Chapter VIII. Findings of the Survey

Transcription

1 Chapter VIII Findings of the Survey 8.1 Questionnaire design: The questionnaire was designed to have an overview of retail investor s attitude towards investments in general and IPO s in particular. The researcher also intends to explore retail investor s awareness regarding the grievance redressal mechanism and their perceptions about the role of the regulator. Hence the questionnaire is descriptive and not analytical in nature. The objective of conducting the survey was not to generalize the findings to the entire population of retail investors but to supplement the findings is the study. The questionnaire was initially administered to a purposive sample of 200 Investors who have applied in the IPOs in the last five years. The respondents were deliberately chosen from the audiences of the investor awareness programmes conducted by BSE, CDSL and SEBI in Pune between the period December 2011-November 2012 and the investors who visited broking firms. The responses from the investors reflect the prevailing market sentiment during the period when the survey was conducted. The questionnaire is divided into four parts; the first part relating to the investors demographic details, the second part relating to their general investment experience; the third part relating to their IPO investments and the fourth part was on their perceptions about SEBI and awareness about redressal mechanism and education. Out of the 200 questionnaires, only 196 were considered and the rest were rejected due to inconsistent information. Out of the 196 filled in questionnaires, 167 investors had participated in the IPOs in the last 5 years and 29 investors could not given adequate information on questions relating to IPOs. However their responses were taken into consideration for assessing their general investment behavior and perceptions about SEBI. Findings of the Survey 8.2 Demographic profile of the sample The sample comprised of % respondents in the age group of years which is normally considered as the young and earning age bracket % of the respondents belong to the age group of A relatively less percentage of % 150

2 belong to the age group of over 50. Hence the sample comprises of investors majority of them in the middle age category as shown in Table (13) The respondents consisted of 70% Males and 30% females as shown in Table (14). The participation of female investors is less when compared to male investors % of the respondents are a Post graduates which signifies that they are well educated as shown in Table (15) The distribution of the sample on the basis of occupation suggests that 42.34% of the investors are employed in the top/middle level management in a company followed by 22% of investors who have self employed business. The number of people in the government service is very low (2.04%). Majority of investors are employed in the private sector.14% of investors are self employed professionals. Investors who are retired or unemployed constitute very small percentage of the sample which is 3% and 5% respectively. Students constitute 4% of the sample. (Table 16) and Fig 13 Retired others 3% 2% Unemployed 5% % OCCUPATION Student 4% Self employed business 22% Top/middle level management 42% Government Service 2% Self employed professional 14% Home maker 6% Figure 13 Sample Composition on the basis of Occupation 80% of the Investors are married and 20% are single. There are no investors in the categories of divorcee, widows, widowers (Table 17). Income of the Investor is a critical factor influencing their investment decisions as this determines their choice of investment, their asset allocation and risk taking ability. It also determines their investment goals. 44% of the investors belong to the lower annual income upto 5 lacs. 20% of the investors belong to the income bracket of 5-7 lacs.5.5% of the investors belong to the 7-9 lacs income group, 4.5% of the investors belong to 9-11 lacs category. 20% of the investors belong to income bracket of more

3 than 11 lacs. The findings suggest that most of the investors are from the lowest income bracket which identifies that they are investors of small net worth. There is a possibility that investors may have understated their income as disclosing one s income is considered as a risk. (Table 18) % of the Investors save upto 20% of their income.32% of investors save upto 20-30% of their total income. A relatively less percentage of the sample which is 16.32% invests between 30-40% of the salary. A very small portion of the sample which is 7.65% invests more than 40%. From this we can infer that majority of the people are able to save only a modest amount of 20%. This can be attributed to the fact that inflation has eaten into the saving potential of the Investors (Table 19) 8.3 Response for questions based on general Investment behavior: Reason for Investment is an important factor affecting the choice of investment. Every investment offers certain benefits in terms of tax savings, liquidity, safety and return to the investors. We can infer that tax planning is a strong reason for investing. Cross tabulation of data about investment preferences indicates that with level of education also indicates that across all classes tax planning is an important factor for investing followed by retirement. (Table 20) Studying the classification on the current investments held by the investors (Fig 14) show that all the investors have invested in shares directly followed by Mutual funds and Bank Deposits. Mutual funds have been preferred over bank deposits. This can be attributed to the fact with the entry load on mutual funds removed by SEBI, the administrative costs for the mutual fund investments has reduced. This is a favorable trend. (Table 21) 152

4 Current investments held Figure 14 current investments held by the investors Holding a demat account and a trading account is an essential prerequisite for trading in shares. A significant majority of 82% of the investors have both demat and trading account. 18% of the investors have only a demat account. This could be attributed to the fact that these investors may have only applied for shares in the IPO without intending to trade in them (Table 22) With regards regularity of investment, 45% of the investors surveyed invest regularly indicating a disciplined approach to investing followed by 41% of investors invest randomly and 13% of the investors invest before the close of the financial year for the purpose of tax saving indicating that they could be making a hurried choice of investing in tax saving avenues. In their rush for investment they might make a wrong decision and may not check the suitability of the investment for their requirements. (Table.23) Majority of investors (41%) do not review their investments on a regular basis as per changes in the market. Diversification of investment among different stocks is important to disperse risk. It is also a factor that improves the returns. However 43.87% of the investors have minimum diversification with a portfolio of just 1-5 companies and 24% of the investors have a moderate diversification of 5-10 stocks. This can be attributed to the fact that small investors have a practical difficulty in supervising a portfolio of too many companies. However 11% of investors have a

5 wider diversification of more than 20 stocks which indicates that they are seasoned investors.( Table.24) Interface with a broker is essential for trading in shares. This could be through an online broker where the investors trade directly through the online trading portal or trade through a physical broker who will execute trades on behalf of the investor while offering them investment advice. 55% of the investor s trade through a physical broker and 45% of the investors trade online. (Table 25) Out of the investors who trade offline, the predominant reason for trading offline is convenience cited by 38% of the respondents. This is followed by 30% of the respondents citing that broker is also their advisor. Only a small segment of 3% of the investors consider buying through broker is cheaper. 8.73% of the investors have cited non accessibility to computer/internet as the reason. Trading through physical broker is still considered a favorable option by retail investors despite the emergence of internet trading. As on line trading requires the time and skill which many investors may not possess, they rely on the broker (Table 26) Comparing the topmost concern of the investors with their mode of trading, whether through broker and directly through online interface, the findings as seen in Fig 15 suggest that Majority of investors who trade directly feel that bad choice of investment is their topmost concern (Table 28). From this one can infer that although investors trade independently they may lack right information to make a suitable investment in line with their investment goals. A relatively less number of people who trade through broker feel that they have made a bad choice. This upholds the earlier view that retail investors rely on the broker for advice. Majority of Investors who trade through brokers however express a lack of skill to monitor investments (Table 29). When it comes to Scams and frauds, there is no significant difference between the investors who trade through a broker and who trade directly. This can be due to the fact that scams and frauds are external events to which both the categories of investors are equally exposed. Hence from this perception we can infer that although majority of investors trade through brokers for convenience and advice, yet they feel that they may be misled by the brokers and other distributors. 154

6 Concerns of Retail Investors who trade directly vs those who trade through brokers. Trade Directly Trade Through Broker Figure 15 Concerns of Retail Investors who trade directly vs those who trade through brokers. The topmost concern of investors with respect their investment, cited by 37.24% of the investors, is bad choice of investment followed by manipulation by operators cited by 17.34%. Lack of protection from scams and frauds are cited by 17% of the investors. 15% of the investors feel Price volatility as their topmost concern. Table (28) With respect to the problems that retail investors have experienced against which they want to complain, a substantial number of investors (42.34%) of the investors felt that loss on shares trading below the issue price is their problem. As the securities market especially the IPO market has not given returns with majority of the stocks trading in red, this finding is in line with the general market sentiment. Table (30) and figure (16)

7 Figure 16 Problems of Retail Investors thatt they want to complain against Heavy Demat charges have been cited as the second major problem by 26% of the investors. 23% of the investors feel that KYC norms are cumbersome.19% of the investors feel brokerage commissions are high. Refund of allotment money in case of unsuccessful application has been cited as a problem by only 10% of the investors. These finding suggest that topmost problem is the wealth destruction of caused by securities trading below the issue price. Demat and brokerage charges even though have been considerably reduced yet there is a perception that they are high. (Table 30) With respect to what the investors consider when they buy and sell their investment, an equal percentage of people have cited that Brokers advice (38%) and self analysis of the company as the reasons. Buy and sell calls on TV channels is cited by 23% of the respondents followed by SMS alerts (6.12%). An insignificant percentage of 2% of the respondent s portfolio is managed by the broker through a POA. Hence the inference is that majority of the investors rely on external sources of information which are to a large extent are unregulated. Table (31) 8.4 Questions on IPO experience. Out of the 196 respondents surveyed 167 participated in the IPO in the last five years (Table 32). As far as the reasons for not participating in the IPO are considered, a significant majority of the respondents (58%) consider investing in the secondary market better than in an IPO. 17% of the respondents consider the Issue price being high as the

8 reason for not investing. 10% of the investors feel inadequate information as the deterrent for participating in the IPO (Table 34) Reasons for Investing in an IPO For investors who subscribed to IPO, listing gains (49%) is the significant reason for investing indicating that the lure of making a quick gain is their main reason for participating in the IPO. This validates the popular perception that retail investors invest in an IPO for making short term gains.29% of the investors are of the opinion that in the long run the returns are going to be good despite short time volatility. 24% of the investors consider it as a good entry point. Only 12% invest because of the discount being offered to the retail investors.(table 35) and Figure 17 Reasons for Investing in an IPO Returns in long run 27% Good entry points 21% Assured allotment 1% Retail investor discount 12% Listing gains 39% Figure 17 Reasons for Investing in an IPO Making use of Increased Investment Limit The investment limit for investors in the retail category has been increased from Rs1.00 lac to Rs 2.00 lacs in an issue with effect from It is important to know whether or not they are availing the revised investment limits. A majority of 73% of the investors are not availing the revised investment limit (Table 37) A small percentage (14.37%) is of the opinion that the limit should be further increased % of the investors are of the opinion that the limit should not be

9 increased and a significant percentage of 49% of the investors are unsure whether or not the limit should be increased (Table 38). Comparing the income of the investor with that of the amount of subscription in an issue we find that investors in the income category of up to Rs 5.00 lacs and Rs 5.00 to 7.00 lacs mostly invest upto Rs 15,000 in an issue. Investors in the higher income bracket also invest to a small extent upto 15,000 in an issue as seen in Fig 18 Subscription level in an IPO based on Income < <30000 <60000 < > N.A Size of application in an IPO in Rs < 5 Lakhs <7 Lakhs <9 Lakhs <11 Lakhs > 11 Lakhs Figure 18 Subscription level in an IPO based on Income An important finding is that majority of the retail investors are not availing the revised investment limit for retail investors in Initial Public Offerings (Table 33).

10 Important Factor influencing the choice of an IPO based on mode of trading Trade Directly Trade Through Broker Broker Self-Analysis News Channels & Papers Word of Mouth Not Answered Figure 19 Important Factor influencing the choice of an IPO based on mode of trading Comparing the important factor influencing the choice of an IPO with the mode of trading of the investors, we can see that for investors who trade through broker, advice of the broker is an important factor influencing the choice of an IPO. Self analysis is an importantt factor for the investor who trade directly. A majority of investors who trade directly and those who trade through a broker also depend on News channels and papers for the choice of an IPO. Majority of investors who trade through broker rely on word of mouth for their choice of an IPO as seen in the figure 19 above Reading the Prospectus Reading the prospectus helps the investor to ascertain the risks, the future growth of the company, the promoter s background and the objectives of the issue. Although the caveat Investors must read the offer document is issued repeatedly, a significant percentages (51%) of the investors do not read the prospectus indicating that they are not making use of the information that is being provided (Table 39). Even among the investors who read the prospectus, a majority of 48% of the people read only information about the Company. A very small percentage of 7.22% of the investors read the legal and other information (Table 40). 75% of the investors who read the prospectus are of the opinion that the prospectus helps them to take an informed decision. This is shows that the objectivee of providing information in the prospectus has been successful as the investors are benefiting from

11 it. However 18% of the investors are not sure whether or not the information has been helpful to make an informed decision (Table 41). 7% of the investors feel that reading the prospectus does not help them to take an informed decision. The complete DHRP is available on the website of SEBI, the Lead Managers to the issue and the stock exchanges; however 54.49% of the investors of the investors do not refer to prospectus on the website. Only 9% of the investors read the complete prospectus Important Factor Considered before investing in an IPO Important factor considered before investing in an IPO Fig % 1% Promoters background 3% 8% 38% sector of the company Issue size and price IPO grading 26% Participation of QIB Figure 20 Important factor considered before investing in an IPO Promoter s background is considered as the most important factor by 38% of the investors before investing in an IPO. 26% of the investors feel the sector of the company and its product are the most important factor. IPO grading is considered most important by only 3% of the respondents. Interestingly Issue price and issue size are considered most important by only 8% of the investors. Participation from the QIB s is considered important factor by 15% of the investors. A negligible amount of 1% of investors considers the reputation of the Merchant Bankers as the most important factor (Table 42). The fact that promoter s background is considered by investors before investing in an IPO is has been proved in case of Reliance Power, India Bulls power and JSW energy which

12 have been oversubscribed in the retail investor s category purely on the reputation of the Promoters. The disclosure made in the prospectus had no bearing on the investor perception. Although Merchant Bankers have a significant role to play in the IPO process and SEBI has mandated disclosure of track record of Issues by Merchant Bankers, 55.68% of the investors consider the reputation of the Merchant Bankers as the least important factor (Table 43) Preference between the IPO of a PSU and a Private sector undertaking. Offerings of Public sector undertakings are perceived as safe for retail investors as they are owned by government and considered as trustworthy. 61% of the investors prefer the IPO of a public sector undertaking while 39% prefer the IPO of private sector undertaking (Table 44) Concerns with respect to Issue process and allotment: Allotment of shares is subject to valid bids being received and until recently the allotment is proportionally done in case of oversubscription. 50% of the investors are satisfied with the allotment process. 41% of the investors have expressed that they are not satisfied with the allotment process. A very small portion of 8.98% of the investors have expressed that they are very satisfied with the allotment process (Table 45). Out of the investors surveyed 68% of the investors claim that the reasons of rejection are not known to them Retail Investors perceptions regarding Issue Process Refund of unsuccessful allotment money is one of the problems associated with the IPO process. Out of the investors surveyed 41% of the investors agree that the refund is without delay.20% of investors strongly agrees about it. 24% of investors disagree with this statement. 14% of investors are indecisive about it. Only 1% of the investors strongly disagree with it. The inference that can be drawn is that the intensity of the problem has reduced with SEBI actively taking steps to address the problem with the implementation of ASBA, ECS and RTGES (Table 45). 50% of the investors disagree with the fact that 35% of reservation in the net offer to the public is adequate. 10% of the investors strongly disagree with this. Hence the 161

13 inference is that 60% of the investors are not satisfied with the present allocation to retail category from the net offer to the public (Table 45). 48% of the investors disagree with the opinion that payment of 100% is a problem indication that they are fine with the payment of full amount. 16% of investors however agree that it is a problem and 12% of investors strongly agree (Table 45) 47% of the investors agrees that minimum lot size and multiples are suitable for applying in an IPO. 16% of investors strongly agree to this. 14% of investors disagree with this. 15% of the investors neither agree nor disagree. Hence 53% of the investors agree that minimum lot size and multiples are suitable for applying in an IPO (Table 45). The inference that can be drawn is that investors are relatively comfortable with the minimum lot size and its multiples and do not see it as a hindrance to participate in the IPO market. Majority of investors (46%) of the Investors do not seem to have a problem with payment of 100% at the time of bidding Pricing of the IPOs A majority of 67% of the respondents consider IPO s highly priced 32% of the respondents consider them reasonably priced. A very small percentage of 1% considers the IPOs low priced. Hence the inference is that majority of investors find the valuation of the IPOs high. However it had been noted before that, retail investors did not consider Issue size and Issue price as an important factors for selection of an IPO at the time of application. The inference that could be drawn is that, although retail investors do not consider the IPO to be highly priced at the time of applying, the fall in the price post listing is the reason for this perception Fig 21. (Table 46) 162

14 Retail Investor perception about Pricing 1% 32% Highly priced Reasonable priced Low priced 67% Figure 21 Retail Investor perception about Pricing Book Building process is a transparent bidding process that allows the market to determine the price based on the demand. Only retail investors have the option of bidding at cut off. Out of the investors surveyed a majority of 90% of the investors do not participate in the price discovery process as they bid at cut off. Only 9.5% of the investors surveyed bid at desired price. 51% of the investors surveyed are unsure about the effectiveness of Book Building in price discovery and 33% of the investors feel it is not a price discovery process. Only 15% of the investors surveyed feel that Book Building is a price discovery process. Once can infer that retail investors are concerned about getting allotment and hence bid at cut off. They are not aware of the price discovery through Book Building (Table 47). Retail investor s gauge the quality of the issue by the QIB participation considering that QIBs are informed investors. An extra day for bidding has been introduced by SEBI to enable Retail investors for this purpose. 58% of the investors surveyed bid on the last day indicating that they are making use of this facility out of which 17% always bid on the last day.14% are not making use of this facility. This shows that most of the retail investors are taking benefit of this facility (Table 48). Return from investment has been negative for 48% of the investors surveyed. Only 12.5% of the investors state that the returns have been positive. Rest of them have not reviewed their investment (Table 49).

15 When it comes to the holding period of the securities that the retail investors have bought it through IPOs 29 % of the investors intend to sell the shares within a few days denoting that listing gains has been their objective of investing in the IPO.24% of the investors hold the shares for few months but not more than a year. 47% of the investors however intend to hold the shares for some years. Hence one can infer that IPOs are also perceived by a significant percentage of investors as a long term investment with the belief that irrespective of short time volatility, in the long run returns will be positive (Table 50) ASBA ASBA has been introduced to do away with the problems of the delay in the refund process. However it appears that retail investor s awareness of ASBA is still less. Only 19% of the investors have applied In IPO through ASBA facility.81% of the investors have not made use of the ASBA facility (Table 53). One of the problems with respect to low popularity of ASBA has been lack of awareness of the facility and the fact that every bank and branch was not listed as a Self Certified Syndicate Bank (SCSB). No assistance in filling the form has been cited as a reason by 34% of the respondents (Table 54) Investor perception on whether they find it difficult to participate in the Primary market 62% of the investors surveyed do not find it difficult to participate in the primary market. Only 28% of the investors find it difficult to participate as seen in (Table 51). Their reasons for finding it difficult to participate in the primary market range from a host of factors. Non accessibility to collection centers appears to be a major problem for 32% of the investors. Second important problem is the delay in the refund of the application money for 23% of the investors. For 15% of the investors are not clear about the instructions. Complicated form and difficulty of instructions are the problems only for 5% and 6% of the investors respectively (Table 52). 164

16 8.5 Perception about the role of SEBI The perception that SEBI is an effective regulator seems to be strong with 68% considering so. 26% of the investors are not aware about SEBIs role (Table 55). 67% of the investors agree that SEBI ensures that investors are educated and protected. A small percentage of 9% disagrees with this statement. 24% of the investors are not aware of SEBI s role. 55% of the investors agree that SEBI ensures that the Book Building is transparent. 29% of the investors are unaware of SEBIs role in making the Book Building process transparent. 16% of the investors do not agree with this role of SEBI. A majority of 63 % agree about SEBIs role of ensuring disclosures are in place. However when it comes to SEBIs role in checking malpractices and defaulters the perception of investors about SEBI is not encouraging.46% of the investors agree about this role of SEBI.25% of the investors disagree with this and 29% of the investors are not aware about SEBI s role. Majority of investors (53%) are not aware about SEBI s role of providing compensation with only 14% of the investors agreeing to this. The inference is that the perception regarding the role of SEBI in promoting disclosures and awareness seems to be strong, however the same cannot be held for awarding compensation. Most of the money disgorged from the entities guilty of violating SEBI s regulations is credited to the Investor Protection Fund of India. Very rarely investors are compensated (Table 56). 8.6 Awareness about grievance redressal and Investor awareness It also appears that SCORES is not very well known to retail investors with 78% of the investors surveyed unaware of this facility (Table 57). A majority of 51.53% of the investors have attended the investor awareness camps. Majority of investors have attended awareness programmes conducted by Stock exchange (31.63%) and CDSL (35.20%). Very few investors have attended the investor awareness programmes of SEBI and NSDL. It is observed by the researcher that maximum number of awareness programmes is conducted by BSE and CDSL compared to SEBI and NDSL. 165

17 8.7 Association with Investor associations Small investors need a forum through which they can make representations before the regulators. 92% of the investors surveyed are not members of investor association. (Table 63) 8.8 Learning outcome from investor awareness programmes: A major learning outcome for investors who attended the programmes is awareness about opening demat a/c 44.89% followed by the technical issues of investing like investment as per risk profile and power of investing 37.24%). Awareness on the procedure to lodge a complaint 2.04% and caution to exercise while investing appear and rights of the investors 3.57% appears to be less. It has also been the observations of the researcher that the objective of investor awareness programmes is to create awareness about demat accounts with the intention of enhancing the business of the Depositories and the participants and not to enhance their knowledge on grievance redressal and rights. (Table 58) 8.9 Source of Information accessed about investments: Newspapers and magazines are the first source of information accessed by investors about information on current investments 57%. This is followed by television 50% and broker 44%. Websites of the stock exchanges are referred by 26% of the investors; website of the Company is accessed by 14.28%. Only negligible 1% of investors visit the website of SEBI for access of information about the company Out of the investors surveyed CNBC-TV 18, business news is most viewed by the investors surveyed 70% followed by NDTV profit 32% and ZEE Business 21% (Table 60) Websites visited to obtain education on the market: However merely 6.5% of the investors surveyed have accessed registry. Majority of investors however visit moneycontrol.com. Websites like the iepf.gov.in which is maintained by the Ministry of Corporate Affairs (MCA) with the objective of educating investors and investor helpline, a free helpline of Midas touch Investor association (which is not operational now) have not be accessed by investors ( Table 61). 166

18 8.11 Rajiv Gandhi Equity Scheme From the investors surveyed, 32% expressed that it will encourage them to invest in primary issues in future if it is extends to all investors % of the investors are indecisive about their interest if extended to them (Table 62) Interest towards doing a course in capital markets There is strong inclination on the part of retail investors to know more about investing in the market as 57% of the investors surveyed are interested in doing a course in the Capital market. Investor awareness programmes are only helpful in acquainting the investors about the nuances of opening a demat account and making them aware of their rights, however a deeper understanding of the markets is needed so that investors not only understand the technical issues of investment but also to able to assess the fundamentals of the company (Table 64) Solution for better investor protection 48% of the investors surveyed state that effectively educating the investors is the best way to protect them from the irregularities in the market. This is followed by 20% of the investors who feel punishment of the defaulters. The need for a separate Act for investor protection is felt by 18% of the respondents (Table 65). The responses through questionnaires from investors were collected during the period December 2011 to November However a lot of reforms were introduced in the Primary market since then. Revisiting the investors to get their opinion proved futile as many were not aware of the reforms and had stopped investing in the market due to losses. Hence structured interviews of brokers and Merchant bankers were conducted to understand the efficacy of reforms. The findings have been reported on the basis of the main themes across the findings Findings of Interviews of Brokers: Top most concerns of retail investors: The brokers interacted were of the view that lack of financial literacy on the part of retail investors is a main concern. According to the brokers, retail investors do not have a goal oriented approach towards their investments and give into peer pressure. 167

19 They are unable to time the market. They enter the market at high and exit at low. Their motive for applying in an IPO is mostly for listing gains. The brokers were unanimous about the fact that very few investors read the offer document to see the sector, its prospects. Retail investors do not understand terms like book value and P/E ratio. They hold the shares for few months and not more than a year. Booking loss is painful for retail investors so they tend to postpone the regret they feel at having made the wrong decision The financial behavior of the investors does not allow them to reinvest in the same scrip once they exit from the copy 321 Brokers are of the view that financial planning is misunderstood as tax planning by many retail investors. Investments are made towards the end of the financial year in investment which may not suit their investment goals. They do not review their investments on a regular basis. Brokers also feel that retail investors indulge in intraday trading and ignore the fundamentals of the company. Pricing of the issue is major concern with respect to IPO. Majority of the brokers feel retail investors are no longer interested in IPOs. Frequent changes to KYC norms also dissuade retail investors to pursue equity investment, brokers feel Criteria for identifying retail investors: Majority of the brokers are of the opinion that investors of HNI category are benefitted from the increase in the limit. To identify genuine retail investors, some brokers feel that there has to be an income based investment limit. One of the brokers interacted said If an investor has to put in Rs. 2 lacs in one public issue, then he/she must be having an investible surplus of at least Rs. 10 lacs (assuming 20% allocation to one instrument). Hence this definition does not actually indentify an investor of small means Few brokers have also suggested bringing down the limit from Rs2 lacs to Rs 50,000 to really identify small investors. Some brokers who have been Underwriters were of the opinion that issuers prefer QIB to retail investors as it adds to the prestige of the company and more is the number of small investors more is cost of servicing (correspondence like annual 321 Quoted from the transcript of the Interview conducted of a broker 168

20 report etc.) Brokers were also of the view that when many issues hit the market at the same time, the true retail investor will not be having surplus funds to invest in all the issues. It is only HNI who has funds to put in. Also investor with small means will not want to take the risk of equity investment. Hence any increase in the investment limit will not benefit retail investors Reservation of 35% to retail investors whether adequate: Majority of the brokers interacted were of the opinion that the reservation to retail investors has to be increased. They feel that as Institutional investors are bulk buyers they can also buy after listing ASBA The interaction with the brokers has also revealed that ASBA has not yet been adopted by investors completely. Retail Investors are still comfortable paying through cheque as it gives them time to arrange for funds. However brokers also agree the Syndicate ASBA introduced by SEBI has encouraged brokers to promote ASBA IPO grading Majority of the brokers are of the opinion that more than the IPO grade, retail investors go by the promoters reputation. Most of the IPOs are sold by word of mouth and investors subscribe to issues to avoid the left out feeling. Grading must also review the price to be truly effective according to the brokers Reforms The recent reforms introduced to by SEBI including Circuit Filter, mandatory allotment, shortening the time between issue closing and listing are all much needed reforms according to majority of the brokers. The Circuit Filter has almost eliminated manipulation in case of small and mid cap companies, brokers feel. However some brokers also feel that retail investor s interest has not been revived since these reforms as most of the shares are trading in losses. Majority of the brokers were of the view that IPOs has lost the favor of retail investors. While information regarding the reforms is widely disseminated by SEBI through its circulars, some of the brokers were not yet aware of reforms like SCORES. REGS has not gained popularity due to complicated rules and the general downturn in the equity market. BSDA also has not 169

21 seen an increase in the number of demat accounts. Minimum allotment is encouraging investors to apply in smaller amounts Views of Merchant Bankers In view of major reforms that were introduced in by SEBI with the intention to streamline the Issue process and invoke greater responsibility on the part of Merchant Bankers, it is important to understand the perceptions of Merchant Bankers and for that purpose a structured interview was conducted. The findings of the interviews have been reported below Concerns of retail investors and their participation The interaction with the Merchant Bankers revealed that the lack of retail participation in IPOs is acknowledged by them. The major concern of retail investors is with respect to their return on investment and uncertainty regarding allotment. Merchant Bankers are of the opinion that the increase in the investment limit is a good measure and investors are making use of it. The limit can be increased further if it enables more retail investors to enter the market. With regards to the retail investor s participation in the Book Building process, majority of the bankers are of the opinion that while nothing stops investors from participating in the Book Building process, retail investors bid at cut off to be safe. IPO grading Grading of IPOs is a unique to the Indian regulatory framework essentially intended to guide retail investors. The Merchant bankers are of the opinion that grading alone is not a parameter to judge the quality of the issues. However a higher rating does influence the decision of the retail investors. More than the grade, retail investors seek cues from the QIB participation. Introduction of Circuit Filter Circuit filter has been put in place to curtail listing day volatility of IPOs. The Merchant Bankers agree that it a good measure and experience of the IPOs that were listed subsequently has shown a near elimination of the manipulators inflating the 170

22 prices and exiting the market. However as the IPO market has been inactive since, the efficacy of circuit filter has yet to be tested over a long term perspective. Pricing of IPOs Merchant Bankers role in the pricing of the Issue has been under focus in view of the post listing performance of the IPOs and SEBI (ICDR) Regulations, 2009 now require the Merchant Bankers to disclose the track record of the performance of IPOs managed by them in the offer document. While most of the bankers were reluctant to comment on the issue of pricing and whether SEBI should involve in the same, some of them expressed that they have been educating their clients to take a realistic view on pricing. Recent reforms With respect to the recent reforms increasing the minimum size of retail application, reducing the bidding period, on line IPO and compulsory allotment to retail investors, There is a consensus among the Merchant Bankers that these reforms were much needed to infuse life into the primary market. Reducing the time lines between the closing of the issue and the listing will help tackle the grey market operations they feel. The general perception of the Merchant Bankers is that while the reforms have stream lined the issue process; the general economic conditions have to improve to revive the IPO market. None of the Merchant Bankers interacted with were unwilling to comment on the safety net mechanism. Suggestions Educating investors is the key to protection as felt by the bankers Views of Experts: Experts in the field of primary market were also consulted to analyze the efficacy of the reforms in the primary market. The findings are reported below: Retail Investor concerns: Experts were of the view that the biggest concern is with respect to pricing. Overpricing the issue leading to sharp fall post listing is the reason for the general apathy of retail towards IPO. Increase in Investment limit: Majority of the experts were of the opinion that there are many investors who would not fit into the retail category but qualify as HNI who apply in 171

23 retail for various reasons. With respect to the increase in the investment limit, the interaction with the experts revealed that from an average size of retail application of 60-65,000 the application size has increased to 1 lakh after the increase. Experts were also of the view that the minimum mandatory allotment to retail investors while it assures investors of allotment, the experience in the recent IPOs after this amendment has been that issues oversubscribed marginally have seen more application of smaller amounts. Hence this is encouraging investors to make smaller applications in view of confirmed allotments. IPO grading: With regards to the efficacy of grading, experts are of the opinion that while grading is an additional tool to assess an issue, as the grade does not take into consideration the price, it is not effective. Recent Reforms Majority of the experts are of the opinion that the Circuit Filter has almost eliminated the first day exit that manipulators used to pump and dump the shares. It has now become difficult for promoters to manipulate and exit on the listing day. ASBA has to be encouraged and then made compulsory for retail investors, they feel. The Electronic IPO according to experts in the long run will elicit more response from across the country instead of the concentrated presence in the cities of Mumbai, Ahmadabad and Rajkot. Some experts are of the view that the e-ipos also address the issue of wastage of resources through IPO application forms. As the average usage rate is less than 1% which means almost 99 forms printed are wasted, the experts are of the view that e-ipos is a much needed reform. Safety Net: While the Merchant Bankers declined to comment on the safety net, majority of the experts feel that providing a safety net will discipline the Issuer with respect to pricing and also provide comfort to retail investors. 172

24 8.21 Summary The Survey has revealed that with respect to general investment attitude, lack of awareness on the part of retail investors is leading to greater dependency on brokers. There seems to be a strong preference for mutual funds. Chief concern remains price volatility and aggressive pricing of IPOs. Listing gains remains a predominant reason for investing in IPO. IPOs have become instruments for trading rather than investment. Significant numbers of retail investors are not making use of the increase in the investment limit. The findings of the interviews reveal that the HNI category is encroaching into retail category and are the beneficiaries of the limit. While timely disclosures are the foundation of market regulation by SEBI, it is disappointing to note that retail investors are not making use of vital information. Preference for IPOs of PSU is evident. Greater shares in the IPO allocations are demanded by majority investors. While the perception that SEBI is an effective regulator appears to be strong, its role is in enforcement and giving compensation to investors is perceived very poorly by retail investors. While investor associations can be pioneers in the protection of investors, there is a general apathy of investors towards investor associations. There is a lot to be desired form investor awareness programmes with the major learning outcome being knowledge about technical aspects of Demat account opening. Brokers, Merchant Bankers and experts are positive of the reforms introduced in the primary market especially e-ipos and Circuit Filter. However with the meagre number of IPOs listed since the reforms and the gradual withdrawal of retail investors from the market, the long term efficacy of the reforms is yet to be tested. 173