Nandita Parker May 16, 2014

I believe it is crucial for India to attract domestic financial savings into its equity markets. These can act as a counterweight to volatile foreign portfolio inflows  and enhance the depth and breadth of Indian Capital markets.

Since the global financial crisis, Indian investors have been exiting Indian equities in droves. Financial savings in equities which peaked at 13% in the early 2000s, actually dipped to -1% in 2013.  So will domestic investors return to the market now that the Sensex is scaling new highs? At the margin, yes, but in my opinion not in the size that counts. Nor do I believe that the market regulator’s bid to “educate investors about the merits of stock market investing” is an effective strategy. If we think about what drove investors away in the first place, it was the loss of confidence as a result of the extraordinary volatility post the 2008 global financial crisis. In the aftermath, Gold and real estate became safe bets and that’s where a bulk of household savings were invested. Today, both have lost their sheen because of RBI controls on Gold and over-investment in property at least in the major metros. Property tends to be illiquid as the speculative run of the last four years has now shown.

I believe that two key changes can significantly impact equity investing in India. First, regular inflows of domestic pension fund money into actively managed funds, something that SEBI has been pushing for. Although this reform has been blocked time and again by special interests, we hope that SEBI can work with the new government to make this happen. If it goes through, EPFO funds to the tune of $12bn would enter the Indian equity markets. Second, a radical shift in corporate governance across the largely ignored section of the market where angels fear to tread, i.e., small and mid-cap stocks. I believe the recent Companies Act 2013, enacted by legislation in August 2013, will go a long way to bring about changes in this regard.