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Business Commentary/ R C Murthy

Online trading: glad tidings for small investors

The emphasis on information technology, as part of India's globalisation, is to have some major unintended, if beneficial, effects on the economy.

Four years after the introduction on Wall Street and other American bourses, Internet-based share trading is to make its debut in India. The Securities and Exchange Board of India, the capital market regulator, is to give the green signal in a couple of months for Web-based share trading.

That will more or less solve the vexed age-old problem of stock brokers refusing to entertain retail investors in a big way. It is not that they do not want that business. They want the investors' cash but without any hassles and risks.

At one stage, the authorities toyed with the idea of enforcing a certain percentage of trades for small investors just as in the case of bank advances, 40 per cent of which should be committed to priority sectors.

But it got bogged down because of complexities of definition and the percentage to be earmarked -- one or two per cent? Percentage of what -- of the amount or the number of trades?

In fact, before the foreign institutional investors arrived in the aftermath of the first phase of economic reforms, stock brokers were in dire need of individual investor business. But they wanted it on their terms: you repose confidence in us but we will not trust you.

In the end, the brokers led the individual investors up the garden path by conniving with unscrupulous corporates to inflate the premia for their public issues.

Bad deliveries, spurious and duplicate share certificates, bouncing of cheques and, above all, high cost of servicing precluded even good samaritans from entertaining small investors.

The present scenario: brokers have no time for retail investors. They run after institutional business. Least risky, no bad deliveries and no duplicate shares because of share dematerialisation. Bulk business. So small investors are not welcome at least as of now.

Yet, everyone laments retail investors deserted the stock markets. Theoretically, he has been the mainstay. Stock markets are to mobilise individual savings and channellise risk capital for the corporate sector.

But corporates issued capital at high, unsustainable premium and managed the public offers. The small investor burnt his fingers as share prices dropped on listing.

One sees a trickle of individual investors returning to the stock market after a lapse of nearly a quenquennium. Obviously, conditions have changed and are conducive for his return. The cream left in IT companies, even after the high premium fixed for their initial public offers, is responsible for it.

Technology is doing the trick where the government and SEBI failed. Online trading with terminals at brokers' offices has led to the elimination of traditional trading ring and facilitated the location of brokers away from the stock exchanges. It also brought about transparency in operations and removed the lingering doubts over manipulations indulged by brokers.

Also, no longer access to live stock quotations during trading hours is restricted to a privileged few brokers and sub-brokers.

Computerisation has made this possible. Transparency has enhanced trust between the investor and broker.

The serioius lacuna still is the small investor is at the mercy of brokers. Which calls for reforms. What is SEBI doing? The bane of Indian stock market is, it is a den of paupers. That is partly traditional. Non-stipulation of strong capital norms made all and sundry to enter the business. They made share broking labour- intensive.

Despite all the reforms, brokers are still under-capitalised. Computerisation has only helped to an extent to solve problems. But a breakthrough will be achieved when Internet-based online trading comes.

Rapid advances in technology are inexorably pushing the brokers to drop willy-nilly their inhibitions against retail investors. Shitin Desai, vice-chairman, DSP Merill Lynch and a staunch supporter of small investor, predicts that the day of the small investor is not far off. In about two years, Internet trading would become a major source of business. It could be some15 per cent of the turnover.

Reform of banking, making it universal and Internet trading are bringing in new if strong players to the business. Resources will not be a constraint for them. And, there is synergy between this and banking.

The new generation banks like ICICI Bank, HDFC Bank and most foreign banks are awaiting SEBI guidelines to set up Internet online trading shops.

If competition hots up, these new entrants will be even prepared to offer this service free of charge. Technology will drive out under-capitalised brokerages unless they upgrade their services and fill the information gap.

A host of newsletters with analysis, research of active scrips and tips for individual investors should come up in the near future as has happened in the U.S.

Although most investors prefer to channel their savings through the mutal fund route, there will be enough retail investors to make the stock markets vibrant.

ALSO SEE

Bombay stock firm plugs into new media

Corporate India makes a beeline for the US bourses

The Future Is Here: All set for Internet-based stock trading

Murali Iyer on Internet-based stock trading
R C Murthy

Business