixed deposits, fixed deposits of NBFCs have been considered risky by 48 per cent of the investor households. By early 1999, when the survey was being conducted, the problems faced by the NBFCs had become well-known and this would perhaps account for the high percentage of the households considering NBFCs as being risky.

Hierarchy of risks in certain instruments:

Ranked in an ascending order of risk perception, bank fixed deposits were considered very safe, ie, least risky, followed by gold, units of UTI-US64, UTI's other schemes, fixed deposits of non-government companies, mutual funds -- equity shares and debentures. Debentures were perceived to be nearly as risky as equity.

The distribution of the investments of all households into different financial instruments corresponds with the risk perceptions:

Higher proportion of households has invested in instruments with a lower risk perception. For example, 76 per cent of all households have invested in fixed deposits and about 65 per cent of all households consider fixed deposits to be very safe investments. That such a large percentage of households have some kind of investments in fixed deposits is indeed significant.

The Investment Preferences

Households' preference for instruments in which they commonly invest (other than equity shares and debentures) match the risk perception:

The percentages of households investing in any instrument, ranked by preference of all households show that the fixed deposits as a class, has the highest preferences, allowed by recurring deposits of post office. LIC policies small savings instruments, contractual savings, UTI schemes, bonds of public sector undertakings, chit funds and public and private sector mutual funds.

Distribution of Households in Instruments by Income Class

Popularity of some instruments is secular to income class; while of others it is income dependent:

This is seen in the relative popularity of bank fixed deposits which has an appeal across all income classes. Tax has an influence particularly among the middle and higher income groups but has little relevance to the lower income group. This is seen by the higher incidence of national savings certificate and national savings schemes among the middle and higher income groups.

There is a fairly high incidence of households in LIC policies across all income groups:

It is interesting to note that at least 29 per cent of all households own LIC policies. Its popularity with the middle and higher income groups could stem from the inherent need of households for safety and protection in the event of any contingencies. The wide distribution network of LIC agents also has an important role to play in the growth of LIC.

Part II: 'The majority of investor households are unlikely to make fresh investments in shares'

Money