Retail Investors Concerns In The Primary Market Finance Essay
The volume of trading in the securities market has been erroneously equated to its development. However 90% of the trading on the Capital market comes from few cities making the market is illiquid and hollow. The level of penetration of the capital market can be gauged by the participation by small or retail investors from every nook and the corner of the country. ‘Retail’ as the terms signifies is someone who buys in smaller quantities. An individual investor who purchases small amount of securities for himself or herself as opposed to institutional investor is called a retail investor. The term retail investor is synonymous with a small investor.
3.2 Definition of a Retail Investor: According to the Securities Exchange Board of India, a retail individual investor is defined as an investor who applies for bids for specified securities for a value not more than 2 lakh rupees in any issue. Earlier the investment limit was 50,000 which were later enhanced to 1lac and with the latest amendment in SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 the limit has been fixed at 2 lacs for investors to fall into retail investor category.
In case of a Further Public Offering “Retail Individual shareholder” means a shareholder of a listed issuer who as on the date fixed for the purpose of determining shareholders eligible for reservation in the retail category is one who is holding equity shares which on the basis of the closing price of the recognized stock exchange in which highest trading volumes in respect of the equity shares of the issuer were recorded as on the previous day, are worth 2lakh; and who applies for bids for specified securities for a value of not more than 2 lakh.
3.2.1 Analysis of the Increase in the investment limit: Presently there is a reservation of 35% of the net offer to the public in case of Public issue for retail investors. Individuals investing up to Rs. 2 Lakhs in an IPO would be treated as “retail investors”, and would be eligible for allocation under the retail quota.  The gradual increase in the investment limit for the retail category has been done due to many factors. Firstly, the reason for increasing the investment limit was done to tap the increasing appetite of the investors as most of the applications in the retail category were in the range of 80,000 to 1, 00,000.By the increase in the investment limit the investor can bid for more shares and increase their chances of allotment. Secondly with the rise in inflation there is change in the market valuation of shares. With the general increase in the offer price, an existing investment limit of 1 lac does not fetch many securities.
3.2.2 Another reason SEBI analysed for increasing the limit was that with an 1 lakh limit it is difficult to get the required number of retail application to fill up the retail category as in a large-sized public issue, for example, an issue size of 4,000 crore to 6,000 crore, the limit of 1 lakh would mean that the issue has to receive a minimum of 1.5 lakh to 2 lakh applications from retail investors to fill in the 35% allocation. However it has been noticed that in case of well oversubscribed issues that have been completed recently the number of applications received in the retail category was in the range of 35,000 to 70,000. So doubling the limit to 2 lakh would possibly make it easier for even large sized issues to get more investors in the retail category.
3.2.3 Considering that the reservation to retail investors remaining the same i.e. 35%, does this increase in the limit enable investors to get more allocations or not is a question as this may also increase competition with more money to be pumped in the retail category. In many cases multiple demat accounts were opened or applications are made in the names of relatives in order to improve their chances of getting allotment.  Allotment in an IPO is equated to wining a lottery as it was a considered a sure shot way of making listing gains. With the increase in the investment limit there might be a reduction in the number of demat accounts being opened.
3.2.4 The definition of a retail investor is based on an investment limit and not on the level of income. The difference between a retail investor and a high net worth individual also called as Non Institutional bidders(NIB’s) is also based on this investment limit. An individual who applies in a retail category in one issue may apply in the HNI category in another issue. An individual with a high net worth may invest in the retail category as there is an increased chance of getting allotment with 35% being reserved to retail while only 15% is reserved in the HNI category .As allotments are made on proportionate basis an investor who had bid for more number of shares will also be allotted more. High net worth individuals by virtue of their larger capacity to invest may eat into the retail category in this way.
3.2.5 For a majority of investors arranging for two lacs at the time of an IPO is not easy. Usually IPO’s hit the market when it is bullish. Applying for IPO’s that come almost at the same time will be difficult as the payment has to 100% at the time of bidding. Reducing the timelines between the issue closing and the allotment will ease out the problem of money getting blocked in an issue.
3.3 Difference between retail and an Institutional Investor:
Retail investors differ from other category of investors with respect to skills, needs, behaviour and awareness of their rights. Their potential to save and invest is more but they shy away from the market due to reasons like; lack of information, bad experiences due to scams and irregularities in the market etc. When compared to an Institutional Investor, a retail investor is not a trader. A retail investor invests his/her hard earned money with a financial goal of meeting her/his future needs in the time frame. But for the institutional investor it is business and they navigate between their investments very swiftly. An institutional investor can afford a huge loss on his investment but for retail investor it very difficult to absorb the loss. . Many a times they are cheated because they lack the financial literacy in interpreting the true essence of the financial statements and disclosures
3.3.1 When compared to an institutional investor retail investor has the following features.
They buy in smaller quantities so their portfolios are modest and they trade less frequently. They are averse to risk and their concerns about their investment in the capital market could range from internal factors like losing money because of a bad choice of investment and the lack of skills in monitoring investments to external factors price volatility and lack of protection from scams and frauds and manipulation by market operators.
They come last in the information chain owning to lobbying between institutional investors and the Company. Institutional Investors are privy to confidential information by virtue of their larger shareholding. Retail investors have lesser influence over corporate decisions than larger institutional investors.
3They have a lesser degree of investment acumen and rely on the advice of the broker. Their choice of an issue or an investment is mostly based on the recommendations of the broker. They often allow the broker to trade on their behalf by executing a Power of attroney in favour of the broker.As brokers get their commission on the volumes traded there have been cases of the brokers using investor money for intra day trading without the investors consent.
4A retail investor has three objectives while investing his money, namely safety of invested money, liquidity of invested money and return on investment.  They often invest in stocks overlooking the fundamentals of the company. Retail investors often look for short-term gains. However making quick gains requires the ability to time the stock market given the volatility in the stock prices.
Ideally, the price of a share should be proportional to the total capital and earnings prospects of the company. However, market frenzy results in shares being, generally, overpriced or underpriced. In a bullish market, investors often invest in overpriced shares because everyone else is buying. They become too optimistic and expect stock prices to continue rising. Conversely, in a bearish market, investors become pessimistic and tend to sell shares when they should be buying.
3.4 Small investor’s methodology of financial planning:
An attempt to list insecurities that an individual of small means may be facing will show that apart from the concern for health of self and the families the other major concerns are the financial contingencies arising in the event of retirement, disablement or unforeseen expenditure. The investment goals of a small investor can be purchase of house property, security for retirement, secure children’s education or to meet contingencies. In this context financial planning for retail investor helps in chalking out a roadmap through a planned investment in meeting such foreseeable and unforceable needs.
3.4.1 However studying the methodology of financial planning done by a retail investor on can say that, more often than not financial planning is misunderstood as tax planning by many investors. Generally investments are made, as an annual ritual before the close of the financial year, in tax saving avenues whether or not they suit the financial goals of the individuals. Once invested, Investors do not review the investments on a regular basis to look into the present value of their investments made by them. Due to lack of financial education and scientific management of their financial goals, small investors put their money in conventional avenues like fixed deposits or Gold and stay away from the capital market.
3.4.2 Mutual funds have always been regarded as a retail product as they have been designed to suit the requirements of salaried individuals who have been intimidated by the volatility of the markets and yet wanted to reap the returns from it. But considering that the investing community is heterogeneous with unique financial requirements, have the mutual fund been able to cater to their specific needs is worth debating.
3.4.3 Financial planning is not given a serious attention by many.  For most people, a specific event or need, such as receiving an inheritance, losing a job or having a baby, triggers the desire in an individual for seeking professional financial planning guidance. This advice is generally given to High Net worth Individuals by portfolio management service providers. Small investors usually take decisions based on advice given by the brokers, friends, colleagues or information provided by print and television media. Their financial planning is based on trial and error rather than by design. Lack of financial education for small investors often results in misallocating their funds, losing money or being burdened by administrative costs and eventually missing their investments goals. Hence the need for financial education cannot be overemphasized.
3.5 Investment experience with respect to IPO.
IPO’s have been regarded as a good entry point for retail investors as maximum amount of Demat accounts are opened at the time of the IPO. Traditionally, Indian investors have always entered the capital market through IPOs, because they were reasonably assured of an attractive price and returns in the form of listing gains. Investing through the primary market might be important considering that once the shares are listed for trading; they usually become dearer to invest in, if the company is reputed one. Hence an IPO gives them an opportunity of buying the shares of the company at a discounted price.  However it has been debated that the short term focus on listing gains has shifted the IPO process from a long term objective by creating a flippant attitude towards investment among retail investors. As IPOs are underpriced to ensure listing gains, the price may not always sustain in the long run.
Siphoning funds earmarked for IPO
In the last two decades, the IPO market has been witness to many scams whether it has been the unscrupulous greed of the promoters or the misallocation of the shares earmarked for retail investors by opening fictitious demats accounts.
Allotment in an IPO:
Pricing of the Issue:
Issue price is an important factor influencing the choice of an IPO for a retail investor.  n Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band
or any price above the floor price. This issue price is called "Cut off price". This is decided by the issuer and LM after considering the book and investors' appetite for the stock. SEBI (DIP) guidelines permit only retail individual investors to have an option of applying at cut off price.
Fixed Price Method: In this method of pricing the investment bank in consultation with the firm fixes the price at which an investor can subscribe to. This price could be at par value or at a premium above the par value.
Book Building Method: In this method of pricing a price band is fixed instead of a fixed price. The lowest price in the price band is called as ‘floor price’ and the highest price is called as ‘cap price’. An investor can subscribe at a price anywhere in the price band. An investor who wants to subscribe at any price can mention the ‘cut-off price’. This cut-off price is decided once the bid period is over. Once the issue is closed a book with descending order of prices is prepared. Cut-off price is the price at which the entire issue gets subscribed. This is the most commonly used method.
Whether or not the investor has made a profit on the investment depends on the difference in the price of the issue at the time of allotment and on its listing. Although the performance of the company and the secondary market will decide the prices after listing, Pricing of an IPO becomes relevant only till the date of listing. Many a time IPO issues are valued at steep prices compared to the peers, and making them more risky for retail investors.
If SEBI’s proposal of Retail investor d
9For retail investors the ipo is positioned as a lottery ticket.They have a short term view at the stock market. Institutional investors are much more able to form their own views of the market and what the trends are. But I would say that they also have the ability to weather a little bit of volatility, because their portfolios are large.
They even play on the volatility?
To a certain extent, yes. But the retail investor does not have either the time or the skills to be able to do that.
Now, with PSU disinvestments, do you expect retail to return?
Certainly, their participation in the market is there, but if you were to ask me, I would be very keen for the retail investors to come in (to the market) at this stage because some of them are still hesitant.
They have seen the problems of the last 15 months and they are choosing to continue to stay away.
And the next you know, in this whole wave of the markets moving up, they are missing out, and that is a lost opportunity. Right now, it is predominantly the institutional investors that are participating in this wealth creation.
I think the PSU disinvestments will certainly be a very positive development. It has been seen in the past that the maximum number of demat accounts in the country get opened at the time of IPOs, particularly the public sector undertaking IPOs.
As a country, we are then also compromising on what I call capital security.
You know when we say we should have energy security, physical security, we also need capital security. And if a large part of our household savings do not find their way, either directly or indirectly (through mutual funds and insurance) into the equity market, all that savings potential is not going into the capital formation of the country.
If that is the case, then why cannot an entire issue be reserved for the Indian public?
In fact, by SEBI rules, there is 50 per cent reservation for retail investors; that is, for applications less than Rs 1 lakh. But if you have a Rs 10,000-crore issue and the retail reservation is Rs 5,000 crore, you know retail investors are not hoarders of savings.
You think of your own behaviour (as an investor). Do you save for six months before the NTPC issue, saying I am going to buy NTPC so I create an FD, won't invest in mutual funds. I won't buy gold, I won't do any of this.
Now if you have a small issue and if you have to fill in Rs 300 crore of retail, of course it will succeed. You have a large issue and you want to fill up Rs 5,000 crore of retail, how can it be over-subscribed?
This difference is often not understood and we are very quick to label an issue saying retail response has not been good.
The impression is also that issues are priced for FIIs and not for retail, and you say that there should be capital security. So, why not, at least in PSUs, give the first right to the Indian public at a fair price?
Depositories collect the fee from depository participants which, in turn, charge the demat account holders.
At present, depository participants (banks, brokerages, registrars) collect an annual maintenance charge ranging from Rs 300-500 for each account, irrespective of whether or not there are any transactions during the year.
In addition, there is also a charge for every sell transaction, which could be either a flat fee, or linked to the value of the transaction. The regulator is of the view that current charges are high are deterring many retail investors from opening demat accounts.
Sebi's proposal comes at a time when the number of demat accounts are growing at a slow rate, and retail participation in the stock market is flagging.
According to the regulator, not having a demat account is an entry barrier in cases where a fixed deposit holder in a PSU bank may want to invest in the retail bond issue of a state-owned bank or financial institution, where semi-literate or illiterate workers in state-owned companies may receive shares of their employers in divestment programmes, and where a person who never trades in shares inherits shares through transmission.
Between the NSDL and CDSL, there are 1.7 crore demat accounts, with NSDL being the market leader. However, industry people say the number of unique account holders will be much lower. Besides a large number of accounts are inactive.
According to a report by the Swarup Committee, India has around 188 million investors holding financial assets. Of these, only 8 million investors participate in the debt and equity markets, either directly or indirectly through complex and risk-bearing products like mutual funds and market-linked insurance plans.
Finding the responsible party to resolve a
market transaction problem can be difficult
and may require approaching several
institutions. For instance, an investor who
does not receive a refund when a subscription
to a new issue is unfilled may ask for the
deficiency to be corrected by either the
banker to the issue, the registrar to the issue,
the issuer, or SEBI. Although the banker
holds the money, the registrar is responsible
for returning funds, and both act as agents
for the issuer. Retail investors may find that a
framework that protects investors’ assets in
another part of the market does not apply to
their transaction or to their problem. Too
often, when investors submit requests for
solving a problem, the answer they receive is,
“that is not my responsibility.”
Limited Financial Literacy of
Financial markets have become increasingly
more sophisticated. New and more
Qualitative Comparison of Indian Securities Markets 1992-2007
Regulation Information disclosures in Indian
Companies Act, Issue provisions in
Capital Issues (Control) Act, Trading
regulations in Securities Contract
Securities Contract Regulation Act is
administered by SEBI. SEBI has a
range of regulations covering various
aspects of the capital markets.
Regulator Central Government Departments SEBI
Capital Market Access by
Controlled by CCI Free access subject to compliance with
Disclosure and investor protection
guidelines of SEBI
Organization of exchanges Association of persons with limited or
Management of exchanges Boards made up of members and few
Demutualised format with management
that is independent of membership
Membership pattern of
Dominated by individuals who inherit
Increased share of institutional
members. Membership on the basis of
capital adequacy requirements.
Pricing of Issues Determined by CCI Determined by the market forces. Book
building process with red herring
Issue Process Limited institutional participation. Retail
distribution by brokers and merchant
Separate subscriptions by institutional
and retail investors
Trading mechanism Floor based open outcry system Screen based electronic open order
Trading hours 11 am to 2pm 10 am to 3.30 pm
Execution of trades Through market makers On-line anonymous execution
Concentration of trades BSE and Mumbai Wider geographical spread of trading.
Dominated by NSE terminals
Access to markets Through broker offices and telephone Internet Access to broker networks
Price information Electronic display within exchanges.
End of day prices published
Real time dissemination of prices through
multiple electronic and media channels
Brokerage Included and grossed into price (gala).
Estimated at 3.5% -4%
Separately disclosed. Estimated at
0.50% for retail 0.10% for institutional
Settlement of trades Batch settlement. 15-day account
periods. Settlement cycle completion in
Rolling Settlement. T+2 cycles
Custody of Securities Physical holding in lockers Electronic holding with custodians
Trade confirmation and payin/
Bilateral end-of-batch process. Several
trades fell into 'objections' (vanda).
Straight through processing and electronic
confirmation of pay-in and pay-out.
Payment mechanism Cheques Electronic Fund Transfer
Delivery of securities Physical form Demat form
Transfer of ownership in books Executed through physical transfer of
documents, along with transfer deeds.
Executed through demat accounts
Counter party risk High. Incidence of bad delivery and
fraudulent transfer high.
Eliminated through Clearing corporation
and settlement guarantee funds.
Derivatives Forward trading in indigenous form,
known as badla. Counter party risk high
due to low levels of transparency.
Futures and options in securities and
index. Clearing corporation eliminated
Risk Management Ad hoc margining system imposed by
VaR based margins computed using risk
management systems, multiple times of
In a haste to make a quick buck from the market, retail investors tend to overlook the fundamentals of the company they're planning to invest in. Some investors buy shares without sparing time to gather the basic information about the company, most importantly the product or service that the company sells and the probable future for that business.
"Retail investors get carried away by a management's overoptimistic speeches, tentative expansion plans and are always biased towards short-term play, never wanting to miss the current surge in the price of the stock," says Hemindra Hazari, head of research, Karvy Stock Broking.
Investors should look at companies that have consistently delivered earnings growth and good corporate governance. Never invest in a firm without understanding the dynamics of the business.
Cheap, yet expensive
A successful investor looks for bargain stocks-the ones which are available for prices lower than their worth and have a strong growth potential. Newbie investors often misinterpret this golden strategy as buying 'cheap' stocks for high percentage gains.
Assume that you can buy a dozen fresh eggs for Rs 36, while rotten eggs are available for only Rs 3 per dozen. If you have Rs 3 in your wallet, will you buy one fresh egg or a dozen rotten ones?
"Retail investors look at the share prices of the stocks. They tend to buy cheap stocks, which might not be very valuable," says Sarabjit Kour Nangra, vicepresident of research, Angel Broking.
Returns from your investment in shares do not depend on the number of shares, but the performance of the company. You will have a higher chance of making a profit if you buy just one share of a blue-chip company rather than buying thousands of penny stocks.
Also, when you stay invested in a stock for longer than one year, the taxman won't come knocking for his share of the profit. Income from stocks held for more than one year is a long-term capital gain, which does not attract any tax. For investments less than one year, you will have to pay short-term capital gains.
Ignoring a Portfolio
You must have heard stories about investors who bought a company's shares, forgot about them and after a decade or so discovered that they had returned a fortune. While this is an example of how long-term investment is profitable, it's not the best.
If you are among those who think that long-term investment means buying shares at low prices and forgetting about them, you are taking a huge risk. The economic environment and market scenario are very dynamic. Apart from global and local policies and macroeconomic factors, there can also be changes in company strategies or management.
An investor should review his portfolio at regular intervals. If the outlook of a company improves, or at least remains stable, he should buy or hold the stock. When the assumptions under which he bought the shares no longer hold true, it might be time to offload them.
Unwillingness to Book Losses
Investors eagerly cash out small profits on retail investments, but they are often unwilling to book losses on stocks that are sinking. Even when stock prices keep declining, they continue to hold on in the hope that the stock will bounce back and turn profitable sometime. This often results in bigger losses for the investor.
When prices decline, some investors buy more shares in an attempt to reduce the average cost of their stock portfolio. Buying on dips is recommended, but only when the decline is due to a temporary setback and growth prospects remain positive.
"Retail investors should stop averaging every second stock unless they have a thorough understanding of the company. They should try to explore of the reasons for its underperformance. Averaging is not a tool to minimise losses but should be treated as a maximisation instrument," says Hazari.
When investing in a stock, you should also set a stop-loss instruction for it. When the price of a stock falls to the stop-loss level, the broker will sell them. If you set a stop-loss order at 10% below your purchasing cost, your loss will be limited to 10%.
Entry at Peaks, Exits at Lows
Thanks to cheap bulk messages, you might have received SMSes tipping you about a 'golden opportunity' to earn huge profits. If you have acted on any of these tips, you probably have lost some money. If you haven't, you've done well to stay away from such unsolicited mails and messages.
Even solicited tips can do you harm. If you try to find trading tips on the Internet, you will get a large number of websites and blogs that offer you free advice. Don't take the advice on these sites as gospel. It's equally dangerous to buy shares because a friend told you that "its price is going to double in six months". Stock tips by analysts published in newspapers or aired on television should also be subjected to scrutiny.
Always perform due diligence before placing an order with your broker.