By Manish Bhandari, CEO, managing partner, Vallum Capital Advisors
The Indian Equity market is plagued with low interest by retail investors and it is good to take a note that government is clearly concerned about their apathy towards equity markets; the measure taken by Union budget 2012 to channelize savings in financial assets is a testimony to this. Currently, there are approx. 20 mn demat account and 38.5 mn folio of Mutual funds, suggesting 5% equities penetration in Indian households. With one of the largest pool of domestic savings, the equity penetration is abysmally low. Retirement money and pension money has not found its place in equity markets. I am a firm believer that equity markets provides unparallel opportunity to create wide spread prosperity in the country. However, the current measures by the government are insufficient looks like a baby step and do not appreciate the problem faced by retail investor while investing in equities. The key reason for Indian equity to remain underappreciated by domestic investors are : 1) Asset classes of choice ; Gold and Real estate has given superlative returns with much lower volatility in comparison to Equity markets over the last few years. 2) Retail investor has to rely on the kindness of the strangers (brokers, advisors) to scan profitable investing opportunity/stock while in case of the other two asset classes it can be evaluated by themselves. 3. Corporate governance issues in corporate India have been overweighing in minds of retail investor while investing in the domestic equities. This concentrated controlling shareholders coalition creates agency issues such as – reluctance to distribute cash flows, excessive investing in growth projects to have a larger empire, complex structures /tunneling, and voluminous yet opaque information – while other minority shareholders or independent board members are disinclined or unable to challenge them.
If we intend to foster equity culture in India, the above mentioned problems require a radical solution; providing an incentive to equity shareholders in form of Allowance of Corporate Equity (ACE), a form of allowing nominal interest on equity capital tax deductible. This should be coupled with a compulsory dividends pay out policy, around 25% or more by corporate. ACE, allows deduction on shareholder funds (long term bond rates of Govt. Securities) from corporate taxability. The compulsory payout of the profits will ensure that accounting profits are aligned with the cash generated by the company. To me, this is the best way to separate the wheat from the chaff in corporate India, encouraging long term investment in Indian equities and channelizing domestic saving in the productive financial assets.
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