INVESTOR PROBLEMS

IN CAPITAL MARKET

4.1 INTRODUCTION

Investors in India, traditionally investing in fixed deposits

with the banks, were happy with small rate of returns.
Industrialization of the country had drawn them towards
companies fixed deposits for investing. However, since seventies
and more pronouncedly in eighties, number of investors investing
in equity shares started showing upward trend because of
constantly much higher rate of returns than on fixed deposits.
Investor I'roblems in ICM 180

These new investors did not crowd the market for speculative
purpose. As a result of increase in investments in stock market,
the BSE-30 share index doubles in six years from a base figure of
100 in 1978 to 266 in 1984.
A virtual boom in the share market in 1985 brought even the
traditional fixed deposit investors in the middle age group in to
the fray. It was seen first in primary market, which finally resulted
in the investments taking place in secondary market as well. The
boom in stock market also saw the rise of speculators since
investors got a good return in very short period. Subsequently,
there was a crash in the share prices in the later part of the year
1986, which drifted away some investors. This effected the
primary market very badly. However; the investors did not parted
with their equity holding for long time.
In the late eighties share market increased steadily and in
1990 the market rose very rapidly and the high returns attracted
even a large number of small investors into the fray. At one stage,
investors become so obsessed with the constantly rising rates of
returns in stock market that they even started selling their
properties, as well as house hold items to invest in the shares. It
was evident in UTI scheme Master Gain 1992 issue that collected
Rs.4500 crores from the public. At this stage even fake persons
started floating new companies and entered new issue market
with public offer of equity shares and to the surprise even these
issues got over-subscription with by heavy margin.
The last best day for the investors was April 22,1992 after
that day, the market have hardly looked back and has shown a
continuous fall. First came the exposure of stock-scam, followed
by the Ayodhya incidence and bomb blasts in Bombay and
Investor Problems in ICM 181

Calcutta and then the budget 93-94 much different from what the
share market expected.
The M.S. Shoe fiasco has proved the concern of many
financial experts who have been warning about a possible shake
out of the entire capital market. It is pity that we show our
concern only when enough damage has already taken place. Such
warnings were ignored even at the time of Harshad Mehta’s frenzy
in the stock market.
It has been adequately proved this time that liberalization
does not mean doing away traffic red lights. The whole system of
capital markets in the last couple of years has been geared to
mop up as much capital as one can at the highest of premiums.
Today most genuine companies are finding it difficult to come out
with a well-justified capital issue even at a very deserving
premium.
It is beyond doubt that SEBI has not been clear about the
role it is supposed to play and has grossly failed in achieving the
mandated task. Inspite of being very active in issuing frequent
guidelines and modifications, there has been trouble both in
primary as well as secondary market. The stock exchanges do not
perform the desired quantum of business.

Now the Indian capital market has grown in size and also
through some promoters investors did burn their fingers by
playing with the shares. The efficient performance of capital
market is handicapped by several procedural and other problems.
The nagging problems in the market have played havoc with
equity investors and discouraged the potential investors from
entering into the market in a big way. The Indian investor lack
Table 4-1 Percentage Distribution of Risk Perception in Various Instruments

1
0

T
o
x>

3
«
JZ
to
Instruments Investor Households

to 2
o
2

Z
(0
§
1 1 1 1 1 1

£*
Very Reason Some Very Reason Some

s
IS
S3

CO
S3
CO

>*
>*
Safe Opinion 1 Safe what Opinion
1 Safe ] safe 1 1 Safe 1
Safe
Investor Problems in 1CM

CO
UTI-US64 10.62 9.97 11.97 56.25 25.39 25.98 10.76 8.07 29.80

UTI-Other Schemes 7.07 11.12 8.59 12.78 60.44 17.18 24.92 15.31 11.89 30.70
5909

to
Mutual Fund -Public Sector 9.44 9.34 16.42 11.92 20.67 15.83 16,79 34.79
896
Mutual Fund - Private Sector 1.84 5.72 21.78 61.09 4.71 12.34 18.19 26.13 28.64
L........ _....

CM

lO
CO
CO
Fixed Deposits- Banks 64.91 3.60 13.67 76.49 15.19 2.41 1.81 4.10

•tr**
CO
Fixed Deposits-Non-Govt.Co.s 6.15 12.95 28.32 40.75 13.46 20.28 21.25 25.92 19.9
898

o
N
"«•
o
CO
r^ CO
L V iz
Fixed Deposits- NBFCs 2.71 47.52 8.44 13.81 17.64 32.95
2.06 6.91 8.06 25.53 57.44 10.22 23.97 18.69 31.78 15.33
J
Equity Shares Z9'9 0999
Convertible Debentures 2.07 4.85 20.81 7.83 14.37 19.99 23.55 34.26
CM
to
h-
o

Non-Convertible Deb. 21.24 4.22 7.34 20.69 66.52 5.55 11.96 20.11 36.31
686
Chit Fund 2.43 4.99 6.87 25.38 58.34 4.54 12.95 35.20 37.43

CO
30.07 19.23 7.04 | 30.66
Gold 36.54 25.97 11.50 11.94 14.5
I

I
________
Source; SEBI-NCAER Survey of Indian Investors, June 2000.
182
Investor Problems in ICM 183

professional knowledge and their lack of awareness results in

wrong investment decisions leading to financial disasters. The
protection of investors thus assumes greater importance. It is
therefore of the utmost importance that the weakest part of the
market structure should be put into order and completely
recognized to suit the changed conditions and enabled to offer
dependable and honest service to investor community.

Investing in stock markets is not something, which one can

participate in a big way. The middle class investors should treat it
as a luxury, to be indulged in rarely. The expectation that mutual
funds would come to the help of small investors to secure capital
appreciation in addition to current income has not been realized,
judging from India’s experience in the last 5-6 years.1

4.2 Investors Perception

SEBI-NCAER Survey: According to the survey, safety and

liquidity are the primary considerations that determine the choice
of an asset. Ranked by an ascending order of risk perception,
bank fixed deposits were considered very safe, i.e., least risky,
followed by gold, units of UTI-US64, UTI- other schemes, fixed
deposits of non-government companies, mutual funds, equity
shares and debentures. Debentures were perceived to be as risky
as equity. About 65% of all households and 76% of investor
households consider bank fixed deposits as very safe. 30% of all
households and 37% of investor households regard gold as very
l. Prof. S.L.N. Simha : The Gamble Of Stock Market Forecasting,Southern
Economist, Oct,02.
Investor Problems in ICM 184

safe. About 26% of all households and 32% of investor

households consider investment in equity as risky. Table 4-1
presents distribution of investor households in terms of their risk
perception of different instruments.
The distribution of investments of all households into
different financial instruments corresponds to their risk
perception, i.e. higher proportion of households invest in
instruments with a lower risk perception. For example, 76% of all
households invested in fixed deposits, while 65% of all
households consider fixed deposits to be very safe. It is clear
from Table4-2 that fixed deposits with banks, post office,
government and non-government undertakings, NBFCs and term
lending institutions are the most preferred choice of investors.
About three-fourth of households own a fixed deposit. 45% of the
Table: 4-2 Distribution of Households by Instruments
( in per cent )
Instruments All India Urban Rural

UTI Schemes 8.45 19.52 4.50

Other MFs 5.45 12.20 2.84
Fixed Deposits 76.23 83.89
Bonds 6.21 11.56 4.80
Provident Fund 20.92 40.24 13.24
Life Insurance 39.21 57.31 32.10
Chit Funds 5.94 9.51 4.52
Post Office RDs 44.73 40.77 46.30
Small Savings 27.46 35.98 24.07
Preference Shares 2.63 6.59 1.60
Others 8.75 11.85 7.52
Source; SEBI-NCAER survey of Indian Investor
Investor Problems in ICM 185

households have invested in fixed deposits with banks and post

offices, 17% each in fixed deposits with government undertakings
and non-government undertakings, 7% in NBFCs and 2% in term­
lending institutions. The second preference is the recurring
deposits of banks and post offices, where 45% of households
have invested. LIC policy is another preferred investment
instrument for 39% of households, while 27% of households have
Invested in small savings instruments.

This brings out the importance of distribution network.

Banks and post offices have wide network of branches and are in
a better position to garner a large chunk of savings of
households. About 80% of equity investor households were the
first generation investors. Majority of equity owning households
has inadequate diversification of portfolio. About 23% of the
households have invested in one company, 38% in two
companies, while only about 5% in more than five companies.
These data indicate lack of experience in stock market operations.
Out of 12.1 million equity investor households, 84% have invested
in equity shares through the primary market, and 63% have
bought equity shares in the secondary market.

The ICM has proved a fertile ground for investors to make

money. As a matter of fact, a great public disenchantment with
paper assets has began during ‘80s. of late, the investor
preference seems to have shifted from equity to debt capital. Most
of the investors to have realized that debt unlike equity are
assumed to be risk free with assured return.2
2. G.V.Chalam : Investors Behavioral Pattern Of Investment And Their
Preferences, Southern Economist, Feb,03.
Investor lYoblems in ICM 186

It has been estimated that 16% of equity investor

households have invested only through the secondary market,
37% invested only through the primary market and 47% invested
through both the primary and secondary markets. Difficulties
faced by households in investing through secondary market-lack
of easy access to the market, inadequacy of the market
infrastructure, problems in locating the right intermediary, lack of
guidance and advice-inhibited the households from investing in
the secondary market. The number of broker related problems are
higher than the number of issuer related problems.

TABLE: 4.3 Motivating Factors to Invest

SL INVESTORS
NO
FACTORS PROFESSIONAL OCCATIONAL TOTAL
REGULAR

NO. % NO. % NO. % No. %

1 Dividends 8 16 12 24 20 40 40 27

2 Capital gain 24 56 22 44 12 24 60 40

3 Tax 2 4 3 6 3 6 8 5
incentive

4 Liquidity 10 20 9 18 5 10 24 16

5 Regular 2 4 4 8 10 20 18 12
income

As regard to the motivating factors of the investors the first

factor is capital gains which 40% of the total investors response
indicating, most of the investors are after capital gain followed by
 Chart: 4 .1 Investor Motivating Factors

70

60
Investor Problems in ICM

50

40

30

siuepodsa^ jo -on
20

10

0
Professional Regular Occational Total
■
Dividends 12 20 40
■
Capital gain 24 09
22 12
Tax incentive 2
Liquidity 10 24
Regular income 10 18
187
Investor Problems in ICM 188

dividends as their motive. Where as 16% are preferring liquidity

as their requirement and 12% are depending on regular income as
their objective to invest. Lastly only 5% are investing for tax
incentive benefit.

Regarding to the investor’s groups professional investor’s

priority goes to capital gain followed by liquidity 20%, dividends
16% and remaining negligible. Regular investors follow the suit
with 44% for capital gain, 24% dividends, 18% preferring liquidity.
But occasional investors prefer dividends with 40% followed by
capital gain 24% and regular income 20% and only 10% need
liquidity because they are long-term investors.

TABLE: 4-4 Investors Opinion on Influence of Fils in ICM

SL. RESPONDENTS
NO. YES % NO. %
INVESTORS
1 □ PROFESSIONALS 38 76 12 24

O REGULAR
35 70 15 30
□ OCCATIONAL
31 62 19 38

2 TOTAL 104 69 46 31

After the arrival of Foreign Institutional Investors in Indian

capital market. They became very active in trading. As they had
lot of funds, their transactions are also in large number of shares.
So, their trading pattern started influencing the indices.

The survey of investors reveals that 69% are agreeing that

Fils influence the market prices. Where as 31% are in opinion of
Investor Problems in ICM 189

Fils does not effect the share prices. In the groups of investor’s
professions 76%, regular group 70% and in occasional investors
62% are agreeing that the Fils trading pattern is effecting the
browses.

And 24% of professional, 30% of regular and 38% of

occasional investors are not agreeing to the opinion of that Fils
are not influencing the share market prices in India.

TABLE: 4-5 Investors Opinion on Influence of International

Stock Markets on ICM

SL.
NO. RESPONDENTS YES % NO. %

1 INVESTORS 36 72 14 28
□ PROFESSIONALS

□ REGULAR 32 64 18 36

□ OCCATIONAL
28 56 22 44

2 TOTAL 96 64 54 36

Regarding the relation between Indian capital market and

International capital markets, this survey reveals that 64% of
investors are in opinion of international markets are having impact
on our markets now a days i.e. after the arrival of Fils into India.
Where as 36% of the investors is in the opinion of the
international share markets did not influence the Indian capital
market. If we observe the sub groups, 72% of professionals, 64%
of regulars and 56% of occasional are in the same opinion of
international stock markets influence our market and remaining
are having the other opinion.
Investor I'roblems in ICM 190

4.2.1 SCMRD Survey: An all-India survey of household investors,

conducted by the Society for Capital Market Research and
Development (SCMRD) during April - June 2001, has thrown up
some interesting findings. These findings can be helpful in
understanding the recent changes in the household investor’s
general attitude towards participation in the equity market and
also their problems.
General Image: Table4 - 6 brings out the general image of the
stock market among household investors. It found that only 18.1%
of the respondents taken as a whole viewed the Indian stock
market as a good place for long-term investment and 44% of them
regarded it as a place where a majority of people are likely to lose
money. About one-third of the respondents regard the stock
market as suitable for knowledgeable investors only.
Perceptions about instruments: Table 4-7 shows how the
respondents perceived the various types of capital market
instruments. It brings out that only about 29% of the respondents
regarded IPOs as reasonably good long-term investment. The
corresponding percentage for shares purchased from the
secondary market was much higher at 39%. A decade ago, the
position was just the reverse. The IPOs have gone down in the
investor’s preference, while the attraction of shares purchased
from the secondary market has gone up.
The reforms of the secondary market have made it a safer
place but the new issue market is perceived as much riskier than
before. Mutual fund (MF) equity schemes were regarded as
reasonably good long-term investment by an average of 40% of
respondents, varying in the range of 31-44% among the income
classes. This percentage for MF equity schemes is not
Investor Problems in ICM 191

significantly higher than the percentage for equity shares held

directly
Investor’s expectations are unrealistically high and have
not gone down with the changing realities such as softening of
inflation, interest rates, excess capacity in the industry, reduction
of import duty etc.,3
Table 4-6 Income Class Wise distribution of Respondents who
had the particular Mental image about the Indian Stock Market
(% of respondents)

Mental Image Category Household Income (Rs.Per Month)

Upto 10001- 15001 20001- Over All

10000 15000 20000 25000 25000 classes
Good place for long-term 17.52 20 17.72 17.72 17.78 18.08
investment
A place where a majority 45.26 46.53 43.04 54.44 44.26
of people are likely to
loose money
A place suitable for 37.96 33.60 30.65 35.44 23.33 33.21
knowledgeable investors
only
A place for making quick 14.60 12.80 12.87 6.33 7.78 11.44
money
Any other-unclassified 1.46 4.00 6.93 8.89 4.44 4.61

All categories 100 100 100 100 100 100

No. of respondents 137 125 101 79 90 542

analyzed
Note: Actual column total of percentages exceeds 100 because several respondents
have ticked against more than one category.
Source: SCMRD Survey June 2001

3. Dr. A.S. Harish : Equity Markets-Issues & Challenges, Certified Financial

Analyst,Jan,03.
Investor ftoblcms in ICM 192

In other words, MF equity schemes do not command any

better image or rating among investors than direct equity holding
This means that investors are not impressed by the often-
repeated claim of mutual funds that they provide a superior return
due to professional management and diversification. However, MF
income schemes were regarded by every class of investors as
substantially better than equity shares directly held as also
Table 4-7 Income Class Wise Percentage of Respondents Who
Regarded the Particular Investment Category as “ Reasonably
Good Long Term Investments”
(% of respondents)

Investment Category Household Income (Rs. Per Month)

Upto 10001- 15001- 20001- Over All
10000 15000 20000 25000 25000 classes

IPOs 22.63 24 24.75 32.91 33.33 28.71

Shares Purchased In 41.61 35.2 31.68 31.65 44.44 39.14

the Market
MF Equity Schemes 33.58 44.8 41.58 31.65 36.67 40.35

MF Income Schemes 47.45 62.4 54.46 51.11 56.24

Index Funds 16.79 16 12.87 18.99 16.67 17.71

Deb. Of Non-Govt. 20.44 26.4 33.66 31.65 24.44 28.43

Co.s
All Respondents 100 100 100 100 100 100

Absolute Number Of 137 125 101 79 90 542

Respondents Analyzed
Source : SCMRD Survey June 2001

compared to MF equity schemes. Among capital market

instruments, the MF income schemes were regarded as the best.
Investment Intentions: Respondents intending to invest in new
share issues were much fewer than those intending to buy shares
Investor Problems in ICM 193

from the secondary market, the respective percentages being 16%

and 41% (Table 4- 8). It implies that there is a decline in the
Capital-raising role of the market. Household investors have
largely withdrawn from the new issue market. Earlier, during the
Table 4-8 Investment Intentions: Percentage of respondents
who intended to Invest in the various Investment categories
Investment Category Percent Of Respondents
Tax-saving bonds 52.21

Buying shares from the market 40.59

Tax free bonds of govt. cos. 29.52

Tax saving mutual fund schemes 25.46

( equity-linked saving schemes)
9% tax free RBI Bonds 22.51

Mutual fund income schemes 19.00

UTI US- 64 units 18.08

New share issues 16.05

Mutual fund equity schemes 14.76

Deb. Of non-govt. COs 8.67

Mutual fund balanced schemes 6.27

Gilt funds 5.54

Index funds 4.80

Total no. of respondents analyzed 542

Note: actual column total of percentages exceeds 100 because several

respondents have ticked against more than one category.
Source : SCMRD Survey June 2001
1980s and early 1990s, new issue subscription was the favorite
and the dominant form of household investor’s participation in the
Investor Problems in ICM 194

share market. However, since the mid-1990s, the raising of new

money from capital market through prospectus and rights issues
of shares and debentures has sharply declined.
More recently, household investors have increasingly taken
to secondary market purchases. Such purchases represent
transfers of existing securities from one set of households to
another without providing any finance to the companies.

TABLE: 4-9 Investor attribute ratings for investments

SL.
No. ATTRIBUTES POINTS RANKS
1 Equity 793 1
shares
2 Debentures 451 4
3 Company deposits 420 5
4 Mutual funds 610 2
5 LIC 585 3
6 Post-office 292 6
deposits

The above table gives the insight into the investor’s

preferences in selecting order in capita! market securities.
Investors are given a list of securities to give their preferences in
ranks for which proper weightage is given accordingly.

Observation indicates that equity shares are the most

favorable instruments of investors followed by mutual fund units
getting second rank which can be defined as indirect investment
in equity through mutual funds with relatively less risk than equity
shares.
Investing in LIC got third preference in investing
community, even though this avenue is not related to capital
Investor Problems in ICM 195

market, investors prefer in LIC as their choice. Debentures got

fourth rank of priority in investor’s preference as they are giving
only a regular rate of interest as return. Next it is company
deposits which got fifth rank of priority followed by post-office
deposits which are assumed as risk free investments with low rate
of returns.

4.3 Investors Concerns:

Table 4-8 indicates investors single most important concern or

worry about the stock market. The topmost concerns of investors
are: (a) too much price manipulation, and (b) too much price
volatility. Nearly 62% of the respondents indicated one or the
other of these two concerns. These concerns are inter-related
because price manipulation increases the market volatility.
The market is made by investors and not by intermediaries
and brokers. Investors interest is paramount and must be duly
safeguard by the laws and regulations. It is emphasized that SEBI
has been doing a commendable job and its performance so far
has much exceeded the expectations proceeding in right direction.
If SEBI also take care of the loopholes and gets rid of the hitches
in the operation, possibly it can turn out to be a better managed
show.
What we may still witness is a short-term ‘revival’. This
could happen because the returns on small savings have crashed
by more than 4% points in the recent years, the safe
governmental institutions have been increasingly on the default
track.4
4. Prithvi Haldea, : Revival In Offing?, Certified Financial Analyst,Oct,03.
 Table 4-10 Income Class Wise Analysis of Investors Most Important Concerns
Investor Problems in ICM

Household Income (Rs. Per month)

Investment Category
Upto 10001- 15001- 20001- Over All
10000 15000 20000 25000 25000 classes

d
00
o
o
eo

CO
CO
o

Too much volatility 31.39 32.80 34.70 26.67

080€

00
CO

CO
o
CO
r-~-

Too much price manipulation 23.36 31.65 38.98

Fraudulent promoters 19.71 20 18.81 13.92 11.11 17.40

00
00
o
o

Too much insider trading 10.22 11.88 16.46 8.89

6SZ
Lack of brokers reliability 10.22 6.40 10.89 5.56 8.70
o
00
00
CO

Any other-unclassified 5.10 2.40 1.99 1051

V-
o
o

Total 100 100 100 100 100

v—
h-
co
o
CM
lO

No. of respondents analysed 125 79 90

Source : SCMRD Survey June 2001
196
Investor Problems in 1CM 197

Table 4-11 Investor opinion on continuation in

capital market

SL. RESPONDANTS
NO. YES % NO. %

1 INVESTORS 44 88 6 12
□ PROFESSIONALS

□ REGULAR 41 82 9 18

□ OCCATIONAL
45 90 5 10

2 TOTAL 130 86 20 14

The above analysis gives the investors general opinion of

their stand about the staying in capital market or not. In the
professional group 88% of investors are claimed that they are
going to continue investment of their funds in capital market and
remaining 12% are in opinion to discontinue or would like to stay
away from the capital market.

In regular investor group it is 82% and 18%response for the

same and it is 90% and 10% in the occasional group of investors .
In total it is 86% of the investors are going to continue their
involvement in participating in capital market and the remaining
14% are decided to stay away from the capital market.
Investor Problems in ICM 198

TABLE: 4.12 Investor reaction to rise & fall in prices

SL INVESTORS
NO
Response PROFESSIONAL OCCATIONAL
REGULAR

NO. % NO. % NO. %

1 RISE
O SELL 16 32 22 44 28 36
□ BUY
21 42 16 32 6 12
□ HOLD
13 26 12 24 16 32
2 FALL
21 42 18 36 20 40
□ SELL

□ BUY 24 48 26 32 8 16

□ HOLD 5 10 6 12 22 44

Regarding the fluctuations in the shares market prices

investor's reactions are analyzed in the survey. The results
denote that when market in bull phase each group of investors are
reacting differently. In case of professional investors 42% are
claims to buy more shares, 32% like to sell and 26% claims to
hold the shares.

Regular investors responds 44% would like to sell when the

prices are raised 32% like to buy and only 24% like to hold the
stocks. Occasional investors 36% prefer to sell the shares, 32%
would like to stick to the shares for further gain and only 12 %
them like to buy further.
Investor Problems in ICM 199

On the other of bear market the behavior of investors, 48%

professional investors prefers to buy more shares and 42% willing
to sell to stop further loss and only 10% like to wait and see.

Regular investors 36% like to sell, 32% would like to buy

further and 12% are going to hold.

4.4 Investor Population

The Society for Capital Market Research and Development

carries out periodical surveys of household investors to estimate
the number of investors. Their first survey carried out in 1990
placed the total number of shareowners at 90-100 lakh. Their
second survey estimated the number of shareowners at around
140-150 lakh as of mid-1993. Their latest survey estimates the
number of shareowners at around 2 crore at 1997 end, after which
it remained stagnant upto the end of 1990s. The bulk of increase
in number of investors took place during 1991-94 and tapered off
thereafter. 49% of the shareowners at the end of 2000 had, for the
first time, entered the market before the end of 1990, 44% entered
during 1991-94, 6.3% during 1995-96 and 0.8% since 1997. The
survey attributes such tapering off to persistent depression in the
share market and investors bad experience with many
unscrupulous company promoters and management.

According to the SEBI- NCAER survey of Indian investors

conducted in early 1999, an estimated 12.8 million, or 7.6%, of all
Indian households representing 19 million individuals had directly
invested in equity shares and/or debentures as at the end of
financial year 1998-99. The investor households increased at a
compound growth rate of 22%, between 1985-86 and 1998-99.
Investor Problems in ICM 200

There was a sharp rise in investor households between 1991-92

and 1998-99 than between 1985-86 and 1991-92. About 35% of
investor households became investors in equity shares prior to
1991, while 47% of the investors entered the market between
1991 and 1995 and 17% after 1995. More than 156 million, or
92%, of all Indian households were non-investor households who
did not have any investments in equity/debentures. Low per capita
income, apprehension of loss of capital, and economic insecurity,
which are all inter-related factors, significantly influenced the
investment attitude of the households. The lack of awareness
about securities market and absence of a dependable
infrastructure and distribution network coupled with aversion to
risk inhibited non-investor households from investing in the
securities market.

An estimated 15 million, or nearly 9%, of all households

representing at least 23 million unit holders had invested in units
of mutual funds. Total investible resources of mutual funds
account for about 23% of market capitalization compared to more
than 50% in developed countries. The mutual funds have not yet
become an attractive investment avenue for the low and middle-
income groups.

Distribution of Investors: According to SEBI-NCAER survey, of the

48 million urban households, an estimated 8.8 million households,
or 18%, representing approximately 13million urban investors
owned equity shares and/or debentures. Of the 121 million rural
households, only about 4 million households, or 3%, representing
nearly 6 million rural investors owned these instruments. The rural
Investor Problems in ICM 201

investor households have increased at a compound growth rate of

30% compared to 19% for urban investor households.

The Society for Capital Market Research & Development

estimates that 15% of urban households and only 0.5-1.0% of
semi-urban and rural households own shares. It is estimated that
4% of all households own shares.

An indirect, but very authentic source of information about

distribution of investors is the database of beneficial accounts
with the depositories. By February 2002, there were 4 million
beneficial accounts with the National Securities Depository
Limited (NSDL). The state-wise distribution of beneficial accounts
with NSDL. As expected Maharastra and Gujarat accounted for
nearly 50% of total beneficial accounts.

4.5 INVESTOR PROBLEMS

It is beyond doubt that SEBI has not been clear about the
role it is supposed to play & has grossly failed in achieving the
mandated task. In spite of being very active in issuing frequent
guidelines & modifications, there has been trouble both in primary
as well as in secondary market. Certainly this cannot go for a very
long time. The choice of a chairman is not the only factor, which
can resolve the problem. The problem basically pertains to the
complete absence of clear guidelines, efficient systems & trained
manpower.5
5. Krishna Kumar Agrwal : New Issue Market Operations In India, Kanishka
Publications.
Investor Problems in ICM 202

The growth of the capital market during the last decade is a

tribute both to the entrepreneurial class availing of the funds
provided by this market on the one hand & to the vast investing
public supplying these funds on the other. While no doubt the
growth needs to be sustained, several problems, confronting this
market have tackled so those unscrupulous elements are
prevented from taking undue advantage of the growth. Several
major problems confronting in capital market are discussed below:

1. Investor grievances against the brokers and the companies :

Purchasing and selling shares in not a smooth operation in
the Indian capital market. In many occasions, the capital market
investors face problems, which may be the handwork of the
broker, the company or the system. Some of the common
complaints received from the small investors against the company
relate to non-receipt of the refund order, allotment orders
dividends, share certificate, annual reports, right forms and bonus
shares.
Similarly the grievances against the brokers relate to the
rate at which shares are bought and sold, non-furnishing of the
contract notes, selling securities with forged signatures, expiry of
the validity of the transfer deed etc.

2. Price rigging :
An important problem faced by the individual equity investor
in the new issue market is price rigging. A fair number of
promoters resort to an assortment of tricks to raise cheap and
easy cash from the market. Along with the collusion of the
selected brokers, the company try to jack up the script price a few
months before the issue by buying share of his own company in
Investor Problems in ICM 203

the stock exchange. If the investors are impressed by the rise in

the prices, they fall over on one another to invest in the
company’s share capital (e.g., M.S Shoes) by paying high
premium. But rarely has the price of the stock remained stable
after the issue has gone through.

3. Inadequate disclosure of information :

For investing in the equity shares, the investors should
have full information to analyze the risks and benefits associated
with the investments. In this regard it is noticed that the capital
market faces the problems of ‘Asymmetric information’ i.e., the
issuer knows the real risks and potentialities of the securities
being offered by the investor knows very little. In other occasion’s
information provided to the investors in the prospectus are mis­
leading and do not adhere to any prescribed norms. Some other
companies are making exaggerated claims about prospects to the
public in press conference and privately circulated brouchues.

4. Low level of liquidity :

According to report published in Economic times, as
far as market capitalization is concerned India lags behind Korea,
Singapore, Thailand & Malaysia. The annual trading in stock
market is also the lowest in relation to market capitalization. This
low level of liquidity has been identified as the single most
important problem of investment market.

5. Lack of adequate number of floating stocks :

In the capital market there is an acute shortage of
floating stocks in respect of which there is a good demand. This is
due to the facts those joint stock companies, financial institutions
Investor Problems in ICM 204

and other large investors who collectively own nearly three

quarters of the equity capital in the private sector do not offer
their concentrated trading in few shares in the market.

6. Hardship on account of non- receipt/ delay :

Investors have also been facing a lot of hardship in the new
issue market on account of non- receipt/delay in receipt of refund
order/allotment advice, share /debenture certificates after
transfer/ allotment/ endorsement/ conversion etc., non receipt or
delayed receipt of interest on fixed deposits & non payment of
fixed deposits on maturity, non receipt of rights form.

7. Delayed listing of securities :

It is usual for the company to state prominently on the
face of the prospectus that an application has been made to one
or more stock exchange for listing of shares or debentures offered
for subscription. The object underlying this statement is to give an
assurance to the investor that the shares / debentures will
become marketable and to induce him to subscribe for them on
that basis. Although there is no guarantee that the permission for
listing will be granted by the stock exchange authorities, the
public assumes that permission is likely to be granted and is there
by encourage to subscribe.

8. Full payment on application :

Many companies are asking for full amount on
application against the earlier practice of mostly calling 50
percent of the amount on application and the rest on allotment.
Investor Problems in ICM 205

9. Excessive premium :
There is a stream of rights issues from existing
companies at fat premiums. No doubt, the companies are
expected to provide justification for the issue price but it is
unlikely that all companies will have real convincing justification.
Asking for a flat premium and thus talking of spectacular book
values in the years to come, may well amount to fooling the
investors, the problem level of operational and marketing
efficiency not- withstanding.

10. Dud shares :

The increasing list of 'dud' shares that the new issue
market has given birth to-scrips in which lakhs of good money
have been ploughed in by unsuspecting investors and from which
hardly any returns can be expected in the near future. In the
ultimate analysis, the sufferers are the ordinary investors, who
may not have sold off when the scrip after listing was rising in the
hope that the price will continue to climb.

11. Safety net a none too viable option :

Several merchant bankers, who introducing issuers to
charge unrealistically high premiums and that resulted in the
failure of several right issues, misused free pricing of capital
issues. According to the study conducted by Economic Times
research bureau, “Investment," 84 out of 125 rights offer of shares
and convertible debentures at premiums after the introduction of
free pricing turned out to be a raw deal for the shareholders.
Investor Problems in ICM 206

12. Insider trading :

Insider training has been found, in the capital
market that is, at the time of public/right issue. The issues
involved here are interesting. Companies change accounting
period immediately before or after the public/right issue. A
management may conceal positive information for alternatively
come out with the most conservative or depressed figures,
deliberately ignoring the inherent strength of the enterprise and
the likely excellent future results, with the objective to keep the
right issue undersubscribed, thereby enabling the management or
those close to the management to corner the unsubscribe portion
at a highly subsidized price or to make a fast buck by selling the
same later on at an attractive price which will be there when the
price sensitive information is made public. All this is unfair and is
naturally at the cost of genuine investors.

13. Private placements and the capital markets :

There is yet another racket being played in the capital

market trying to part the unwary investor from his hard- earned
money and that is the private placement or promoters’ quota
racket. Even fairly good companies are said to be indulging in
these games. Here a promoter goes for bulk sale of promoter’s
equity, which he would otherwise have to raise from the public.
The promoter “places privately" with a banker or a broker known
to him the entire equity capital he wants to rise.

14. Over-subscription :
Multiple applications are increasing the burden on the
issuing company. In some instances over one crore applications
Investor Problems in ICM 207

were received. Neither the register nor the issuing company had
the infrastructure facilities to score and process the applications
and the cost of processing these was astronomical.

15. Free pricing- destroyed investor confidence :

To make matters worse, the new issues market left the
small investors bankrupt. Earlier, several small investors used to
apply only in the new issues, which used to offer shares at a price
much lower than its market rate because of control by the office of
controller of capital issues. The investors getting allotment in the
primary market issues were bound to gain inspite of any crash in
the share prices. However with the closing of office of CCI in May
1992, the government lost control over the issue prices of shares
and the firms were free to change any amount of premium, as they
feel fit. Taking advantage of the above situation, the companies
started charging exorbitantly high premium.
Table: 4- 13 Investor Problems in Primary Market

Problems 1 2 3 4 5 6 7 8
No
Professional 9 11 8 7 4 6 3 2
%
18 22 16 14 8 12 6 4
No
Regular 10 12 7 5 4 6 3 3
%
20 24 14 10 8 12 6 6
No
Occasional 7 9 10 7 4 5 4 4
%
14 18 20 14 8 10 8 8

The above-referred problems are

1. Delayed Refund Orders 5. Private Placement
2. Free Pricing of New issue 6. Fictitious Companies
3. Over Subscription 7. Projects Not Executed
4. Mis-Leading Information 8. Belayed Listing
Investor Problems in ICM 208

Regarding the investor’s problems in primary market in India

the survey reveals that according to investors which are more
affecting them. According to survey, professional investors
suffering mostly i.e. 22% for free pricing of new issues followed
by 18% delayed refunds, 16% over subscription, 14% mis-leading
information by companies.
Where as regular investor’s opinion goes like this 24% for
free pricing, 20% for delayed refund orders, 14% for mis-leading
information as their major problems. Occasional investors in their
opinion, 20% says over subscription, 18% free pricing, and 14%
delayed refunds and mis-leading information by companies.
About the other problems of private placement, fictitious
companies, projects not executed and delayed listing investors
assume them as minor compared to the above stated problems.

Table 4-14 Investor Problems in Secondary Market

Problems 1 2 3 4 5 6 7 8

No
Professional 5 6 5 7 9 5 6 7
%
10 12 10 14 18 10 12 14
No
Regular 6 7 4 5 8' 6 7 7
%
12 14 8 10 16 12 14 14
No
Occasional 8 6 3 3 9 5 8 9
%
16 12 6 6 18 10 16 18
The above-referred problems are

1. Liquidity 5. Scams
2. Dead Shares 6. Fll influence
3. Insider Trading 7. MFs under Performance
4. Less Float Stock 8.High Fluctuations in Prices
Investor Problems in ICM 209

Regarding the secondary market problems professional

investors opinion the major factors are 18% scams taking place
and after market crashes, 14% for less floating stock which
creates demand and high fluctuations in prices, followed by 12%
for dead shares which makes difficult to sell and mutual funds
under performance followed by less liquidity, insider trading, Fils
influence on the capital market share prices.

The regular and occasional investors view of secondary

market problem the scams and its effects is the major problem,
followed by illiqudity, mutual funds under performance, dead
shares, Fils, insider trading are regarded as major problems faced
by investors in the Indian capital market.

TABLE: 4-1S Investor opinion on Scams in ICM

INVESTORS
SL
NO
RESPONSE PROFFESIONAL REGULAR OCCATIONAL TOTAL

NO. % NO. % NO. % No. %

1 Brokers 18 36 18 36 20 40 56 38
Stock
2 exchange 5 10 6 12 8 16 19 12
officials
Market
3 rumors 14 28 15 30 11 22 40 26

4 Governme 8 16 10 20 9 18 27 18
nt
Authorities

5 Financial 5 10 1 2 2 4 8 6
institutions
Investor Problems in ICM 210

Regarding the investors opinion on what causes the

formation of scams, the survey reveals the investor perception as
38% are in the opinion of brokers are the main cause for scams,
next 265 says the market rumors are behind these scams followed
by 18% in opinion of government authorities negligence in
following rules and inspections procedures. And lastly with 6% in
the opinion that financial institutions trading pattern gives scope
to scams.
The sub groups of investor’s analysis reveals the same
pattern of opinions. All are in opinion of that brokers got first
accused followed by market rumors, government authorities, stock
exchange authorities and lastly financial institutions.

4.6 CONCLUTIONS

Indian investors in the beginning were investing in company

deposits, only in 70"s onwards they started investing in shares of
public issues and gradually entered into secondary market. There
after they faced not only many booms but also market crashes
and scams which are giving nightmares to them. A series of
events had taken place after 92, which made investors to lose
confidence on capital market.

SEBI the capital market regulator is coming up with required

different directives, guidelines and regulations periodically to
control different market participants, but it is unable to control
the market as every time a new problem is arising . SEBI is
confined to limited powers to exercise.
Investor Problems in ICM 211

SEBI-NCAER conducted a survey, which revealed the

investor behavior and perceptions towards capital markets. The
survey says that safety and liquidity are the prime considerations
in selecting assets. Investors rated bank FDs and gold as safest,
followed by LIC policies ranked as next best..

SCMRD survey brings out the investor perception that 29%

regarded IPOs as reasonably good long-term investment, and 39%
for secondary market. About the investor population it is
estimated around 100 lakhs in 1990 and increased to 150 lakhs in
’97 and latest survey estimates it around 2 crores of investors in
India at the end of 1997.

The Indian investor is facing many problems in capital

market. They had grievances against brokers and issue
companies, price rigging in stock markets, inadequate disclosure
of information, less floating stock, non-receipt of refund orders,
delay in listing, free pricing of shares, dead shares, insider
trading, over-subscription are some major problems coming
across by the common investor in Indian capital market today,
which have to be bring to the notice of SEBI to take initiatives to
curb them.