AN INQUIRY INTO THE INVESTORS' PREFERENCES IN CAPITAL MARKET INVESTMENT WITH SPECIAL REFERENCE TO TIRUCHIRAPPALLI – DISTRICT
Dissertation submitted to the BHARATHIDASAN UNIVERSITY, TIRUCHIRAPPALLI in partial fulfillment of the requirements for the award of the degree of
DOCTOR OF PHILOSOPHY IN COMMERCE
By J. MICHAEL SAMMANASU (Ref.No.4187 / PhD / Comm / PT / April’03)
Under the guidance of Dr.G.JOHN, M.Com., B.Ed., M.Phil., PGDCA., Ph.D.,
PG AND RESEARCH DEPARTMENT OF COMMERCE St. JOSEPH’S COLLEGE (Autonomous) Nationally Re-accredited with A+ Grade College with Potential for Excellence TIRUCHIRAPPALLI - 620 002, INDIA
APRIL 2010
Department of Commerce Dr. G. John St. Joseph’s College M.Com., B.Ed., M.Phil., Tiruchirappalli – 620 002. PGDCA., Ph.D., Ph : 0431 – 42266391 (O) Reader in Commerce E-mail:[email protected]
CERTIFICATE
This is to certify that the thesis entitled “AN INQUIRY INTO THE
INVESTORS’ PREFERENCES IN CAPITAL MARKET INVESTMENT
WITH SPECIAL REFERENCE TO TIRUCHIRAPPALLI – DISTRICT” submitted by J. MICHAEL SAMMANASU, M.B.A., M.Com., M.Ed., M.Phil., is a bonafide record of research work done by him under my guidance in the
Department of Commerce, St. Joseph’s College (Autonomous), Tiruchirappalli and that the thesis has not previously formed the basis for the award of any
Degree, Diploma, Associateship, Fellowship or any other similar titles. The thesis represents the independent work on the part of the candidate.
Tiruchirappalli – 2 Dr. G. JOHN April 25, 2010 Research Supervisor
DECLARATION
I hereby declare that the work presented in the thesis entitled
“AN INQUIRY INTO THE INVESTORS’ PREFERENCES IN CAPITAL
MARKET INVESTMENT WITH SPECIAL REFERENCE TO
TIRUCHIRAPPALLI – DISTRICT” has been originally carried out by me independently under the guidance and supervision of Dr. G. John, Reader in
Commerce, St. Joseph’s College, Tiruchirappalli. This work has not been submitted either in whole or in part for any other Degree or Diploma at any
University or Research institute.
Tiruchirappalli – 2 J. MICHAEL SAMMANASU April 25, 2010
ACKNOWLEDGEMENT
This thesis work has attained the concluding stage after the itinerant of a long distance. As it is true even this voyage had a proper boulevard to pass through. Various supervisors and guides laid this boulevard for the safe journey. It is the time now to recall each and every one for acknowledging their painful efforts and valuable guidelines.
It is true that a research work cannot reach the excellence as expected, without the proper supervision. I express my profound gratitude to my
Research Guide, Dr. G. John, M.Com., B.Ed., M.Phil., PGDCA., Ph.D.,
Department of Commerce, St. Joseph’s College, Tiruchirappalli – 2 for his guidance and valuable advice throughout the study.
I wish to express my unconditional gratitude to
Rev. Dr.R.Rajarathinam, Principal, St Joseph’s College, Tiruchirappalli for lengthening his support at any required time.
I wish to express my deep sense of gratitude and indebtedness to
Rev. Dr. Antony A. Pappuraj SJ, M.Com., M.Phil., Ph.D., Director,
St. Joseph’s Institute of Management, St. Joseph’s College, Tiruchirappalli – 2 for his valuable advice and for the fine tuning of the thesis.
I also thank all the staff members in the Department of Management
Studies (JIM) for their help in completing this work.
I specially express my sincere thanks to the Doctoral Committee members Rev. Dr. (Sr) Sarguna Mary, Principal, Holy Cross College and
Dr. D. Joseph Anbarasu, Reader in Commerce, Bishop Heber College for their co-operation and support all through my Ph.D. work.
I convey my thanks to Dr. Stephen Vincent G, M.Sc., M.Phil.,
PGDBA., PGDCA., Ph.D., Reader in Statistics, St. Joseph’s College, for his efficient application of SPSS tools. I also thank Dr. Shanmuga Vadivel,
M.Sc., M.Phil., Ph.D., Reader in Statistics, for his efficient work in preparing and finalising the Interview Schedule. My special thanks are due to
Rev. Fr. M. Arockia Samy SJ, my Mentor for his constant encouragement and the blessings. I also remember my parents S.M. Joseph, J. Packiam and my family members for their prayers and wishes.
I express my gratitude to my wife M. Josephine Masilla Crecentia and to my sons M. Jerald Joel Ambrose, M. Johan Kingsly for their affectionate encouragement.
I am grateful to the officials of the Securities and Exchange Board of
India, Regional Office, Chennai and Coimbatore Stock exchange for the valuable information and advice provided to me.
Similarly I thank the Share brokers and mutual funds agents for providing me with the lists of investors and for their suggestions.
I am deeply indebted to the investors for their co-operation and their willingness to provide me with useful data required for the study.
Michael Sammanasu J
CONTENTS
CHAPTER PAGE TITLE NO. NO.
I METHODOLOGY OF THE STUDY 1
II REVIEW OF LITERATURE 10
III PROFILE OF THE STUDY AREA AND TE 79 SAMPLE OF INVESTORS
IV ANALYSIS AND INTERPRETATION OF 99 DATA
V SUMMARY OF FINDINGS, CONCLUSION 241 AND SUGGESTIONS
BIBLIOGRAPHY
QUESTIONNAIRE
LIST OF TABLES
TABLE PAGE TITLE NO. NO. 2.1 Market Participants in Securities Markets 32 2.2 Dependence on Securities Market 37 2.3 Distribution of Beneficial Accounts at NSDL 39 2.4 Resource mobilisation from the primary market 45 2.5 Unit holding pattern of mutual funds Industry 50 2.6 Assets under management of MFs 51 2.7 Secondary Market – Select Indicators 52 2.8 Growth and distribution of turnover on stock exchanges 58 2.9 Growth of dematerialization 59 2.11 Securities transaction tax 63 2.13 Regulations, Guidelines and Schemes issued by SEBI 69 3.1 Personal Profile of Respondents 92 3.2 Sex 93 3.3 Marital Status 94 3.4 Education 95 3.5 Occupation 96 3.6 Annual Income 97 3.7 Annual Savings 98 4.1.01 The Annual Savings of Investors in Financial Assets 100 4.1.02 Analysis of variance the annual savings of Investors in 100 financial assets 4.1.03 Average Annual Savings in Financial Assets 101 4.1.04 Average Annual Savings in Capital Market Instruments 104 4.1.4A Comparative Assessment of income and savings 106 4.1.05 Distribution of Investors According to Experience in the 108 Capital Market 4.1.06 Distribution of Investors Actively Investing in Shares 110 4.1.07 Distribution of Investors Actively Investing in Debentures 112 4.1.08 Distribution of Investors Actively Investing in Mutual Fund 113 Schemes
4.1.09 Level of Diversification in Shares 114 4.1.10 Level of Diversification in Debentures 116 4.1.11 Level of Diversification in Mutual Fund Schemes 117 4.1.12 Size of Investment in Shares 119 4.1.13 Size of Investment in Debentures 120 4.1.14 Size of Investment in Mutual Fund Schemes 121 4.1.15 Opinion of Investors about Future Investment in Capital 122 Market 4.1.16 Investment options preferred in Future 125 4.1.17 Factors Hindering capital market Investment 126 4.1.18 Rank Correlation Coefficient of Factors Hindering Capital 127 Market Investment 4.1.19 Mode of Investment Preferred by Investors 128 4.1.20 Investment Criteria in the Primary Market 131 4.1.21 Rank Correlation Coefficient of Investment Criteria in the 133 Primary Market 4.1.22 Investment Criteria in the Secondary Market 135 4.1.23 Rank Correlation Coefficient of Investment Criteria in the 138 Secondary Market 4.1.24 Motives Behind Capital Market Investment 139 4.1.25 Factors Considered before Investing in Company Shares 141 4.1.26 Rank Correlation Coefficient of Factors Considered for 142 Investing in Company Shares 4.1.27 Method of Secondary Market Operations Preferred by 144 Investors 4.1.28 Factors Influencing Choice of Mutual Fund Scheme 147 4.1.29 Type of Mutual Fund Schemes Preferred by Investors 150 4.2.01 Education wise Distribution of Investors According to 153 Period of Active Investment in Shares 4.2.02 Education wise Distribution of Investors According to Level 155 of Diversification in Shares 4.2.03 Education wise Distribution of Invest According to Size of 157 Investment in Shares 4.2.04 Education wise Distribution of Investors According to their 158 Future Investment Plan
4.2.05 Education wise Distribution of Future Investment Options 159 4.2.06 Education wise Distribution of Factors Hindering Investment 160 in Capital Market 4.2.07 Education wise Distribution of Investors According to Mode 161 of Investment 4.2.08 Education wise Distribution of Investment Criteria in the 163 Primary Market 4.2.09 Education wise Distribution of Investment Criteria in the 164 Secondary Market 4.2.10 Education wise Distribution of Investment Motives 166 4.2.11 Education wise Distribution of Factors Considered for 167 Investment in Shares 4.2.12 Education wise distribution of investors according to their 170 mode of operations in the secondary market 4.2.13 Occupation wise Distribution of Investors According to 171 Period of Investment in Shares 4.2.14 Occupation wise Distribution of Investors According to 173 Level of Diversification in Shares 4.2.15 Occupation wise Distribution of Investors According to Size 174 of Investment in Shares 4.2.16 Occupation wise Distribution of Investors According to their 176 Future Investment Plan 4.2.17 Occupation wise Distribution of Future Investment Option 177 of Investors 4.2.18 Occupation wise Distribution of Factors Investment in 178 Capital Market 4.2.19 Occupation wise Distribution of Investors According to 179 Mode of Investment 4.2.20 Occupation wise Distribution of Investment Criteria in the 180 Primary Market 4.2.21 Occupation wise Distribution of Investment Criteria in the 182 Secondary Market 4.2.22 Occupation wise Distribution of Investment Motives 184 4.2.23 Occupation wise Distribution of Factors Considered for 185 Investment in Shares 4.2.24 Occupation wise Distribution of Investors According to 187 Mode of Operation in Secondary Market
4.2.25 Income wise Distribution of Investors According to Period 189 of Active Investment in Shares 4.2.26 Income wise Distribution of Investors According to the 190 Level of Diversification in Shares 4.2.27 Income wise Distribution of Investors According to the Size 192 of Investment in Shares 4.2.28 Income wise Distribution of Investors According to their 193 Future Investment plan 4.2.29 Income wise Distribution of Future Investment Option of 194 Investors 4.2.30 Income wise Distribution of Factors Hindering Investment in 195 Capital Market 4.2.31 Income wise Distribution of Investors According to Mode of 196 Investment 4.2.32 Income wise Distribution of Investment Criteria in the 198 Primary Market 4.2.33 Income wise Distribution of Investment Criteria in the 200 Secondary Market 4.2.34 Income wise Distribution of Investment Motives 201 4.2.35 Income wise Distribution of Factors Considered for 202 Investing in Shares 4.2.36 Income wise Distribution of Investors According to Mode of 203 Operation in Secondary Market 4.2.37 Market Experience Distribution of Investors According to 204 Period of Active Investment in Shares 4.2.38 Market Experience Distribution of Investors According to 206 Level of Diversification in Shares 4.2.39 Market Experience wise Distribution of Investors According 207 to Size of Investment in Shares 4.2.40 Market Experience wise Distribution of Investors According 208 to Future Investment Plan 4.2.41 Market Experience wise Distribution of Future Investment 209 Option of Investors 4.2.42 Market Experience wise Distribution of Factors Hindering 210 Investment in Capital Market 4.2.43 Market Experience wise Distribution of Investors According 211 to Mode of Investment
4.2.44 Market Experience Distribution of Investment Criteria in the 213 Primary Market 4.2.45 Market Experience wise Distribution of Investment Criteria 215 in the Secondary Market 4.2.46 Market Experience wise Distribution of Investment Motives 216 4.2.47 Market Experience wise Distribution of Factors Considered 217 for Investment in Shares 4.2.48 Market Experience wise Distribution of Investors According 218 to Mode of Operation in secondary Market 4.3.01 Overall Experience of Investors in Capital Market 220 Investment 4.3.02 Education wise distribution of Investors According to 222 Overall Experience in Capital Market Investment 4.3.03 Occupation wise Distribution of Investors According to 225 Overall Experience in Capital Market Investment 4.3.04 Income wise Distribution of Investors According to Overall 227 Experience in Capital Market Investment 4.3.05 Market Experience wise Distribution of Investors According 230 to overall performance in Capital Market Investment 4.3.06 Suggestions of Investors for Improving Capital Market 232 Operations 4.3.07 Options for moving out of capital market investment 235 4.3.08 Reasons for moving out of capital market investment 238
LIST OF GRAPHS
GRAPH PAGE TITLE NO. NO. 2.1 The movement of S&P CNX Nifty 56 2.2 India’s stock markets: scaling new highs 73 4.1.01 Comparative assessment of income and savings 107 4.1.02 Investment criteria in the primary market 134 4.1.03 Investment criteria in the secondary market 137 4.1.04 Motives behind capital market investment 140 4.1.05 Rank correlation coefficient of factors considered for 143 investing in company shares 4.1.06 Factors influencing choice of mutual fund scheme 149 4.3.01 Occupation wise distribution of investors according to 226 overall experience in capital market investment 4.3.02 Income wise distribution of investors according to overall 229 experience in capital market investment 4.3.03 Suggestions of investors for improving capital market 234 operations 4.3.04 Reasons for moving out of capital market investment 240
LIST OF CHARTS
CHART PAGE TITLE NO. NO. 2.1 Trading network 61 2.2 Clearing and settle process 66 2.3 India’s GDP per capital steadily rising 74 2.4 Assets under management of mutual funds have soared 77 4.1.01 Average annual savings in financial assets 103 4.1.02 Average annual savings in capital market instruments 105 4.1.03 Opinion of investors about future investment in capital 123 market 4.1.04 Mode of investment preferred by investors 129 4.1.05 Method of secondary market operations preferred by 146 investors 4.2.06 Type of mutual fund schemes preferred by investors 151 4.3.01 Overall experience of investors in capital market investment 221 4.3.02 Options for moving out of capital market investment 237
LIST OF MAP
MAP PAGE TITLE NO. NO. 3.1 TRICHIRAPPALLI DISTRCT 91
I
METHODOLOGY OF THE STUDY
METHODOLOGY OF THE STUDY
1.1 Introduction The economic development of a country depends mainly on the sustained growth of the industrial and service sectors. It requires vast resources and a major part of which is to be mobilised from domestic savings. In India, household sector is the major contributor to domestic savings. But savings of the household sector are held mainly in physical assets and conventional forms of financial assets like currency, bank deposits, post office savings bank, chit funds, and insurance funds and provident and pension funds. If those savings can be channelised into the business sector it will facilitate the development of the country through the development of industrial and service sectors. This calls for the existence of an efficient capital market. The capital market is a agency or conduit through which small and scattered savings of investors are directed towards productive activities of business enterprises. With this end in view, capital market instruments like share, debentures and mutual funds are offered to investors. Investors can select the suitable avenue according to their desired level of risk, return and liquidity. Investment in securities of capital market can be made through primary market or secondary market. In the primary market corporate entities offer new securities directly to the investors and mobilise the funds needed for their development. The secondary market provides continuous liquidity to the securities by trading them in the stock exchanges. The investors can buy or sell the existing securities at the prevailing market prices in the stock exchange through stockbrokers. Indian capital market is one of the oldest and largest capital markets in the world. The first instance of organized trading in securities in India started with the trading of securities of East India Company in the 19th century. The establishment of Bombay Stock Exchange, the first in India, as early as in 1875 gave momentum to the capital market operations in the country. The rapid industrialisation in the country since independence has given vitality to the capital market. The market reforms initiated as part of liberalization measures in the Nineties like dematerialisation of securities, screen based trading and rolling settlement and establishment of Securities and Exchange Board of India, National Stock Exchange and Depositories added vigor to the growth of Indian Capital market. At present there are 24 stock exchanges in the country.
1.2 Need for the Study The individual investors numbering millions constitute the backbone of Indian capital market. Their active involvement in the capital market helps the corporate sector to mobilise sufficient funds required for development and ensures continuous liquidity in the capital market. This necessitates ensuring confidence in the minds of individual investors about capital market investment. But the individual investors are experiencing a number of difficulties from different market participants. Their widespread geographical distribution, unorganised nature and lack of awareness about capital market investment have instigated unscrupulous market participants to exploit them. It is believed that India’s economic transformation is irreversible. Hence, a greater efficiency in financial intermediation is required to support investment and growth, but this will require structural changes in India’s Public finance and dismantling of unwieldy regulations. Other wise it will adversely affect the mobilization of resources through capital market by corporate bodies, which may ultimately affect the economic development of the country. Therefore it is felt necessary to study the difficulties encountered by investors and examine the growth of Capital market in the context of liberalization, analyse the supply (bonds, equities, and derivatives) and demand conditions of household and institutional investors.
2 1.3 Overall objective of the study The overall objective of the study is to review the growth of capital market in India, particularly in the context of liberalization measures and the various factors influencing the preferences of investors in the Capital Market Instruments in Tiruchirappalli District.
1.4 Specific objectives of the study The following are the specific objectives of the study: 1. To Analyse the level and pattern, diversification and size of capital market investment. 2. To identify the mode of investment preferred by investors and the factors influencing the choice of mutual fund schemes. 3. To study the overall experience of investors in the capital market investment. 4. To find out the options of investors from moving out of capital market investment and the reason for it and 5. To Make recommendations/suggestions for improving the attractiveness of capital market investment.
1.5 Hypotheses of the study The following hypotheses have been formulated on the basis of objectives of the study. 1. There is no significant regional difference in the saving pattern of investors in financial assets. 2. There is no significant regional difference in level of diversification in shares. 3. There is no significant regional difference in size or the amount of investment in shares.
3 4. Educational qualification, Occupational status, Annual income and the Period of market experience have a significant influence on the level of diversification in shares. 5. Educational qualification, Occupational status, Annual income and the Period of market experience have a significant influence on the size of investment in shares.
1.6 Methodology The study is conducted in two phases. In the first stage, secondary data from the publications of Government of India, Government of Tamil Nadu, Central Statistical Organisation, Reserve Bank of India, Stock Exchanges, Securities and Exchange Board of India and from relevant reports, periodicals and news papers are collected and analysed. In the second stage, primary data have been collected from individual investors through a sample survey. A sample of 300 individual investors from Trichy has been selected for this purpose. A structured interview schedule was used to elicit information on the level and pattern of savings and investment in capital market instruments of investors, mode of investment preferred by investors, and the factors influencing the choice of mutual fund schemes of investors. Discussions have also been held with share brokers, portfolio managers, officials of SEBI and officials of stock exchanges to get an insight into the problems of capital market investment.
1.7 Survey Design For the purpose of the study Tiruchirappalli district is divided into three geographical regions- the Southern region, the Central region, and the Northern region. The southern region consists of the following places Manikandam, Ramji Nagar, Enamam Kolathur, Navalpattu, and Manaparai. The central region consists of the following places in Trichy city like Central bus stand, Puthur, Thillai Nagar, Chathiram bus stand, Srirangam and BHEL. The northen 4 region consists of places like Tolgate, Samayapuram, Lalgudi, Jeeyapuram, Musiri, and Thottyam. A sample of 100 investors have been collected from each of the sample region on simple random basis from the list of investors supplied by the broker firms and mutual fund agents. In Tiruchirappalli an official estimate of the numbers of investors, their geographical distribution and their investment characteristics not available. Hence the assistance of share broking firms and mutual fund agents has been sought for identifying the investors. There are 115 sub brokers of National stock exchange and 7 sub brokers of Bombay stock exchange. Majority of them have membership in National Stock exchange. Some of them have membership in Inter connected Stock Exchange and Chennai Stock Exchange and Coimbatore Stock Exchange. These member brokers together with their business house associates and franchises have opened a wide net work of business houses. They cover a wide geographical area of the district. Some of the member firms and mutual agents were sought to provide the total members of their client investors in the district. A total of 154784 investors’ names and addresses were been received. This include 90280 investors from central region, 33754 investors from southern region and 30750 from the northern region. Out of these a sample of 100 investors were been selected on a simple random from each region by the list supplied by broker firms and mutual fund agent and the investors visiting share broking centres at Tiruchirappalli.
1.8 Reference Period Secondary data used for the study have been collected for a period of 15 years from 1990-91 to 2005-2006. Primary data relating to income, savings, savings in financial assets etc. of investors were collected for a period of 6 months from 12 August 2008 to January 2009.
5 1.9 Concepts and Definitions The main concepts and definitions used in the study are listed below.
1. Capital Market Capital Market is a market for long term financial instruments consisting of shares, debentures and mutual fund schemes. It covers both primary market and secondary market.
2. Primary Market Primary market is that segment of capital market where new financial instruments like shares, debentures and mutual fund schemes are offered to investors for cash which are issued at par, at premium or at discount. It includes initial public offering, subsequent issues and private placement.
3. Private Placement It is a method of primary market operations in which new financial instruments are offered directly to investors on a private basis without complying with all legal formalities including the issue of prospectus.
4. Secondary Market Secondary market is that segment of capital market where existing instruments are listed in the stock exchanges, which facilitate buying and selling of the securities. It includes any off-market transactions entered through a stockbroker.
5. Security The term security means a capital market instrument, which may be a share, debentures or mutual fund scheme.
6 6. Share A share is a form of capital market instrument, which evidences fractional ownership of a corporate body and includes both equity shares and preference shares held in physical or electronic form.
7. Debenture It is a credit instrument issued by a corporate body including a public sector undertaking whether convertible into shares or not and which carries a fixed rate of interest.
8. Mutual fund scheme A mutual fund scheme is a capital market instrument, issued by a mutual fund organization, whether open-ended or close-ended and includes any type of scheme.
9. Individual Investor Any individual employing his funds for personal investment in the capital market with the objective of receiving future benefits and who takes the financial decisions of his own. It includes a person who owns any capital market instrument through inheritance.
1.10 Pilot study and finalistion of interview schedule The interview schedule prepared was tested through a pilot study covering a sample of 30 investors in Trichirappalli district. It was finalized after making necessary modifications based on the pilot study results and used for the field survey.
7 1.11 Collection of Data The primary data for the purpose of the study were collected personally by interviewing investors with the help of the structured interview schedule. Which took about four months i.e. from, 1st October 2008 to 31st January 2009 for the filed survey for the researcher.
1.12 Tools of Analysis The data collected for the study have been analysed with the help of computer keeping in view the objectives of study. Simple statistical tools like percentages and averages are extensively used in the study. Apart from this, other mathematical and statistical tools like Compound growth rate, ANOVA, Rank correlation co-efficient, Chi-square test and Kolomogorov – Smimov (K.S.-test) were used for analysis.
1.13 Limitations of the Study The study suffers from the following limitations. 1. Official records relating to the details of individual investors in Trichirappalli are not available. Hence only the details of investors supplied by broker firms and mutual fund agents are used for the selection of samples. 2. Statistics relating to capital market investment in Trichy is virtually absent. Non-existence of vital data has forced the investigator to depend solely on the information collected through field survey. 3. The investors in general do not properly keep records of their income, saving and investment. Therefore the information furnished by them from their memories have to be relied upon. Inspite of the above limitations, the highlights of the study can help the policy markers and the investing community at large to frame suitable policies for the betterment of capital market investment.
8 1.14 Chapter Scheme The report of the study is presented in Five chapters
Chapter – I Deals with the methodology of the study Chapter – II Presents the review of literature on capital market investment Chapter – III Gives the profile of the study area and the sample of investors Chapter – IV Analyses the data and interprets the results Chapter – V Lists the summary of findings, conclusions and the recommendations based on the study
9 II
REVIEW OF LITERATURE REVIEW OF LITERATURE
Indian capital market took rapid strides during the last decade as a result of liberalisation, privatisation and globalisation (LPG) measures initiated in the country. It was a comprehensive charge, which could be witnesses in every segment of the capital market especially in the stock market. Formation of the National stock exchange, introduction of screen based trading system in place of floor trading, establishment of trading terminal networks, switching over from physical holding to demat system, replacement of badla system to T + 3 rolling settlement and derivatives trading in the capital market are prominent among them. All these resulted in increased volume of trading in the stock exchange and increased market capitalisation of listed companies. A review of some of the important studies in capital market investment is attempted here.
Capital Market Investment Ahmed Naseem1 (2000) in his study opined that bonus shares are considered a mover of market sentiments which in turn sets an upbeat trend in equity price movement. Amanullah and Kamaiah2 (1998) in their study attempted to test whether Capital Asset Pricing Model (CAPM) can perform well in describing the stock return in India. They opined that though the CAPM describes stock return well in the Indian context, it is preferable that investor’s investment decision may be decided with the help of other relevant factors such as P/E ratio, EPS dividend, bonus and right issues besides the CAPM estimates. The estimation of these variables call for information on historical data from the company’s financial statements. There is an on-going argument that the company presents a rosy picture of financial estimates by manipulating its financial statements such as
1 Ahmed Naseem 2000. Equity Price Behaviour and Bonus Issues. Delhi: Rajat Publications. 2 Amanullah S. and Kamaiah. “Asset Price Behaviour in India Stock Market: Is the ‘CAPM’ Still Relevant?” Journal of Financial Management and Analysis. Vol:11, No.1. January-June 1998. pp.32-47.
10 profit and loss account and balance sheet. In such a case it is difficult to obtain a true and fair view of its financial position and hence investment decisions based on these statements may not provide a meaningful estimation of stock returns. Thus investors are required to take extra care in estimating stock returns to construct the portfolio of securities. Balkrishan and Nartha3 (1997) made a review of Indian securities market in the light of economic liberalization measure initiated in India. According to him financial markets are instrumental in allocating the savings in the most desirable way so that the desired national objectives can be achieved. This facilitates efficient production of goods and services. Thus it contributes to the well-being and raises the standard of living not only of borrowers but also of others in the economy. Financial markets, perform this function by transmitting the nation’s saving into the best possible productive uses which in turn raises the output and employment level in a country. Belgaumi4 (1995) in his study attempted to test whether the random walk hypothesis or weak from of efficient market hypothesis holds good in the Indian Stock Market. 70 companies were taken as sample in the A group of the Bombay Stock Exchange during 1991-92. He concluded that share price behaviour in the Indian stock market followed the random walk model. Hence the exchanges are weakly efficient in pricing their shares. Bhave5 (1998) in his study pointed out that setting up of securities depositories will bring about a change in the capital market with significant impact for the banking industry. Chandrasakhara Rao6 (1996) focussed his study on the possible abnormal patterns of price behaviour around the release of earnings information in
3 Balkrishnan and Nartha, S.S. 1997. Security Markets in India. New Delhi: Kanishka Publishers, Distributors. 4 Belgaumi, M.S. “Efficiency of the Indian Stock Market: An Empirical Study”. Vikalpa. Vol:20. No.2. April-June 1995. pp.43-47. 5 Bhave, C.B. “Securities Depositories in India”. In (Raj Kapila and Uma Kapila (Ed). 1998) pp.84-87. 6 Chandrasekhara Rao, K. and Geetha T. 1996 Indian Capital Market. New Delhi : A.P.H. Publishing Corporation. 11 case of a selected sample scrips. The period of study was from 1991 to 1994 on a sample of 53 companies. Cherian Samuel7 (1996) in his study opined that the stock market plays only a limited role providing finance for both U.S. and Indian firms. In seeking funding a firm’s main choice is between external and internal financing. Internal finance plays less of a role in Indian firms than for U.S. firms and external debt a bigger role. This is in consistent with the theoretical prediction that information and agency problems are less severe for Indian firms that for U.S. firms. Cirvante8 (1956) in his study pointed out that capital market in India is in a process of transition. A gradual shift in investment is taking place from the private sector investment to the public sector. This is due to the inability of the private sector to undertake large scale investment on account of the paucity of aggregate savings and the direction of these savings into trading and speculative activities rather than into fixed investment. Claessens9 in his study on equity investment in developing countries points out that the benefits available to an investor of equity investment in emerging markets ultimately depend on a trade-off between the expected rate of return and its associated risk. To assess this trade-off a number of factors are important: the underlying factors driving the rate of return and its variability; the efficiency of the domestic stock market; the regulatory, accounting and enforcement standards in the host country etc. The risk-return trade-off should, however, be investigated from the point of view of an internationally well diversified investor who is considering investing in emerging markets.
7 Cherian, Samuel, “The Stock Market as a Source of Finance: A Comparison of U.S. and Indian Firms”. Policy Research Working Paper No.1592. 1996. Washington D.C.: World Bank. 8 Cirvante, V.R, 1956. The Indian Capital Market. Bombay: Oxford University press. 9 Claessens, Stijin “The Emergence of Equity Investment in Developing Countries: Overview”. The World Bank Economic Review. Vol:9, No.1.pp.1-17.
12 Crockett Andrew10 (1998) in his study revealed that the past twenty five years have witnessed a process of accelerating change in the world’s financial markets. Driven by an interacting process of liberalistion and innovation, regulations have been removed, new products have emerged and old boundaries between financial intermediaries have been blurred. Innovation has brought many advantages. The menu of financial assets and liabilities available to end-users has been greatly enlarged. The costs of financial intermediation have fallen. Risk management tools have become increasingly sophisticated. Developing countries have found new ways to mobilize domestic and international savings. Desai Ashok11 in his paper mentioned that regulators are necessary to prevent intermediaries from decamping with investor’s money. But in India there are too many regulators who have no co-ordination among themselves. In addition to that multiple regulation of financial institution divides up their business in an inefficient manner. Thus financial regulation needs to be taken out of the hands of zealous servants of the government and placed in the hands of a much smaller number of regulators who would have the investor’s interests at heart and who would concentrate on giving investors more choice and a greater voice in the investment decisions of the intermediaries. Feldman and Kumar12 in their article examine the main characteristics of emerging stock markets. They point out that the regulatory environment is particularly important for countries eager to integrate their market with the international financial system. Without effective regulation and enforcement, domestic and international investors will be reluctant to commit resources to these markets. Regulation to effect governmental control should be restricted
10 Crockett Andrew. “Capital Market Innovations: Opportunities and Challenges” in (Raj Kapila and Uma Kapila (Ed). 1998). pp.19-33. 11 Desai, Ashok, V. “Capital Markets in India Issues and Agenda for Reforms” in (Raj Kapila and Uma Kapila (Ed). Monthly update-Vol:16). Pp.33-59. 12 Feldman Robert, A. and Kumar Manmohan, S. “Emerging Equity Markets: Growth, Benefits and Policy Concerns,” The World Bank Research Observer. Vol: 10. No.2 pp.181-200.
13 to those strictly necessary for correcting market failures prove to occur in unregulated markets. Gupta13 conducted a survey of 1755 investor households in 1992 to make factual data available on investor preferences to mutual funds. According to the report (1993) the availability of the mutual fund vehicle has enabled investors to substantially reduce the risk of equity investment. Only 41-48 per cent of household investors viewed direct share investment as safe whereas indirect share investment through pure equity schemes of mutual funds was considered safe by 75 per cent of household investors. Regular income and growth schemes of Unit Trust of India or other mutual fund companies were perceived as safe by over 80 per cent household investors. In the case of directly held shares, buying on stock exchanges was considered somewhat less safe than buying new issues. Gupta and Choudhury14 in their study pointed out that index funds have gained acceptance among investors because it was found that fund managers often did worse than the market average. The index fund is an admission of failure of fund management to beat the market. Gupta and others15 (1994) in their study enquired into shareowners geographic distribution covering a sample of 165819 shareholders and 63157 debenture holders from 80 companies. The study pointed out that despite the spectacular growth of share holding among Indian households over the last decade, individual shareholders are still highly concentrated in a few traditional areas. The top 10 cities ranked by their percentage share of the total accounted for nearly two-thirds (65.3 percent) of India’s total number of shareholders in 1992. However, the degree
13 Gupta, L.C. 1993 Mutual Funds and Asset Preference. Delhi: Society for capital Market Research and Development. 14 Gupta, L.C. and Choudhary Utpa, K. “Return on Indian Equiteis., 1980-99. The sensex portfolio”. Eco., and Pol. Weekly Vol:XXXV No.5 January 29, 2000 pp.357-64. 15 Gupta, L.C. et al. 1994 Shareowner’s Geographic Distribution: City-wise Urban-Rural and State wise. Delhi: Society for Capital Market Research and Development.
14 of concentration of shareowners in traditional areas is slowly coming down. Bombay’s share had fallen by about one-fifth from 35.3 per cent in 1983-84 to 27.3 per cent in 1992. The absolute number of shareowners has exploded everywhere rising from an estimated 30 lakhs for the whole country in 1983-84 to roughly 125 lakhs in 1992; most places show an increase of 3-4 times in the number of shareowners over this period. The share owning population in India is currently increasing by about 10 per cent per annum (excluding indirect ownership through mutual fund schemes). Gupta and others16 (1998) in their study analysed short term movements of the market’s average P/E ratio and conclude that the India market still has the character of a “bubble market” and not a market governed essentially by economic fundamentals. The market’s unhealthy functioning should be a matter of concern for policy makers specially because, in the context of economic liberalization greater reliance is to be placed on the market. International Finance Corporation discussion paper17 (2000) examined the aggregate domestic primary capital market activity in a cross section of countries including 24 emerging markets. The study revealed that there was considerable variation across countries in investor protection but relative stability over time within countries. Unlike the accounting standards measure where deterioration was evident in some countries, investor protection has tended to remain constant or improve in all countries. International Finance Corporation18 discussion paper (2000) on Trends in private investment in developing countries observed that the new pattern of foreign finance emphasizes direct funding of developing country firms rather
16 Gupta, L.C. et al. 1998. 1998. Indian stock Market P/E Ratios. Delhi: Society for Capital Market Research and Development. 17 International Finance Corporation Discussion Paper No.39. Primary Securities Markets, Cross Country Findings. 2000. Washington D.C.: The World Bank. 18 International Finance Corporation Discussion Paper No.41. “Trends in Private Investment in Developing Countries-Statistics for 1970-98”. 2000 Washington D.C: The World Bank.
15 than sovereign borrowing which was the dominant theme for many years. This switch over is being facilitated by the trade and financial liberalization under way in many developing countries. Led by actual or potential balance of payments crisis and the belief that globalization is inevitable, many developing country governments are jumping on to the free market bandwagon to ensure that their firms can compete on the same terms as their less constrained foreign competitors. An exciting outcome partly attributed to such liberalization and accompanying privatization is that developing country firms have continued to grow in the 1990s in spite of recession in the West. Jain19 (1999) in his study on restructuring capital market observed that the agenda for further reforms of capital market in India broadly comprise the developments in the debt market, revival of equity markets and improved disclosures and corporate governance standards, reforms in insurance and pension funds to enable flow of funds to infrastructure and the emergence of financial derivatives and risk management products. Jayadev20 (1998) in his study made an evaluation of the performance of mutual fund schemes in India in terms of return and risk. He observed that the average returns of the selected 62 schemes is 1.29 per cent per month and the average risk is 7.5 per cent. As many as 36 schemes have an above average return out of 62 schemes, 33 have returns in conformity with the linear relationship of above average returns with above average risk and vice versa. Sixteen schemes have above average returns with a risk less than average and 13 schemes have less return than the average with higher risk. In terms of risk adjusted performance, 33 schemes have outperformed their bench-marks in terms of the total risk and 30 schemes have outperformed in terms of systematic risk.
19 Jain, Nidhi. “Restructuring Capital Market”. Chartered Secretary. Vol: XXIX No.9. September 1999. pp.982-90. 20 Jayadev, M. 1998. Investment Policy and Performance of Mutual Funds. New Delhi: Kanishka Publishers, Distributors.
16 Jha and Natarajan21 (1999) in their study analysed the structure of Indian stock market in terms of volatility and price efficiency of Bombay Stock Exchange and National Stock Exchange. They pointed out that there are well- defined relations between stock prices in the long run in each of these markets. Hence market segmentation is strongly ruled out. The short-run behaviour of stock prices is such that no stock price can be considered to be independent of the other. Short run price movements are mostly random or unstable but the impulse response function analysis suggests that the instability will not persist for long. Kishore22 (1997) in his article pointed out that the FIIs are manipulating equity market through price rigging even during GDR issues of Indian companies for their own benefit at the cost of domestic investors. They also play a major role in shaping the ‘equity price movement’ in India since 1991. However, FIIs whose hot money moves from one emerging equity market to other markets on whims and flimsy ground is creating disasters like that in December 1994. Maxican crisis and July 1997 Thailand problem do not help in ‘equity market development’ in India. Lamba23 (1999) in his paper attempted to given empirical evidence to the general perception that Indian Stock Market reacts to domestic as well as external influences. His study revealed that during January 1993-July 1998 Indian market appeared to be quite isolated from external influences. However an examination of the behaviour of the India market during the bullish and bearish sub-periods indicates that the major developed markets exert considerably more (less) influence on the Indian market during the bearish (bullish) phase.
21 Jha Raghbendra and Natarajan Hari, K. “Market Integration Price Efficiency and Short-Run Dynamics. A Tale of Two National Stock Markets” Economic and Political Weekly Vol:XXXIV. Nos.3 and 4. January 16-23 1999. pp.195-202. 22 Kishore, C. Samal “Emerging Equity Market In India: Role of Foreign Institutional Investors”. Economic and Political Weekly. Vol:XXXII. No.42 October 18, 1997. pp.2729-32. 23 Lamba Asjeet S. “How Isolated is the Indian Stock Markets. Empirical result findings?”. Journal of Financial Management and Analysis. Vol:12 No.1 January-June 1999 pp.35-46.
17 Lease24 and others conducted a survey of individual investors in 1972 to find out who the potential investor is, how he makes his decisions, how he deals with his broker, what his portfolio consists of and how well he has done as a portfolio manager. A sample of 3000 individuals were selected, stratified according to the geographical distribution of all American share holders as reported by the NYSE surveys. According to the survey report (1974) the individual investor has to be primarily a fundamental analyst who perceives himself to hold a balanced, and well diversified portfolio of income and capital appreciation securities. He asserts that he invests predominantly for the long run and is prone to use one of the broad based market indices as the bench-mark by which to judge his personal investment performance results. Long-term capital appreciation is the paramount investment concern with dividend income and intermediate-term gains running distance second. Levine and Zervos25 (1996) in their study examined whether there was any association between stock markets and long run growth. According to them stock markets may influence economic activity through their liquidity. Many high-return projects require a long run commitment of capital. Investors, however, are generally reluctant to relinquish control of their savings for long periods. Therefore without liquid markets or other financial arrangements that promote liquidity, less investment may occur in the higher return projects. Malhotra26 (1994) examines the empirical relationship between equity prices and various explanatory variables like dividend per share, earning per share, book value to par value, P/E ration, yield, growth etc. for the period from 1982 to 1985. According to the study, the dividend per share and earning per share are the strongest determinants of market price.
24 Lease Ronald, C. et al. “The Individual Investor: Attributes and Attitudes”. The Journal of Finance Vol: 29 No.2 pp. 413-433. 25 Levine Ross and Zervos Sara. “Stock Market Development and Long Run Growth”. The World Bank Economic Review. Vol:10, No.2. 1996, pp.323-339. 26 Malhotra, Sagar Vijay.1994. determinants of share prices in india Delhi: Kanishka publishes, Distributors. 18 Misra27 (1997) traced the evolution of Indian Capital Market and described important aspects of development in its primary and secondary segments. He pointed out that Indian Capital Market has evolved during the last fifty years (1947-1997) from a dormant segment of the financial system to a highly active and dynamic segment characterized by institutional build up, technological advancement and modernization. The reforms in the market have been vast and varied since 1992. While the primary market has emerged as a major source of funding for the corporate entities both in the public and private sectors, the secondary market has modernized itself through advanced technology and transparent trading practices. The array of development financial institutions also has played a crucial role in meeting long-term credit needs of the industrial sector. Mohana Rao28 (1998) made a survey of Mutual funds to address the following issues: (a) Which mutual fund is popular amongst the investors? (b) Which factors govern the choice of a mutual fund organization? (c) What type of scheme/schemes are preferred by households? (d) Which type of financial asset is opted by investors? (e) How are mutual funds helping to enhance capital market activities in India? Following conclusions were reached by him: (a) The top most popular mutual fund amongst investors is Unit Trust of India followed by State Bank of India Mutual Fund and Canbank Mutual Fund. (b) The most popular financial asset preferred by the respondents is UTI products followed by debentures and products of mutual funds.
27 Misra, B.M. “Fifty Years of the Indian Capital Market: 1947-97”. Reserve Bank of India Occasional Papers Vol:18 Nos.2 and 3 Special Issue June and September) 1997. 28 Mohana Rao 1998. Working of Mutual Fund Organisation in India. New Delhi Kanishka Publishers, Distributors.
19 (c) The most important factors of choice for a mutual fund organization is ‘investors service’ followed by income-cum-growth and tax benefits and capital appreciation. (d) A vast majority of respondents agreed that mutual funds are desirable and necessary for growth of Indian capital and money markets. (e) Majority of respondents showed their willingness to invest their savings in private sector mutual funds. Mohanthy29 (1997) in his study observed that the primary objective of market regulation is avoidance of market failure. Symptoms of market failure emerge when the risk-return balance breaks down. This can happen when accurate evaluation of market risks is not possible under imperfect market conditions. Viewed from this perspective the first and fore most task of the market regulator is to identify imperfect market conditions, evaluate the risks involved and take corrective measures. For proper identification of market imperfections the capital market can be viewed as being composed of three distinct market segments: (i) the Capital Allocation Market where savings are distributed among the productive users of capital (i.e. Primary Market); (ii) the Financial Securities Market where the stocks owned by the providers of capitals are traded by them (i.e. secondary market) and (iii) the Financial Information Market where information is transmitted by the productive users of capital to the suppliers. Nagaishi30 (1999) in his paper on stock market development and economic growth viewed that Indian stock market development from the 1980s onwards has not played any prominent role in domestic savings mobilization. Both GDS and the share of the financial assets of the household sector have been stagnating since 1992, that is, in the post reform period.
29 Mohanthy, Basudev “Slump in the Securities Market-Problems and Strategies for its Sustainable Growth”. Economic and Political Weekly. Vol.XXXII. No.42. October 18, 1997. pp.2733-46. 30 Nagaishi, Makoto, “Stock Market Development and Economic Growth, Dubious Relationship”. Economic and Political Weekly. Vol:XXIV. No.29. July 17 1999.pp.2004-11. 20 Nagaraj31 (1996) in his paper examined the trends in the capital market growth and its implications for the economy and the corporate sector. He observed that financial liberalization thesis posits its likely positive effect on the economy’s savings investment and efficiency. A well functioning stock market also has a screening and monitoring role. Nandi32 (1995) studied the international mobility of capital in the context of India and the quantitative relation between Indian stock market and the stock markets of some important developed countries. Experience of the capital mobility across the countries show that irrespective of the existence of control on the mobility of capital and exchange rate movement some sort of a relation gets established between the capital markets of major countries. Wherever a pervasive control on the movement of capital exists capital flight takes place without the approval of the government machinery. Nartha33 (1992) endeavoured a study of the trend and progress of underwriting capital issues in India for the period from 1970-71 to 1988-89. In his study he pointed out that underwriting activities increased with the availability of underwriting facilities provided by the various underwriting agencies. Yet is showed a declining trend in the decade of the eighties largely on account of the equity cult in the late eighties and the good public response with the entrance of most of the middle class families in the capital market. Panda34 studies the working and role of stock exchanges before and after independence. It revealed that listed stocks covered four fifths of the joint stock companies. The shares of government sector joint stock companies were not yet quoted on the recognized stock exchanges. Investment in stocks and shares was no longer the monopoly of any particular class or of a small group
31 Nagaraj, R. “India’s Capital Market Growth-Trends, Explanations and Evidence”. Economic and Political Weekly. Vol:XXXI. Nos.35, 36 and 37 Special number. September 1996. 32 Nandi, Sukumar, “Some Critical Issues on the Globalisation of Indian Capital Market”. Finance India. Vol: IX. No.4. December 1995. pp.989-995. 33 Nartha, S.S. 1992, P.22.Capital Issues in India; New Delhi; Kanishka Publishers, Distributors. 34 Panda , J. “Changing Pattern of Business Finance in India- A study of the Role of Stock Exchanges”. The Indian Journal of Commerce Vol:XXXIII part IV No. 125, pp.121-122. 21 of people. It attracted the interest of a large number of small and middle class individuals. The people in general were not reluctant to invest in equity shares. Paranjape35 (1992) made a study of investors’ preference on rights issues made by corporate bodies. It revealed that only a little more than 20 per cent of the investors always applied for rights in the past. Roughly an equal number participated depending on the availability of funds. The remaining did so only after evaluating the merits of the offer, either by themselves or on the basis of advice from experts. Investors generally go by the future prospects of a company, its overall standing and the merits of the offer. However a small number are likely to base their decision on the state of the market as well. Parthapratim36 in his study opined that the influx of foreign institutional investors failed to invigorate the Indian Stock Market. The argument that the entry of foreign portfolio will boost a country’s stock market and economy does not seem to be working in India. The supposed linkage effects have not worked in the way the mainstream model predicted. Instead, there has been an increased uncertainty and skepticism about the stock market in India. Patil37 (2000) in his study on the future of global capital markets observed that the stock exchanges as we understand it today may not be there after about two decades. The first major transformation related to growing cross-country listings. The other major development related to mergers and strategic partnerships among stock exchanges of different countries. Pratip Kar and Others38 (2000) on behalf of SEBI made a comprehensive survey to help gauge the impact of the growth of the securities market on the households during the decade of the 1990s and to analyse the quality of its growth.
35 Paranjape, A.M. “Of Rights and Wrongs”. The Economic Times. September 21, 1992, p.22. 36Parthapratim Pal. “Foreign Portfolio Investment in India Equity Markets. Has the economy benefited?”. Economic and Political Weekly Vol:XXXIII. No.11. pp.589-598. 37 Patil R.H. “The Capital Market in 21st Century”, Economic and Political Weekly Vol:XXXV No.45, November 18, 2000. pp.4097-4102. 38 Pratip Kar et al. 2000. Survey of Indian Investors. Mumbai: Securities and Exchanges Board of India. 22 The survey was based on a sample of 300000 geographically dispersed rural and urban households out of which a sample of 25,000 households were chosen for detailed convassing by field staff through a pre-tested questionnaire. Raj Kabila and Uma Kabila39 (1998) in its discussion paper pointed out that as the process of economic reform continues and the share of the corporate sector in the economy increases, the role of securities markets as a source of raising funds for investment is expected to become more critical. If Indian markets are to serve the need of firms as well as a nationwide community of investors, it is essential that efforts to lower transaction costs and to increase the integrity and fairness of Indian markets continue. While measures that have been taken by the government, SEBI, exchanges and market intermediaries in this direction have led to an increase in capital market activity and investor confidence, it is necessary to focus on further changes that are still required Rangarajan40 (1998) in his paper put forward a valid view regarding the major issues to be addressed in order to strengthen the functioning of Indian Capital Market. He held that effective and efficient capital market required a stable and sturdy infrastructure of payment, settlement and clearing system and setting up of depositories. This infrastructure is the life-line of the securities market as it helps market participants to exercise economic choice by prompt and credible transfer of value. Sarkar41 in his study observed that the major stock exchanges were experiencing heavy work load of monitoring the working of all the listed companies on the exchange. The number seeking listing on the Bombay Stock Exchange has increased in recent years. According to reports published, around 1100 companies were listed in 1994 and an average of 80 companies
39 Indian Securities Market – SEBI Discussion paper in (Raj Kapila and Uma Kapila (Ed). 1998) pp.104-141. 40 Rangarajan. C. “The Indian Capital Market, Problems, Prospects and Agenda for Reforms”, in (Raj Kapila and Uma Kapila (Ed). 1998) pp.97-103. 41 Sarkar, A.K. “Indian Capital Markets: Recent Developments and their Implications”. The Management Accountant. Vol:XXXII. No.3. pp.173-179. 23 per month are listed on the exchange. Out of this over 75 per cent of the companies have paid up capital of less than Rs.5 crores. SEBI42 (1996) made an analysis of income and expenditure of 100 schemes of 15 Mutual Funds and 13 Asset Management Companies. The report revealed that it was difficult to establish any correlation between expense ratio of similar type and size of scheme within the same mutual funds or across mutual funds, the profitability of an Asset Management Company (AMC) or Return On Net Worth (RONW) to the corpus managed by a fund and its years of existence. Schemes of same size and type have varied expense ratio, income ratio, AMCs which manage more assets, earn a larger income but RONW for them may be lower than one which manages a smaller corpus. All this understates the state of affairs of the mutual funds and fund manager and raises concerns about the need for a greater degree of introspection on the part of the AMCs to get their houses in order. Singh43 (1994) in his study pointed out that the proper development and growth of securities market plays a vital role for a faster growth of industry and economy. The role of securities market can be judged by examining how efficiently and successfully they meet the financial requirements of the industrial enterprises by mobilizing by the saving of masses and their ability to provide a well organized market for sale and purchase of the industrial securities. The securities market helps in distributing the fruits of economic prosperity in a country amongst the masses through returns on investment of surpluses in the securities. Terrance44 examined the behaviour of individual investors and found them exhibiting disposition effects, that is, they realize their profitable stocks held as investment at a much higher rate than their unprofitable ones. The
42 SEBI Report 1996 (1998) “Mutual Funds-2000” . in (Raj Kapila and Uma Kapila (Ed). 1998). pp.217-275. 43 Singh, Pyarelal. 1994. determinants of Share Prices in India. Publishers, distributors. 44 Terrance Odian. “Are Investors Reluctant to Realize Their Losses?” The Journal of Finance. Vol:53. Issue No.5 pp.1775-1798. 24 disposition effect is found to influence market prices; yet its economic significance is likely to be the greatest for individual investors. Vinayakam45 (1994) in his study viewed that with the introduction of free pricing in 1992, the total equity share issues were of the order of Rs.2792 crores. Of these the share of premium was a stupendous Rs.1945 crores, i.e., nearly 70 per cent of the issue amount. This has resulted in failure of certain issues which had to be bailed out. He suggested that apart from the investors’ awareness, education and associations which go a long way in giving the much needed protection to the small investors, a separate legislation or compendium conferring protection to investors was the need of the hour. The investors would have a sigh of relief just as consumers did with the emergence of Consumer Protection Act and consumer courts in all trading centres in the country. Vinayakam and Charumathi46 (1995) in their study observed that equity cult had spread to different parts of the country and millions of Indian investors invested their savings in the booming stock markets. What was once considered as the exclusive game of the rich and privileged class is now becoming a matter of day interest for millions of middle and low income groups of investing public in India. In spite of such widespread interest of Indian investors in shares, investment knowledge is very much lacking in them. This is evident from the fact that most of them usually get attracted towards the stock exchanges like moths to a candle in periods of boom and rising prices in a bid to become rich quickly. When the boom bursts and a depression sets in, most of such new entrants prove a menace to themselves and to the general public ultimately.
45 Vinayakam N., “ Case for Separate Legislation on Investors protection”. in (Vinayakam N. (Ed). 1994).pp.85-95 46 Vinayakam, N. and Charumathi, B. “Globalisation of Emerging Equity Markets”. Finance India. Vol: IX No.3. September 1995. pp.655-666.
25 INDIAN CAPITAL MARKET-AN OVERVIEW
The capital market is a medium through which savings of the community are made available for industrial and commercial enterprises. It facilitates sustainable development of the economy by providing long term funds in exchange for financial assets to investors. A well organized capital market provides the essential attributes of liquidity, marketability and safety of investments to the investors. It is considered indispensable for economic growth and helps to improve productivity.
2.1 Evolution of the Indian Capital Market The history of Indian Capital Market can be traced back to the 19th century. Even in medieval times trading in Hundies was common amongst the trading communities. But the first instance of organized trading is related to trading in securities of East India Company in the 19th century. The era of joint stock companies in India commenced with the enactment of Companies Act, 1956 which introduced the concept of limited liability. Investors in general welcome this as it restricted the liability of members to the extent of the capital subscribed by them. The outbreak of American Civil War in 1860-61 led to a share-mania in India. During the war period, supply of cotton from the United States to Europe was completely stopped. This situation opened up a window of opportunity to Indian producers. Cotton prices shot up and many Indian companies boomed. Share prices of companies were rigged up to unsustainable levels by share brokers. But when the civil war ended in 1865 the bubble burst and a deep depression set in. Many companies were liquidated and a number of people went bankrupt. Investing public were the worst affected in the spell of depression. Even though the share mania of 1861-65 caused hardships and suffering to many, it was instrumental in the establishment of a regular market in securities. Brokers assembled at some
26 common places to conduct trade. By 1874, Dalal Street in Mumbai became a prominent place of meeting of the brokers. In 1887, an indenture was executed and the Bombay Stock Exchange (BSE) was formally established as a society named Native Share and Stock Brokers Association. The effects of industrial revolution began to be felt in India by the dawn of 20th century. This period was also marked by the swadeshi movement which created much industrial enthusiasm in the country. During the period of the first and second world wars, the industrial sector as well as the capital market exhibited much dynamism. However domestic industries did not receive any support in pre-independence period from the British Government. After independence, the Indian Government gave priority to infrastructure development considering the urgency of proceeding with large scale industrial development. Accordingly, Industrial Finance Corporation was formed in 1948 with the objective of providing financial assistance to the industrial sector. In 1955, Industrial Credit and Investment Corporation of India (ICICI) was set up for providing the capital market with underwriting facility. Establishment of Life Insurance Corporation in 1956 was another landmark in the field of institutionalization of the capital market. Apart from the insurance business it also invested in shares engaged in underwriting of new issues and invested in government securities. An important development in company law took place when the Government of Indian promulgated the Companies Act, 1956 based on the recommendations of the company law committee. This was the largest statute ever passed by the Parliament. Unit Trust of India (UTI) was formed in 1964 for providing facilities of equity investment for small investors thereby supplementing the efforts of institutions engaged in mobilizing the savings of the community. Mutual fund scheme was first introduced in India by UTI in 1964. Industrial Development Bank of India (IDBI) was also formed in 1964 for financial assistance to medium and large scale industries. As the apex development bank of the country, IDBI has been
27 vested with the responsibility of strengthening the resources of the financial institutions including banks. The passing of Foreign Exchange Regulation Act, 1973 limited the share holding of foreign firms to 40 per cent, if they were to be recognized as Indian Companies. For diluting their share holdings, many multinational companies offered shares to the public at attractive rates. Encouraged by the good response to these issues, many domestic companies also came out with public issues. Individual investors were enthusiastic to invest in the capital market as they found equity investments to be a hedge against inflation and a source of higher earnings compared to other investments. The process of broadening the capital market is said to have begun during this period. During 1980s, debentures emerged as a powerful device for mobilizing funds in the capital market. Also, many public sector undertakings came out with bonds. There was also an impressive growth in the secondary market as Ten stock exchanges were established in the mid-eighties. Moreover, several instruments like convertible debentures and mutual fund schemes were offered to meet the expectations of emerging investors. In the meantime a number of committees and working groups were constituted to go into the functioning of the capital market and suggest ways and means to improve its functioning. Prominent among them were the Patel Committee in 1986 on organization and management of stock exchanges, the Abid Hussain Committee in 1989 on the development of new stock exchanges and the Nadkarni Committee in 1992 on trading in public sector bond and units of mutual funds. Various steps were taken to streamline the operation of the above committees. A number of financial intermediaries like merchant bankers, underwriters, mutual funds, custodial service etc. came into existence during this period. Establishment of Securities and Exchange Board of India (SEBI) as a non-statutory body was another development of the decade.
28 In 1991, Government of India launched a policy of liberalization and globalization of Indian economy in general and of financial sector in particular. It covered measures like abolition of industrial licensing except for a short list of industries, reduced reservation for public sector, abolition of assets ceiling for companies, under Monopolies and Restrictive Trade Practices Act, 51 per cent foreign ownership of equity, permission for Foreign Institutional Investors (FIIs) to invest in securities in primary and secondary markets and permission for Indian companies to raise capital abroad through the issue of Global Depository Receipts (GDRs) or American Depository Receipts (ADRs). These reforms, particularly the deregulation of financial sector, fuelled the growth of equity cult in India. Boom market conditions and heavy speculative activities led stock market prices to sky-rocketing levels. The rise in price was not warranted by any macro-economic factors or change in fundamental aspects of corporate functioning. Subsequently, the securities scam was unearthed in June 1992. The scam had a paralyzing effect on the operations of the stock exchange. It shattered the confidence of investors in the capital market and money market. The parliamentary committee which probed into the scam recommended that SEBI should examine trading practices and systems in the stock exchanges and should effect necessary changes. Also the Narasimham Committee and Estimates Committee of the parliament underscored the urgency of providing sufficient legal and administrative safeguards to protect small and inexperienced investors so as to minimize the risk of exploitation by unscrupulous elements and fly – by – night operators. This necessitated a vigilant regulatory body. Consequently SEBI which was formed in 1988 as a non-statutory body was endowed with statutory powers through the enactment of SEBI Act, 1992.
29 2.2 Market Segments The securities market has two interdependent and inseparable segments, viz, the new issues (primary market) and the stock (secondary) market. The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued. The price signals, which subsume all information about the issuer and his business including associated risk, generated in the secondary market, help the primary market in allocation of funds. The issuers of securities issue (create and sell) new securities in the primary market to raise funds for investment and/or to discharge some obligation. They do so either through public issues or private placement. It is a public issue if any body and everybody can subscribe for the securities. If the issue is made to select people, it is called private placement. In terms of the Companies Act, 1956, an issue becomes public if the offer or invitation to subscribe to securities is made to 50 persons or more. This means that an issue offered to less than 50 persons is a private placement. If the securities are issued exclusively to the existing shareholders, it is called ‘rights’ issue. It is a public issue if the offer is made to public at large. The securities are issued at face value or at a discount / premium. There are two major types of issuers who issue securities. The corporate entities issue mainly debt and equity instruments (shares, debentures, etc.), while the governments (central and state governments) issue debt securities (dated securities and treasury bills). A variant of primary market allows the existing shareholders of a company to offer securities to public for subscription through an offer document. This is called offer for sale. This is route is generally used by government for disinvestment of its shares in PSUs. Another variant allows and (company or government) to buy back its securities. The companies buy back from the existing security holders on a proportionate basis through tender offer or from the open market, through book building process or stock exchanges.
30 Still another variant allows a person to acquire shares / voting rights in excess of a certain per cent through a public announcement offer to do so. The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risk and return. They also seel securities for cash to meet their liquidity needs. The secondary market has further two components, namely the over-the-counter (OTC) market and the exchange-traded market. OCT is different from the market place provided by the Over the Counter Exchange of India Limited. OTC markets are essentially informal markets where trades are negotiated. Most of the trades in government securities are in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. The exchanges do not provide facility for spot trades in a strict sense. Closest to spot market is the cash market where settlement takes place after some time. Trades taking place over a trading cycle, i.e. a day under rolling settlement, are settled together after a certain time (currently 2 working days). All the 24 stock exchanges in the country provide facilities for trading of equities. The trades in corporate debt securities and retail trades in government securities take place in the cash equity segments of the leading exchanges. Trades executed on the leading exchanges. Trades executed on the leading exchange, National Stock Exchange of India Ltd. (NSE) are cleared and settled by a clearing corporation which provides notation and settlement guarantee. The trades on other exchanges are cleared and settled through clearing houses. The trades on all exchanges enjoy settlement guarantee. Over 99.99 per cent of the trades settled by delivery are settled in demat form. Three exchanges, namely, NSE, OTCEI and BSE provide trading platform for government securities. A variant of secondary market is the forward market, where securities are traded for future delivery and payment. Pure forward is out side the formal market. The versions of forward in the formal market are futures and options.
31 In futures market, standardized securities are traded for future delivery and settlement. These futures can be on a basket of securities like an index or an individual security. In case of options, securities are traded for conditional future delivery. There are two types of options – a put option permits the buyer to sell a security to the writer of options at a predetermined price while a call option permits the buyer to purchase a security from the writer of the option at a predetermined price. These options can also be on individual stocks or a basket of stocks like index and can follow European or American style of settlement. Stock options follow American style of settlement where the options can be exercised at any time up to the expiration date, while the index options follow European style where options can be exercised only on the expiration date. Two exchanges, namely NSE and BSE provide trading of derivatives of securities.
2.3 Products and Participants Table – 2.1 Market Participants in Securities Markets as on March 31, 2004 Sl. Market Participants Number No. 1 Securities Appellate Tribunal 1 2 Regulators (DEA, DCA, SEBI, RBI) 4 3 Ombudsman 0 4 Depositories 2 5 Depository Participants 431 6 Clearing Corporation (NSCCL, CCIL) 2 7 Stock Exchanges (Cash Segment) 23 8 Listed companies 9359 9 Stock Exchange (Derivatives Segment) 2 10 Negotiated Dealing System (for Government securities) 1 11 Brokers (Cash Segment) 9368 12 Sub-brokers (Cash Segment) 12815
32 13 Derivative Brokers 829 14 Foreign Institutional Investors 540 15 Portfolio Managers 60 16 Custodians 11 17 Share Transfer Agents 78 18 Primary Dealers (Government securities) 18 19 Merchant Bankers 123 20 Bankers to an Issue 55 21 Debenture Trustees 34 22 Underwriters 47 23 Venture Capital Funds 45 24 Foreign Venture Capital Investors 9 25 Mutual Funds 37 26 Collective Investment Schemes 0 27 Credit Rating Agencies 4 28 Approved Intermediaries (Stock Lending Scheme) 3 29 Investor Associations (Registered) 7 30 Central Listing Authority 1 31 STP Service Providers 4 32 STP Central Hub 1 33 Self Regulatory Organizations (Registered) 0 34 Investors (Estimated) 20 million 35 Certification Agencies (NSE, BSE and AMFI) 3 Source: SEBI Bulletin It is seen from the above table 2.1 the securities market, thus, has essentially three categories of participants, namely the issuers of securities, the investors in securities and the intermediaries and two categories of products, namely, the services of the intermediaries and the securities, including derivatives. The issuers and the investors are the consumers of services rendered by the intermediaries while the investors are consumers of securities issued by the issuers. Those who receive funds in exchange for securities and those who receive securities in exchange for funds often need the reassurance 33 that it is safe to do so. This reassurance is provided by the law and custom, often enforced by the regulator. the regulator develops fair market practices and regulates the conduct of the issuers of securities and the intermediaries so as to protect the interests of the investors in securities. The regulator ensures a high standard of service from the intermediaries and supply of quality securities and non-manipulated demand for them in the market so that the issuers and the investors are able to undertake more and more transactions with ease, efficiency and security. In the Indian context, the regulators have an additional responsibility of developing the market and also the exclusive responsibility of protecting the interests of investors in securities.
2.4 Profile of the Securities Markets The recent past, particularly since the establishment of SEBI in 1992, in many ways has been remarkable for securities market in India. It has grown exponentially as measured in terms of amount raised from the market, number of market participants, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population. The figures relating to last financial year 2003-04 bear testimony to such growth. The year witnessed a net FII inflow of US $ 10 billion. Indian companies raised a sum of Rs.2,67,660 crore from the market. Besides, government raised about Rs.15,000 crore through offer for sale of shares of PSUs. The MFs mobilized net resources of about Rs.48,000 crore, equivalent to about one fourth of incremental bank deposits. The assets at their disposal increased to Rs.1,39,616 crore at the end of March 2004. The benchmark indices namely the SENSEX and S&P CNX NIFTY generated astounding returns of 83 per cent and 81 per cent respectively during 2003-04. The market capitalization reached a peak level of Rs.14 trillion at the end of March 2004 indicating that the equity market is as big as the banking system. The exchanges reported a turnover of Rs.16,20,931 crore in the cash segment and Rs.21,42,920 crore in the derivative segment, while the subsidiary general 34 ledger (SGL) reported a total turniover of Rs.26,39,244 crore in government securities. Mumbai contributed less than 45 per cent of total trades in cash and derivatives indicating the huge participation of retail investors. NSE and BSE are the 3rd and 5th largest exchanges respectively in the World. NSE is the largest exchange in stock futures. The open interest in derivatives at the end of March 2004 exceeded Rs.7,000 crore. The exchanges have settlement guarantee funds which can meet the settlement obligations for 4 or 5 consecutive settlements even if all the trading members default in their obligations. The impact cost of Nifty for a traded of Rs.0.5 crore reduced to 0.09per cent in 2004 reflecting substantial improvement in liquidity. The brokerage reduced to as low as 0.15per cent. The depositories were having a total of 58,32,552 investor accounts at the end of March 2004.
2.5 Dependence on Securities Markets Three main sets of entities depend on securities market. While the corporate and governments raise resources from the securities market to meet their needs of investment and / or discharge some obligations, the households invest their savings in the securities. During 2003-04, corporate sector and governments together raised a total of Rs.267,660 crore from the securities market, while the household sector invested Rs.22,554 crore of their financial savings through the securities market. The central government and the state governments now-a-days finance about two third and one third of their fiscal deficits respectively through borrowings from the securities market. The corporate sector finances about one third of its external finance requirements through the securities market. The households invest about 6per cent of their financial savings in securities (Table 2.2 and 2.4).
2.6 Corporate Sector The early 1990s witnessed emergence of the securities market as a major source of finance for trade and industry. However, according to CMIE data, the
35 share of capital market based instruments in resources raised externally increased to 53.2per cent in 1993-94, but declined thereafter to (-)18per cent in 2002-03. This causes more concern when the share of external finance in the corporate finance declined from 74per cent in 1996-97 to 38per cent in 2002- 03. The paper ‘Finance for Industrial Growth’ by Dr. Rakesh Mohan (RBI Bulletin, March 2004) indicates that capital market has virtually collapsed as a source of industrial finance as its share in industrial finance has declined from 1.9per cent of GDP at current prices during 1992-93 to 1996-97 to a meagre 0.2per cent during 1997-98 to 2001-02. Similarly the share of equity capital in the external finance of corporates declined from 20.5per cent during 1992-97 to 12.8per cent during 1997-2001.
2.7 Governments Along with increase in fiscal deficits of the governments, the dependence on market borrowings to finance fiscal deficits has increased over the years. The state governments and the central government financed about 14per cent and 18per cent respectively of their fiscal deficit through market borrowings during 1990-91. In percentage terms, dependence of the state governments on market borrowings did not increase much till 2000-01. However, their dependence on market borrowing has been increasing since then to reach 28per cent during 2002-03 and 32per cent during 2003-04. In case of central government, it increased to 72per cent by 2002-03 and then declined to 65per cent during 2003-04.
2.8 Households Household sector account for 86.5per cent of gross domestic savings during 2003-04; 46.8per cent of their savings were in financial assets. The share of financial savings of the household sector in securities (shares, debentures, public sector bonds, units of UTI and other MFs and governments
36 securities) is estimated to have gone down from 22.9per cent in 1991-92 to 5.4per centn in 2003-04. Table – 2.2 Dependence on Securities Market Share (per cent) of Securities Market in Year External Fiscal Deficit Fiscal Deficit Financial Finance of of Central of State Savings of Corporates Government Governments Households 1990-91 19.35 17.9 13.6 14.4 1991-92 19.17 20.7 17.5 22.9 1992-93 33.38 9.2 16.8 17.2 1993-94 53.23 48.0 17.6 13.9 1994-95 44.99 35.2 14.7 12.0 1995-96 21.67 56.4 18.7 7.7 1996-97 21.83 30.0 17.5 7.0 1997-98 27.85 36.5 16.5 4.5 1998-99 27.49 60.9 14.1 4.1 1999-00 33.63 67.1 13.8 8.6 2000-01 30.17 61.8 14.0 5.8 2001-02 38.71 64.4 17.7 8.5 2002-03 -17.99 71.8 27.9 5.9 2003-04 NA 64.9 32.1 5.4 Source: CMIE & RBI
2.9 Investor Population The Society for Capital Market Research and Development (SCMR & D) carries out periodical surveys of households investors to estimates the number of investors. Their first survey carried out in 1990 placed the total number of share owners at 90-100 lakh. Their second survey estimated the number of share owners at round 140-150 lakh as of mid-1993. Their latest survey estimates the number of shareowners around 2 crore at 1997 end, after which it remained stagnant up to the end of 1990s. The bulk of increase in number of investors took place during 1991-94 and tapered off thereafter. 37 49per cent of the share owners at the end of 2000 had, for the first time, entered the market before the end of 1990, 44per cent entered during 1991-94, 6.3per cent during 1995-96 and 0.8per cent 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 managements. According to the fist SEBI-NCAER survey of Indian investors conducted in early 1999, an estimated 12.8 million, or 7.6per cent 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 22per cent between 1985- 86 and 1998-99. About 35per cent of investor entered the market between 1991 and 1995 and 17per cent after 1995. More than 156 million or 92per cent 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 (nearly 9per cent) of all households representing at least 23 million unit holders had invested in units of MFs. According to the second SEBI-NCAER Survey conducted in late 2000, 13.1 million, or 7.4per cent of all Indian households, representing 21 million individuals directly invested in equity shares and or debentures during the financial year 2000-01. There were 11.8 million households representing 19 million unit holders who had invested in units of MFs in 2000-01. According to the SEBI-NCAER survey, of the 48 million urban households, an estimated 8.8 million households, or 18per cent, representing approximately 13 million urban investors owned equity shares and / or
38 debentures. Of the 121 million rural households, only about 4 million households, or 3per cent, representing nearly 6 million rural investors owned these instruments. The rural investor households have increased at a compound growth rate of 30per cent compared to 19per cent for urban investor households. The SCMR & D estimates that 15per cent semi-urban and rural households own shares, 4per cent of all households own shares. An indirect, but very authentic, sources of information about distribution of investors is the data base of beneficial accounts with the depositories. At the end March 2004, there were 5.2 million and 0.6 million beneficial accounts with the National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) respectively. The state-wise distribution of beneficial accounts with NSDL at the end of August 2004 is presented in Table 2.3.
Table – 2.3 Distribution of Beneficial Accounts at NSDL as on 31str August, 2004
State No. of Demat Per cent of Total Accounts Andaman & Nicobar 243 0.01 Andhra Pradesh 2,89,654 6.21 Arunachal Pradesh 70 0.00 Assam 18,225 0.39 Bihar 55,734 1.20 Chandigarh 11,077 0.24 Daman & Diu 73 0.00 Delhi 4,46,710 9.58 Goa 17,363 0.37 Gujarat 7,76,111 16.64 Haryana 85,245 1.83 Himachal Pradesh 8,126 0.17
39 Jammu & Kashmir 18,249 0.39 Karnataka 3,30,311 7.08 Kerala 1,12,147 2.41 Madhya Prades 1,12,114 2.40 Maharashtra 11,88,674 25.49 Manipur 164 0.00 Meghalaya 302 0.01 Mizoram 16 0.00 Nagaland 309 0.01 Orissa 29,468 0.63 Pondicherry 4,198 0.09 Punjab 97,209 2.08 Rajasthan 1,09,568 2.35 Tamil Nadu 3,46,923 7.44 Tripura 1,335 0.03 Uttar Pradesh 3,18,523 6.83 West Bengal 2,84,848 6.11 Total 46,62,989 100.00 Unclassified and Others 9,47,112 - Grand Total 56,10,101 - Source: NSDL
2.10 Primary Market a) Corporate Securities Average annual capital mobilisation by non-government public companies from the primary market, which used to be about Rs.70 crore in the 1960s, increased manifold during the 1980s, with the amount raised in 1990-91 being Rs.4,312 crore. It received a further boost during the 1990s with the capital raised by these companies rising sharply to Rs.26, 417 crore in 1994-95. The capital raised, which used to be less than 1per cent of gross domestic savings during 1970s, increased to about 13per cent in 1992-93. It decreased to less than 1per cent in 2003-04. In real terms, the amount raised by non- 40 government public companies during 2003-04 is about 31per cent of the amount raised about a decade back in 1990-91. The amount raised by these companies constituted about 85per cent of total disbursements by all-India FIs in 1992-93. It decreased to 10.1per cent in 2003-04. The market appears to have dried up since 1995-96 due to interplay of demand and supply side forces. However, 2003-04 has witnessed a reviving trend in resource mobilization by non-government public companies with the amount mobilised increasing from Rs.1,878 crore during 2002-03 to Rs.3,210 crore during 2003-04. Besides, approximately Rs.15,000 was realized from offer for sale of PSU shares by the Government of India. Many investors who were lured into the market during 1992-94 apparently adopted a very cautious approach because of their frustration with some of the issuers and intermediaries associated with the securities market. They withdrew from the market for a while, and looked for quality issues the availability of which declined due to stricter eligibility criteria for public issues imposed by SEBI and the general slowdown in the economic activity. Simultaneously, issuers shifted like private placement where compliance is much less and to overseas market which is cost effective. Available data (Table 4), although scanty, indicate that private placement has become a preferred means of raising resources by the corporate sector. It is believed in some circles that private placement has crowded out public issues. There are several inherent advantages of relying on private placement route for raising resources. While it is a cost and time effective method of raising funds and can be structured to meet the needs of the entrepreneurs, it does not require detailed compliance with formalities as required in public or rights issues. However, recent SEBI guidelines reduced the attractiveness of private placement and the amount raised through this route declined during 2003-04 when it accounted for about 68per cent of total resources mobilised through domestic issues by the corporate sector as against 89per cent in the preceding
41 year. Simultaneously, availability of good public issues (particularly PSU disinvestments), with the improved perception about regulatory effectiveness (The Indian Household Investor’s Survey 2004 by SCMRD has found that there has been great improvement recently in the general public perception about capital market regulation in India), attracted the attention of investors to public issues. They seem to have returned to the primary market in 2003-04 as revealed by huge oversubscription to offer for sale. The amount raised by the corporate sector through public and private issues, as presented in Table 4, is quite impressive. However, most of the amount is being raised through private placement of debt securities. According to prime database, the share of debt securities in total resource mobilisation of the corporate sector was in the range 95-99per cent during 1997-98 to 2002-03. It was 75per cent during 2003-04. It may be noted that debt capital is temporary capital and has to be repaid on maturity. Hence most of the capital being raised by the corporate sector is not going to be available to them permanently. The capital which is of real consequence is equity capital which is not a significant source of finance for the corporate sector. What would, therefore, be relevant is the net amount raised through debt securities, i.e., the amount raised minus the amount repaid during the year. If such data were available, the amount raised would not look as impressive. Since such data are not available, we are having an inflated impression about the amount raised from the securities market. Despite massive modernization of the market and best market practices, government / public sector continues to dominate the securities market. Out of the Rs.267,660 crore raised during 2003-04, Rs.198,157 was raised by the government. Government raised another Rs.15,000 crore through offer for sale. Public sector accounted for 80per cent. The public sector accounted for 75per cent (Rs.44,349 crore) of total amount raised through private placement during 2003-2004. The government / public sector not only raised huge resources from
42 the securities markets, they also invested heavily through the securities market as subscribers to government securities and private placements. A relatively large proportion of shares in Indian companies are held by promoters. This accounts for over 55per cent in respect of companies listed on NSE. About 16per cent shares are held by institutional investors while Indian public hold only 18per cent. This is to be seen in the context of the Securities Contracts (Regulation) Rules, 1957 which requires a company desirous of getting its securities listed on a stock exchange to offer at least 25per cent securities to public for subscription. At the end of March 2004, 45 venture capital funds had raised Rs.1,750 crore from domestic and foreign investors and had invested Rs.1,415 crore in 409 companies. During 2003-04, these funds obtained 56 exits. Indian market is getting integrated with the global market though in a limited way through euro issues. Since 1992, when they were permitted access, Indian companies have raised over Rs.40,000 crore through ADRs/GDRs and ECBs. By the end of March 2004, 540 FIIs were registered with SEBI. They had net cumulative investments over of US$25.74 billion by the end of March 2004. The market is getting institutionalised as investors prefer MFs as their investment vehicle, thanks to the evolution of a regulatory framework for MFs, tax concessions offered by government and preference of investors for passive investing. The net collections by MFs picked up during 1990s and increased to Rs.19,953 crore during 1999-2000 (Table 4). This declined to Rs.4,583 crore during 2002-03 only to rise to Rs.47,684 crore during 2003-04. Starting with an asset base of Rs.25 crore in 1964, the total assets under management of MFs at the end of March 2004 were Rs.139,616 crore. Though the MF industry was opened up to private sector only in the 1990s, the private sector MFs account for three fourth of the assets under management.
43 The first SEBi-NCAER Survey (1998-99) had reported 23 million unit holders. The second survey (2000) reported 21 million unit holders. These numbers compared well with the number of investors owning equity and debentures. However, according to SCMRD, (The India’s Stock Market and Household Investors Survey, 2004) the Indian MF schemes, as a class, have remained far behind direct holding of equity shares. This difference in the findings is apparently accounted for by the time of the surveys. The Unit 64 of the UTI, which had huge investor accounts, has almost disappeared in the recent years.
44 Table – 2.4 Resource mobilisation from the primary market (Rs. crore) Issues 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 Corporate 14,219 16,366 23,537 44,498 48,084 36,689 37,147 42,125 60,192 72,450 78,396 74,330 75,241 69,503 Securities Domestic 14,219 16,366 23,286 37,044 41,974 36,193 33,872 37,738 59,044 68,963 74,199 71,988 71,815 66,405 Issues Non-Govt. 4,312 6,193 19,803 19,330 26,417 16,075 10,410 3,138 5,013 5,153 4,890 5,692 1,878 3,210 Public Co. PSU Bonds 5,663 5,710 1,062 5,586 3,020 2,292 3,394 2,982 ------Govt. - - 430 819 888 1,000 650 43 - - - 350 - 100 Companies Banks & - - 356 3,743 425 3,465 4,352 1,476 4,352 2,551 1,472 1,070 2,989 3,880 FIs Private 4,244 4,463 1,635 7,466 11,174 13,361 15,066 30,099 49,679 61,259 67,836 64,876 66,948 59,215 Placement Euro Issues - - 702 7,898 6,743 1,297 5,594 4,009 1,148 3,487 4,197 2,342 3,424 3,098 Govt. 11,558 12,284 17,690 54,533 43,231 46,763 42,658 67,386 106,067 113,336 128,483 152,308 181,979 1,98,1257 Securities Central 8,989 8,919 13,885 50,388 38,108 40,509 36,152 59,637 93,953 99,630 115,183 133,801 151,126 1,47,636 Govt. State Govt. 2,569 3,364 3,805 4,145 5,123 6,274 6,536 7,749 12,114 13,706 13,300 18,707 30,853 50,521 Total 25,777 28,650 41,227 99,031 91,315 83,472 79,835 109,511 166,259 185,786 206,879 226,838 257,220 2,67,660 Mutual 7,508 11,253 13,021 11,244 12,274 -5,833 -2,036 4,064 3,611 19,953 11,135 7,137 4,583 47,684 Funds Source: RBI Bulletin
45 b) Pricing An eligible company is free to make public/rights issue of securities of any denominations and at any price. It can issue the equity shares in the firm allotment category at a different price than the price at which net offer to public is made, provided the former price is higher than the latter. It has opinion to determine the price and justify the same in prospectus or may allow investors to determine the price through book building. In the former case, the price is known in advance to investor and the demand is known at the close of the issue. In case of public issue through book building, demand can be known at any time when the issue is open but price is known at the close of issue. The book building has become very popular now-a-days. Almost all the equity offering during 2004 were made through book building. A company making a public offer of equity shares can avail of green shoe option for stabilizing post- listing price of its shares. An issuer company proposing to issue capital through book building has two options viz., 75per cent book building route and 100per cent book building route. In case 100per cent book building route is adopted, not more than 50per cent of net offer to public can be allocated to QIBs, not less than 25per cent to retail individual investors (an investor who applies or bids for securities of or for a value of not more than Rs.50,000) and not less than 25per cent to non- institutional investors. In case 75per cent of net public offer is made through book building in the book built portion and not more than 50per cent of the net offer can be allocated to QIBs. The balance 25per cent of the net offer to public, offered at a price determined through book building, is available to retail individual investors who have either not participated in book building or have not received any allocation in the book built portion. In case of under subscription for any category, the undersubscribed portion can be allocated to the bidders in other categories. The underwriting is compulsory if the issue is made through book building. A company can use the online system of
46 exchanges for making public issues (called E-IPO). In such cases, the specified brokers collect application and application moneys from their clients and place orders with the company to buy its securities. An eligible company is free to make public or rights issue of equity shares in any denominations. However, in case of IPO by an unlisted company, the face value can be less than Rs.10 (but not less than Re.1) if the issue price is Rs.500 or more. If the issue price is less than Rs.500, the face value shall be Rs.10. c) Promoters’ Contribution The promoters’ contribution in case of public issues by unlisted companies and promoters’ shareholding in case of offers for sale should not be less than 20per cent of the post issue capital. In case of public issues by listed companies, promoters should contribute to the extent of 20per cent of the proposed issue or should ensure post-issue holding to the extent of 20per cent of the post-issue capital. The promoters should bring in the full amount of the promoters’ contribution including premium at least one day prior to the issue opening date. The minimum promoters’ contribution is locked in for a period of 3 years. The contribution in excess of minimum contribution is locked in for one year. The requirement of promoter contribution does not apply in case of public issue of securities by a company which is listed on a stock exchange for at least 3 years and has a track record of dividend payment for at least 3 preceding years. A listed company can make preferential issue of equity shares or other instruments convertible to equity to any select group of persons on private placement basis. Such shares can be issued at a price not less than the higher of the average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during preceding 6 months or the average of same during the last two weeks. The instruments allotted to promoters on preferential basis are locked in for 3 years. The instruments allotted to others or 47 promoters in excess of 20per cent of capital of the company are locked in for one year. The lead merchant banker discharges most of the pre-issue and post- issue obligations. He satisfies himself about all aspects of the offering and adequacy of the disclosures in the offer document. He issues a due diligence certificate stating that he has examined the prospectus, he finds it in order and that it brings out all the facts and does not contain anything wrong or misleading. He also takes care of allotment, refund and dispatch of certificates. The admission to a depository for dematerialization of securities is a prerequisite for making a public or rights issue or an offer for sale. The investors, however, have the option of subscribing to securities in either physical form or dematerialized form. All new IPOs are compulsorily traded in dematerialized form. Every public listed company making IPO of any security for Rs.10 crore or more is required to do so only in dematerialized form. A company cannot make a public issue unless it has made an application for listing of those securities with stock exchange(s). d) Mutual funds MF is a kind of collective investment vehicle which pools the resources of small investors, who generally lack expertise to invest on their own, invests in securities and distributes the return there from among them on cooperative principles. It is set up in the form of a trust which has sponsor, trustees, asset management company, and custodian. The 1990s witnessed emergence of a large variety of funds. There are funds which invest in growth stocks, funds which specialize in the stocks of a particular sector, funds which assure returns to investors, funds which invest in debt instruments, funds which invest aggressively and funds which do not do any of these. Thus there are income funds, growth funds, balanced funds, liquid funds, gilt funds, index funds, sectoral funds, and there are open ended, close ended and assured return (now extinct) funds there is a fund for every body and also fund of funds. At the end 48 of March 2004, there were 37 MFs with 403 schemes. The MFs are regulated by SEBI regulations which prescribe a code of conduct as well as impose various investment restrictions in the interests of investors. In order to reduce skewed unit holdings, minimum number (20) of investors in a scheme and also ceiling (25per cent of corpus) on holding of an investor in a scheme has been prescribed. e) Government Securities The primary issues of the Central Government have increased many-fold during the decade of 1990s from Rs.8,989 crore in 1990-91 to Rs.147,636 crore in 2003-04 (Table 2.4). The issues by state governments increased by about twenty times from Rs.2,569 crore to Rs.50,521 crore during the same period. The yield on government securities has been declining over the years due to soft interest rates, confortable liquidity, and RBI undertaking substantial private placement. The weighted average yield on central government securities declined to 5.71per cent in 2003-04 from a peak of 13.75per cent in 1995-96. Similarly the weighted average yield on state government securities declined to 6.13per cent in 2003-04 from a peak of 14per cent in 1995-96. There is a conscious effort to elongate the maturity profile of the government securities by issuing of securities issued in 2003-04 increased to 14.94 years, with the highest tenor being 30 years. According to SEBI, there were a total of 1.6 crore investors accounts ( it is likely that there may be more than one folio of an investor with a MF and an investor may have folios with more than one MF) holding units of Rs.79,601 crore as on 31st March, 2003 (Table 2.5). Out of this, 1.56 crore were individual investors accounts, which held units of Rs.32,691 crore. Individual investor accounts constituted 97.42per cent of the total number of accounts and 41.07per cent of the total net assets. Corporates and institutions, who formed only 2.04per cent of the total number of investors accounts in the MF industry, contributed a sizeable amount of Rs.45,470 crore which was 57.12per cent of 49 the total net assets in the mutual funds industry. The NRIs / OCBs and FIIs constituted a very small percentage of investors accounts (0.54per cent) and contributed Rs.1440.18 criore (1.81 per cent) of net assets. Though these detailed data for subsequent years are not available, available data (Table 2.6) indicate that the number of investors has been declining. The number of unit holders declined to 1.46 crore at the end of March 2004 and 1.32 crore at the end of January 2005. This is in consonance with the findings of the SCMRD Survey.
Table – 2.5 Unit holding pattern of mutual funds Industry as on 31st March, 2003
(Rs. crore)
Per cent of Number of Net Asset Total Per cent of Category Investors Value Investors Total NAV Accounts (Rs. crore) Accounts Individuals 15,557,506 97.42 32,691.12 41.07 NRIs / OCBs 84,311 0.53 878.51 1.10 FIIs 2,058 0.01 561.67 0.71 Corporates / 324,979 2.04 45,469.53 57.12 Institutions / Others Total 15,968,854 100.00 79,600.83 100.00
Source: SEBI Bulletin
50 Table 2.6 Assets under management of MFs as on 31st March, 2004 (Rs. crore)
Open Ended Close Ended Total Scheme No.of No.of No. of Amount Amount Amount Investors Investors Investors Income 60,854 3670127 1,670 800 62,524 3670927 Growth 22,154 5903361 1,459 826895 23,613 6730256 Balanced 3,296 2715284 784 76942 4,080 2792226 Liquid 41,704 48889 - 0 41,704 48889 Gilt 6,026 97714 - 0 6,026 97714 ELSS 489 338427 1,180 964885 1,669 1303312 Total 1,34,523 1,27,73,802 5,093 18,69,522 1,39,616 1,46,43,324 Source : AMFI & SEBI
2.11 Secondary Market a) Corporate Securities Select indicators in the secondary market are presented in Table 2.7. The number of stock exchanges increased from 11 in 1990 to 23 now. All the exchanges are fully are fully computerised and offer 100per cent on-line trading. 9,359 companies were available for trading on stock exchanges at the end of March 2004. The trading platform of the stock exchanges was accessible to 9,368 brokers / 829 derivative brokers and 12815 sub-brokers from over 400 cities on the same date.
51 Table – 2.7 Secondary Market – Select Indicators (Amount in Rs. crore)
Cash Segments of Stock Exchanges At the End of SGL Turn Derivatives Turn Financial Market Cap over Turnover No. of No. of Listed S & P Market Turn over Year Ratio (per Brokers Companies CNX Nifty Cap over Ratio(per cent) cent) 1990-91 - 6,229 366.45 110.279 20.6 - - - - 1991-92 - 6,480 1261.65 354,106 57.4 - - - - 1992-93 - 6,925 660.51 228,780 32.4 - - - - 1993-94 - 7,811 1177.11 400,077 45.6 203,703 50.9 - - 1994-95 6,711 9,077 990.24 473,349 45.6 162,905 34.4 50,612 - 1995-96 8,476 9,100 985.30 572,257 47.0 227,368 39.7 127,179 - 1996-97 8,867 9,890 968.85 488,332 34.6 646,116 132.3 122,942 - 1997-98 9,005 9,833 1116.65 589,816 37.7 908,681 154.1 185,708 - 1998-99 9,069 9,877 1078.05 574,064 34.1 1,023,382 178.3 227,228 - 1999-00 9,192 9,871 1528.45 1,146,200 59.2 2,067,031 180.34 539,255 - 2000-01 9,782 9,954 1148.20 6,42,400 30.7 2,880,990 448.47 698,146 4,038 2001-02 9,687 9,644 1129.55 743,201 32.6 895,817 120.54 1,573,874 103,847 2002-03 9,519 9,413 978.20 725,871 29.4 968,954 133.48 1,941,673 442,343 2003-04 9,368 9,359 1771.90 1,377,612 52.3 1,620,931 117.66 2,639,244 2,142,920 Note: Turnover figures for the respective year; - Information Not Available / there was no trading, Market capitalisation up to 1998-99 mean all India market capitalisation and from 1999-00 mean market capitalisation of securities listed on NSE and BSE only. Source: RBI, SEBI, NSE & BSE
52
The market capitalisation grew ten fold between 1990-91 and 1999- 2000. It declined thereafter following a major market misconduct. It, however picked up in 2003-04 to Rs.13,77,612 crore at the end of March 2004. The market capitalisation ratiom, which indicates the size of the market, increased sharply to 60per cent by March 2000. It, however, declined to 52per cent by end March 2004. Traditionally, manufacturing companies and financial services sector accounted for a major share in market capitalisation,. However, in the recent past, the importance of these traditional sectors has declined and new sectors like, information technology, pharmaceuticals and fast moving consumer goods have picked up. The trading volumes on exchanges have been witnessing phenomenal growth during the 1990s. The average daily turnover grew from about Rs.150 crore in 1990 to Rs.12,000 crore in 2000, peaking at over Rs.20,000 crore. One-sided turnover on all stock exchanges exceeded Rs.10,00,000 crore during 1998-99, Rs.20,00,000 crore during 1999-2000 and approahced Rs.30,00,00 crore during 2000-01. However, it declined substantially to Rs.968,954 crore in 2002-03 to almost double in the next year to Rs.1,620,931 crore. The turnover ration, which reflects the volume of trading in relation to the size of the market, has been increasing by leaps and bounds after the advent of screen based training system by the NSE. The turnover ratio for the year 2000-01 increased to 448 but fell substantially to 118 during 2003-04. The average trade size in the equity segments of the Exchanges was about Rs.27,000 during 2003-04. The sectoral distribution of turnover has under-gone significant change over last few years. The share of manufacturing companies in turnover of top ‘50’ companies, which was nearly 80per cent in 1995-96, declined sharply to about 2per cent in 2002-03. During the same period the share of IT companies in turnover increased sharply from nil in 1995-96 to 75per cent in 2002-03. The
53 year 2003-04, however, presents a balanced composition where manufacturing and IT sectors have shares of 38per cent and 31per cent respectively. Trades concentrate on a few exchanges / securities / brokers. The leading stock exchange, NSE, alone accounted for 68per cent of total turnover in the cash segment of stock exchanges in 2003-04. Top two exchanges accounted for 99per cent of total turnover, while over a dozen exchanges reported nil turnover during the said year. Top ‘5’ and ‘100’ securities accounted for 31per cent and 91per cent of turnover respectively during 2003- 04 on NSE. During the same period, top ‘5’ and ’100’ brokers accounted for 12per cent and 61per cent of total turnover respectively. The institutional investors accounted for 10.8per cent of turnover in cash segments of exchanges during 2004. The trading is concentrated among a limited number of stocks and is very thin in a large number of stocks. Many securities listed on stock exchanges are not traded at all and trading in may other securities is negligible. On an average, about 30per cent companies on BSE were traded every month during 2003-04. Only 75per cent of companies traded on BSE were traded for more than 100 days. Trading took place for less than 100 days in cash of 25per cent of companies traded at BSE during the year, and for less than 10 days in case of 6per cent of companies traded. On an average 96per cent of companies available for trading at NSE were traded every month during 2003-04. Over 92per cent of companies traded on NSE were traded for more than 100 days during 2003-04. The historical reasons explain most of the difference in the liquidity on these two exchanges. There was no trade in several companies listed on a number of small (erstwhile regional) stock exchanges.
The two most popular indices used in the market are SENSEX and S&P CNX NIFTY. The movement of the market in terms of the latter has been discussed here it is maintained by IISL, an entity exclusively engaged in this
54 work. In the very first year of liberalisation, i.e. 1991-92, the S&P CNX NIFTY recorded a growth of 267per cent, followed by sharp decline of 47per cent in the next year as certain irregularities in securities transactions were noticed. Since then, the market experienced a roller coaster ride till 1999-2000 when the Nifty firmed up by 42per cent due to perception about the strength of the government and its commitment towards second generation reforms, improved macroeconomic parameters and better corporate results. The trend got reversed during 2000-01, which witnessed large sell-offs in new economy stocks in global markets and on domestic bourses, deceleartion in the growth of the domestic economy, and market turbulence following allegations of large scale irregularities in securities transactions. The trend precipitated further during 2001-02 with introduction of rolling settlement and withdrawal of all deferral products in July 2002, suspension of repurchase facility under UTI’s US-64 scheme, terrorist attack on World Trade Centre in September 2002, etc. It reversed in the year 2003-04 following all-round development and robust fundamentals in the economy coupled with feel good factors and huge FII inflows, when NIFTY firmed up by 81per cent. The second tier stocks represented by NIFTY junior moved even sharper at 169per cent. The movement of S&P CNX NIFTY since January 1990 is presented in Graph 2.1.
55 GRAPH 2.1 THE MOVEMENT OF S&P CNX NIFTY
Source: SEBI b) Derivatives Market Derivatives trading commenced in India in June 2000. The exchange traded derivatives witnessed a volume of Rs. 21, 42,920 crore with about 6 crore contracts during the 2003-04 as against Rs. 442,343 crore during the 2002-03. While NSE accounted for about 99.4per cent of total turnover, BSE accounted for the balance in 2003-04. Mumbai contributed for about 48per cent of total turnover indicating the all India participation in higher volumes from June 2001 with introduction of index options and still higher volumes in November 2001 when stock futures were introduced. Both in terms of number of contracts traded and notional turnover in stock futures, NSE tops the list of world’s derivative exchanges. It is observed that futures are more popular than options; contracts on securities are amore popular than those on indices; call options are more popular than put options; and near month contracts are more popular than not-so-near month contracts. The index futures, stock futures, index options and stock options accounted for 26per cent, 62per cent, 2per cent
56 and 10per cent srespectively of total turnover during 2003-04. The interest rate futures, which witnessed trades only during June- August, 2003, reported an insignificant volume of Rs. 202 crore during 2003-04. Besides, there is a huge OTC market for interest rate derivatives (FRAs/IRSs). The institutional investors accounted for 3.3per cent of derivatives turnover in 2004. c) Turnover on Stock Exchanges The relative importance of various stock exchanges in the market had undergone dramatic change since the advent of NSE. The increase in turnover took place mostly at the big exchanges and it was partly at the cost of small exchanges that failed to keep pace with the changes. NSE is the market leader with over 89per cent of total turnover (volumes on all segments) in 2003-04. Top 2 stock exchange together accounted for 99.64per cent of turnover, while about a dozen exchanges reported nil turnover during the year. The big exchange now report higher turnover from its trading terminals in the home turf of most of the corresponding local exchanges. The growth and distribution of turnover is presented in Table 2.8.
57 Table - 2.8 Growth and distribution of turnover on stock exchanges
Stock Exchange 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 NSE 8,586 79,155 337,681 481,456 519,943 1,143,267 1,770,457 1,562,283 2,126,545 4,546,279 Mumbai 67,749 50,064 124,190 207,113 310,750 686,428 1,001,704 309,474 321,160 524,022 Uttar Pradesh 7,923 12,373 16,070 15,209 18,429 23,876 25,112 13,349 14,763 11,751 Ahmedabad 12,452 20,626 41,065 31,117 29,928 37,566 54,036 14,763 15,459 4,545 Calcutta 52,872 62,149 105,481 178,779 172,818 357,167 355,035 27,075 6,523 1,928 Madras 6,117 3,359 3,912 2,458 739 500 218 48 76 101 OTCEI 365 224 219 283 198 3,603 126 4 0 16 Delhi 9,144 10,083 48,992 67,936 50,651 94,528 82,997 5,526 11 2 Hyderabad 1,160 1,107 480 1,861 1,270 1,236 978 41 5 2 Bangalore 712 897 4,389 8,637 7,749 1,115 600 70 0 0 ICSE NA NA NA NA NA 274 237 70 53 0 Magadh 797 1,129 2,755 323 1 9 2 0 0 0 Bhubaneshwar 303 211 231 203 74 68 0 0 0 0 Cochin 614 287 152 164 96 66 26 2 0 0 Coimbatore 3,192 5,007 4,798 4,274 769 78 0 0 0 0 Gauhati 285 616 484 120 52 0 0 0 0 0 Jaipur 879 1,048 1,519 453 63 2 0 0 0 0 Ludhiana 4,975 4,849 5,274 8,316 6,070 6,872 9,154 964 0 0 Mhdya Pradesh 118 202 5 1 1 10 2 16 0 0 Mangalore 62 39 380 314 11 0 0 0 0 0 Pune 3,672 7,096 10,084 8,624 4,827 6,090 6,171 1,171 0 0 SKSE 329 452 395 17 0 0 0 0 0 0 Vadodara 3,855 2,519 4,344 4,577 1,749 159 2 20 3 0 Total 186,161 263,892 712,901 1,022,235 1,126,187 2,362,913 3,306,856 1,934,757 2,484,596 5,088,647 NSE+BSE 76,335 129,219 461,871 688,569 830,693 1,829,695 2,772,161 1,871,757 2,447,704 5,070,302 Total (Except NSE+BSE) 109,826 134,674 251,030 333,666 295,494 533,219 534,695 63,000 36,896 18,345 Source: SEBI Bulletin
58 d) Dematerialization of Securities In order to get rid of ills of paper based securities and promote dematerialistion of securities, though investors has a right to hold securities in any form, the regulator introduced some kind of compulsion through trading and settlement. At the end of March 2004, there are two fully operational depositories with about 400 depository participants offering depository service from over 2000 locations. The growth of dematerialization is considered as a success story in Indian securities market, as may be seen from the Table 2.9 as stated earlier, there are about 6 million beneficial accounts with these depositories.
Table – 2.9 Growth of dematerialization
NSDL CDSL
At the end of the DPs DPs Crore) Crore) (crore) period (crore) investor investor No. of active No. of active No. of active No. of active Demand Qty. Demand Qty. Demand Qty. Demand Qty. DP Locations DP Locations Mkt. Cap. (Rs. Mkt. Cap. (Rs. accounts (lakh) accounts (lakh)
1996-97 24 24 90818 2 NA NA NA NA NA NA 1997-98 49 200 288347 176 NA NA NA NA NA NA 1998-99 84 750 396551 711 NA NA NA NA NA NA 1999-00 124 1425 765875 1550 NA NA NA NA NA NA 2000-01 186 1896 555376 3721 NA 137 264 10906 192 0.81 2001-02 212 1648 615001 5167 37.17 148 346 24337 482 1.28 2002-03 213 1718 600539 6876 37.96 189 414 36164 821 2.47 2003-04 214 1719 1107084 8369 52.04 211 441 106443 1401 6.29
*Market capitalization of companies that have joined NSDL. # Market capitalization of securities in CDSL. Source: NSDL and CDSL
59 e) Government Securities The aggregate turnover in central and state government dated securities, including treasury bills, through SGL transactions increased 50 times between 1994-95 and 2003-04. During 2003-04 it reached a level of Rs.26,39,244 crore, higher than the trading volumes in cash or derivative segments of all the exchanges in the country, reflecting deepening of the market. The share of outright transactions in government securities increased from 23.2per cent in 1995-96 to 64per cent in 2003-04. The share of repo transactions declined correspondingly from 76.8per cent in 1995-96 to 36per cent in 2003-04. The share of dated securities in the turn-over of government securities increased from 69per cent in 1996-97 to 93per cent 2003-04. The T-bills accounted for the remaining SGL turnover. Contrary to trades in corporate securities, these are generally high value transactions. The average trade size in out-right transactions and repo transactions during 2003-04 were Rs.6.5 crore and Rs.45 crore respectively. 94per cent of trades in government securities were settled through CCIL during 2003-04, while the remaining were settled directly at RBI. f) Trading Mechanism The exchanges provide an on-line fully-automated Screen Based Trading System (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds a matching order from a counter party. SBTS electronically matches orders on a strict price/time priority and hence cuts down on time, cost and risk of error, as well as on fraud thereby resulting in improved operational efficiency. It allows faster incorporation of price sensitive information into prevailing pries, thus increasing the information efficiency of markets. It enables market participants to see the full market on real-time basis, making the market transparent. It allows a large number of participants, irrespective of their geographical locations, to trade 60 with one another simultaneously, improving the depth and liquidity of the market. It provides full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody. Trading platform is also accessible to an investor through the Internet and mobile devices such as WAP. It also provides a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety. A typical trading networks is presented in Chart 2.1.
CHART – 2.1 TRADING NETWORK
a) Trading Rules SEBI has framed regulations to prohibit insider trading as well as unfair trade practices. The acquisitions and takeovers are permitted in a well-defined and orderly manner. Thresholds of shareholding, which require disclosure or public offer, have been prescribed. The companies are permitted to buy back their securities to improve liquidity and enhance the share-holders’ wealth. b) Price Bands Stock market volatility is generally a cause of concern for both policy makers as well as investors. To curb excessive volatility, SEBI has prescribed a market wide circuit breaker system which brings about a coordinated trading 61 halt in all equity and equity derivatives markets nation-wide, when the index moves either way by 10per cent, 15per cent and 20per cent. The movement of either S & P CNX Nifty or Sensex, whichever is breached earlier, triggers the trading halt. As an additional measure of safety, exchanges have imposed individual scrip-wise price banks, as high as 20per cent in some securities. However, in respect of securities for which derivative products are available or those included in indices on which derivative products are available, a daily price limit of 10per cent is applicable. c) Demat Trading There are in place two fully developed depositories which maintain and transfer ownership records in electronic form for the entire range of securities. They encourage broadest direct and indirect industry participation. A large variety of instruments including all securities and money market instruments are hold in depositories. These are held in dematerialized form. Investor is sovereign under the depository legislation which gives him the right to hold the securities in physical form or demat form. All securities which investor likes to hold in demat form, are held in depositories. All active securities are traded and settled in demat form. The depositories operate under the Depositories Act, 1996 and SEBI (Depositories and Participants Regulations) 1996, and systems are in place for smooth inter-depository transfer of securities. Stamp duty on transfer of demat securities have been abolished. Securities held in depositories are freely transferable. Demat securities are the preferred collateral in the market. The admission to the depository for dematerialization of securities has been made a prerequisite for making a public or rights issue or an offer for sale. It has also been made compulsory for public listed companies making IPO of any security for Rs.10 crore or more to do the same only in dematerialized form. All new IPOs are compulsorily traded in demat form.
62 d) Charges The investors directly or indirectly pay different kinds of charges for securities transactions. These are ultimately paid to the Exchanges, depositories, SEBI, state governments and central government. The brokers are required to pay service tax @ 10per cent on their brokerage income. The securities transaction tax (STT) is payable by the brokers at the following rates: (Table 2.11).
Table 2.11 Securities transaction tax Rate (per Type of Transaction Payable by Remarks cent) Delivery based 0.075 Buyer and No long term capital transactions seller each gains tax. 10per cent Non-delivery 0.015 Seller short term capital transactions gains payable. This Derivatives transactions 0.010 Seller tax can be set off against normal tax on Transactions in units of 0.150 Seller business income from equity oriented MF such transactions Transactions in 0.000 - Long term and 30per government securities cent short term and units of debt capital gains tax oriented MFs payable
A stock broker in cash segment is required to pay to SEBI a registration fee of Rs.5,000 for every financial year, if his annual turnover does not exceed Rs.1 crore. If the turnover exceeds Rs.1 crore during any financial year, he has to pay Rs.5,000 plus one-hundredth of 1per cent of the turnover in excess of Rs.1 crore. After the expiry of five year from the date of initial registration as a broker, he has to pay Rs.5,000 for a block of five financial years. A sub-broker is similarly required to pay Rs.1,000 per year for initial five years and Rs.500 per year for subsequent years. A broker in derivative segment is required to pay Rs.10,000 per year plus 10 paise for Rs.1,00,000 of turnover in excess of
63 Rs.500 crore. A clearing member on the derivative segment pays a fee of Rs.25,000 per year. Besides, the exchanges collect transaction charges from its trading members. NSE levies a transaction charge of Rs.4 per Rs.1 lakh of turnover in cash segment. It levies a transaction charge@5 paise per Rs.1 lakh of turnover for trades up to Rs.25,000 crore and @2 paise per Rs.1 lakh of turnover for trades in excess of Rs.25,000 crore on WDM segment. It levies a transaction charge of Rs.2 per lakh of turnover in derivative segment subject to minimum of Rs.1 lakh per year. No separate charge is levied for trading and for clearing and settlement. However, in case transactions in government securities, which are settled through CCIL, CCIL charges fees at different rates for different kinds of transactions. For settlement of out right trades in government securities, each counter party pays to CCIL a sum of Rs.150 per crore or face value, subject to a minimum of Rs.25 and a maximum of Rs.5,00 per trade. The maximum brokerage a trading member can levy in respect of securities transactions is 2.5per cent of the contract price, exclusive of statutory levies like SEBI fee, service tax and stamp duty. This maximum brokerage is inclusive of the brokerage charged by the sub-broker which shall not exceed 1.5per cent of the contract price. However, brokerage as low as 0.15per cent is also observed in the market. Stamp duties are payable as per the rate prescribed by the relevant state. In Maharashtra, it is charged @ Re.1 for every Rs.10,00 or part thereof (i.e. 0.01per cent) of the value of security at the time of its purchase/sale as the case may be. However, if the securities are not delivered, it is levied @ 20 paise for every Rs.10,000 or part thereof (0.002per cent). The depositories provide depository services to investors through depository participants. They do not charge the investors directly, but charge their DPs who are free to have their own fee structure for their clients. By a recent SEBI directive, the account opening charges, custody charges and the
64 charges on credit of securities have been waived. A depository is required to pay a registration fee of Rs.20,00,000 and an annual fee of Rs.10,00,000 to SEBI, while a DP is required to pay a registration fee of Rs.1,00,000 and an annual fee of Rs.1,000. e) Settlement The trades accumulate over a trading cycle of one day and at the end of the day, these are clubbed together, and positions are netted and payment of cash and delivery of securities settle the balance after 2 working days. All trades executed on day ‘T’ are settled on T+2 day. Trades are executed on screen and matched trade details are linked to settlement system electronically, and hence matching and confirmation of trades for direct participants are instantaneous. All communications relating to securities settlement is fully electronic and automated. For instance, the clearing agency of funds/securities to members electronically through secured networks. It also sends electronic advice to clearing banks and depositories to debit the members’ accounts to the extent of their obligations. The banks and the depositories debit accounts of members and credit the account of the clearing agency electronically. The reverse happens when the funds/securities are paid out to members. The exchange is connected electronically to the clearing and settlement agency, which in turn is connected electronically to clearing banks, depositories, custodians and members. The depositories have electronic communication with depository participants, clearing agency, custodians, clients and exchanges. Most of these electronic communications are interactive. The typical clearing and settlement process is presented in Chart 2.2. Except at the stage of entering orders into trading system, no data is entered manually or electronically in the entire value chain. No fresh inputting of data takes place at any stage. Data flows seamlessly among the entities viz. from exchanges to clearing agency and from clearing agency to clearing banks, 65 depository, members and custodians. Once a trade is executed, it has to be settled. There is no way that it can be cancelled. The clearing corporations / houses have been allowed to borrow and settle the trades on behalf of the brokers who fail to deliver securities. Though the largest exchange uses the services of a clearing corporation to clear and settle the trades, all exchanges are being required to transfer these functions to a clearing corporation.
CHART – 2.2 CLEARING AND SETTLE PROCESS
1. Trade details from Exchange to Clearing and Settlement Agency (CSA) (real-time and end of day trade file). 2. CSA notifies the consummated trade details to CMs / custodians who affirm back. Based on the affirmation, CSA applies multilateral netting and determines obligations. 3. Download of obligation and pay-in advice of funds / securities 4. Instructions to clearing banks to make funds available by pay-in-time. 5. Instructions to depositories to make securities available by pay-in-time. 6. Pay-in of securities (CSA advises depository to debit pool account of custodians / CMs and credit its account and depository does it). 7. Pay-in of funds (CAS advises Clearing Banks to debit account of custodians/ CMs and credit its account and clearing bank does it). CSA 66 transfers funds between clearing banks to meet the pay-out requirements at each bank. 8. Pay-out of securities (CSA advises depository to credit pool account of custodians / CMs and debit its account and depository does it). 9. Pay-out of funds (CSA advises Clearing Banks to credit account of custodians / CMs and debit its account and clearing bank does it). 10. Depository informs custodians / Clearing Members (CMs) through DPs. 11. Clearing Banks inform custodians / CMs.
2.13 Securities Contracts (Regulation) Act, 1956 It provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and aims to prevent undesirable transactions in securities. It gives central government / SEBI regulatory jurisdiction over (a) stock exchanges through a process of recognition and continued supervision, (b) contracts in securities, and (c) listing of securities on stock exchanges. As a condition of recognition, a stock exchange complies with the conditions prescribed by Central Government. Organised trading activity in securities takes place on recognised stock exchanges. The stock exchanges determine their own listing regulations which have to conform to the minimum listing criteria set out in the Rules.
2.14 Depositories Act, 1996 The Depositories Acts, 1996 provides for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by (a) making securities of public limited companies freely transferable subject to certain exceptions, (b) dematerialising the securities in the depository mode; and (c) providing for maintenance of ownership records in a book entry form. In order to streamline the settlement process, the Act provides transfer of ownership of securities electronically by book entry without necessitating the securities move from 67 person to person. The Act has made the securities of all public limited companies freely transferable, restricting the company’s right to use discretion in effecting the transfer of securities, and the transfer deed and other procedural requirements under the Companies Act have been dispensed with.
2.15 Companies Act, 1956 It deals with issue, allotment and transfer of securities and various aspects relating to company management. It prescribes for standard of disclosure in public issues of capital, particularly in the fields of company management and projects, information about other listed companies under the same management, and management perception of risk factors. It also regulates underwriting, the use of premium and discounts on issues, rights and bonus issues, payment of interest and dividends, supply of annual report and other information etc.
2.16 Rules and Regulations In order to meet exigencies of the market and to provide flexibility to regulators, they have been delegated substantial powers of subordinate legislation. The Government have framed rules under the SCRA, the SEBI Act and the Depositories Act. SEBI has framed regulations under the SEBI Act and the Depositories Act for registratiion and regulation of all market intermediaries, and for prevention of unfair trade practices, insider trading, etc. The regulated and the market participants are consulted before framing any regulation. Under the Acts, Government and SEBI issue notifications, guidelines, and circulars which need to be complied with by the market participants. The SROs like stock exchanges have also laid down their rules and regulations. The list of the Regulations, Guidelines and Schemes issued by SEBI is presented in Table 2.13.
68 Table – 2.13 Regulations, Guidelines and Schemes issued by SEBI Regulations 1 SEBI (Stock Brokers and Sub Brokers) Regulations, 1992 2 SEBI (Prohibition of Insider Trading) Regulations, 1992 3 SEBI (Merchant Bankers) Regulations, 1992 4 SEBI (Portfolio Managers) Regulations, 1993 5 SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 6 SEBI (Underwriters) Regulations, 1993 7 SEBI (Debentures Trustees) Regulations, 1993 8 SEBI (Bankers to an Issue) Regulations, 1994 9 SEBI (Foreign Institutional Investors) Regulations, 1995 10 SEBI (Custodian of Securities) Regulations, 1996 11 SEBI (Depositories and Participants) Regulations, 1996 12 SEBI (Venture Capital Funds) Regulations, 1996 13 SEBI (Mutual Funds) Regulations, 1996 14 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 15 SEBI (Buy-Back of Securities) Regulations, 1998 16 SEBI (Credit Rating Agencies) Regulations, 1999 17 SEBI (Collective Investment Schemes) Regulations, 1999 18 SEBI (Foreign Venture Capital Investors) Regulations, 2000 19 SEBI (Procedure for Board Meeting) Regulations, 2001 20 SEBI (Issue of Sweat Equity) Regulations, 2002 21 SEBI (Procedure for Holding Enquiry by Enquiry officer and Imposing Penalty) Regulations, 2002 22 SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations, 2003 23 SEBI (Central Listing Authority) Regulations, 2003 24 SEBI (Ombudsman) Regulations, 2003 25 SEBI (Central Database of Market Participants) Regulations, 2003 26 SEBI (Self Regulatory Organisations) Regulations, 2004 27 SEBI (Criteria for Fit and Proper Person) Regulations, 2004
69 Guidelines 1 SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 2 Guidelines for Opening of Trading Terminals Abroad (Issued in 1999) 3 SEBI (Disclosure & Investor Protection) Guidelines, 2000 4 SEBI (Delisting of Securities) Guidelines, 2003 5 SEBI (STP Centralised Hub and STP Service Providers)Guidelines, 2004 6 Comprehensive Guidelines for Investor Protection Fund / Customer Protection Fund Fund at Stock Exchanges (Issued in 2004) Schemes 1 Securities Lending Scheme, 1997 2 SEBI (Informal Guidance) Scheme, 2003 Initiative 1 SEBI (Award for Excellence in Research in Securities Market) Initiative (Announced in 2004) Source: SEBI
2.17 Regulators The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA), Ministry of Company Affairs (MoCA), SEBI and Reserve Bank of India (RBI). The activities of these agencies are coordinated by a High Level Committee on Capital and Financial Markets. The orders of SEBI under the securities laws are appellable before the Securities Appellate Tribunal. The orders of the SAT are appellable only before the Supreme Court on points of law. Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI. The powers of the DEA under the SCRA are also concurrently exercised by SEBI. The specified powers under the SCRA in respect of the contracts for sale and purchase of government securities, gold related securities, money market securities and securities derived from these
70 securities and ready forward contracts in debt securities are exercised concurrently by RBI. The SEBI Act and the Depositories Act are mostly administered by SEBI. The rules under the securities laws are framed by government while the regulations are framed by SEBI. These are administered by SEBI. The powers under the Companies Act relating to issue and transfer of securities and non-payment of dividend are administered by SEBI in case of listed public companies and public companies proposing to get their securities listed. The SROs ensure compliance with their own rules as well as with the rules relevant to them under the securities laws.
2.18 Intermediaries As stated earlier, the securities market used the services of a large variety of intermediaries to bring the suppliers of funds and suppliers of securities together for a variety of transactions. The quality of intermediation services determines the shape and health of the securities market, as the suppliers of funds / securities rely on knowledge and expertise of the intermediaries and look up to them for guidance and support. The provision of quality intermediation is necessary not only to sustain the reforms in the market, but also to maintain and enhance the confidence of investors / issuers in the market. They can have comfort if the intermediary as well as its employees (i) follow a certain code of conduct and behave properly and (ii) are capable of providing professional services. All the intermediaries in the securities market are now registered and regulated by SEBI. A code of conduct has been prescribed for each intermediary as well as for their employees in the regulations; capital adequacy and other norms have been specified; a system of monitoring and inspecting their operations has been instituted to enforce compliance; and disciplinary actions are being taken against them for violating any regulation. All the intermediaries in the market are mandated to have a compliance officer who reports independently to SEBI about any non- compliance observed by him. Thus a reasonably satisfactory arrangement is in 71 place to ensure good conduct of the intermediaries. As regards the capability, the intermediaries need to have capable people who understand the market, regulations and products and can guide the investors and issuers to take appropriate decisions. This is generally ensured through a set of complementary initiatives, namely, training and certification programmes. SEBI has mandated certifications for derivative brokers and MF distributors. SEBI has set up an in institute called ‘National Institute of Securities Markets’ which will undertake training and certification with credibility and efficiency. It would design and implement the entire gamut of educational initiatives, including education, training, certification, research, consultancy, in the area of securities market and allied subjects to build a cadre of securities market professionals, which is a basic infrastructure for development of the securities market. Of India’s 24 stock exchanges, equity trading is most active in the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Since the NSE’s inception in 1994, it has caught up with the BSE in terms of capitalisation but exceeded it in turnover. The BSE boasts of over 4,000 listed companies, surpassing stock exchanges in the US. This explains its slightly higher market capitalisation over the NSE, although its lower turnover implies that inefficiencies remain due to the high proportion of untraded companies. Its share of total equity turnover is just 33per cent compared to 66per cent of its rival, the NSE is presented Graph 2.2.
72 GRAPH 2.2 INDIA’S STOCK MARKETS: SCALLING NEW HIGHS
Source: Bloomberg
2.19 Indian household investments: low risk, low return The lion’s share of households’ total financial savings, roughly 50per cent, is placed in bank deposit accounts. The rest of the pie is spread over small savings accounts28, at just over 10per cent, and a combined 25per cent in insurance and pension funds. Because of these institutions’ conservative approach to investing, they appeal very strongly to households. Over the past 5 years, households had a mere 5per cent of their savings invested in the stock market on average. Granted, the general aversion to riskier instruments such as equities is not only a product of the public’s preference for safe returns. India’s equity markets have experienced several scandals in the past, resulting occasionally in substantial capital losses to many investors. This has essentially discouraged a considerable number of them to return to the stock markets, although in the past two years confidence has gradually regained some ground. How many households are investing in the capital markets? A joint survey by the Securities and Exchange Board of India and National Council for Applied Economics Research (SEBINCAER) in March 2003 estimated 73 that only 13 million households out of the total 177 million surveyed have investments in the capital markets. This is equivalent to a mere 7per cent of total Indian households. The robust economic expansion since the survey and the resulting increase in per capita GDP (see Chart 2.3) may have widened the household investor base, but possibly not enough to considerably increase market volumes. CHART 2.3 INDIA’S GDP PER CAPITAL STEADILY RISING
Source: Institute of International Finance, Reserve Bank of India, DB Research
A key ingredient to reduce households’ risk aversion is improving their understanding of longterm investment, particularly in the equity market. Regarding bonds, there is a concerted effort among the RBI and SEBI, as well as the BSE and NSE, to raise retail investors’ knowledge about the mechanics and risk/return tradeoffs of debt securities. However, the thin volumes can be expected to persist so long as the government continues to provide savings schemes, which reduce incentives to invest in fixedincome instruments.
74 2.20 Institutional investors: Easing regulations will unlock capital market growth Nearly 25per cent of households’ total financial savings are allocated in insurance and pension funds, dominated by the government owned Life Insurance Corporation of India (LIC) and the Employee Pension Fund (EPF). The LIC continues to hold a near monopoly of the industry, accounting for nearly 75per cent of the business, despite the opening up of the industry to private competition in 1999. Similarly, although mutual funds have been permitted to offer pension plans, a majority of the public retirement scheme remains under the control of the EPF. The guaranteed rate of return of 9per cent they offer is a strong incentive for investors to place their financial savings with the institution. Overall, just roughly 10per cent of the labour force is enrolled in a pension scheme. The rest of the workers rely on their families for support at old age or on their accumulated savings.
2.21 Stringent asset allocation guidelines constrain returns Portfolio allocation decisions by the insurance and pension fund sector remain deeply regulated, requiring each to invest between 25 to 50per cent of total funds in government bonds or governmentapproved securities. Just over 85per cent of the LIC’s total investments are in public securities – most of which are of longterm maturities – and about 15per cent in private securities. Given India’s young labour force, it will take quite a number of years before a rush for redemption occurs, suggests that the LIC may not necessarily be optimising its portfolio returns. Portfolio managers’ tendency to follow a buy- andhold strategy precludes efficient duration management and the optimisation of the portfolio’s risk/return profile. At the same time, the underdeveloped corporate bond markets inhibit fixed income portfolio managers to exploit relative value across different segments. Suboptimal returns are also generated by the limited exposure allowed in the equity markets as a result of stringent regulation.
75 Simply put, there is significant room to improve upon households’ long- term wealth creation, but this will call for the relaxation of portfolio asset allocation rules prescribed by the government. Greater private participation will encourage competition in the insurance and pension funds, bringing product innovations in the market that better match investor risk/return requirements.
2.22 Creating more active markets with greater foreign presence Foreign institutional investors (FII) and mutual funds are accorded considerable leeway in their asset allocation decisions in contrast to the insurance and pension fund sectors. Because they can adjust their positions in response to changes in their liquidity needs or the economic environment, they tend to set the tone in market sentiment or influence prices despite their comparatively small size. FIIs can invest across a variety of instruments in the local markets but are subject to limits. Current regulations permit all FIIs combined to own no more than 24per cent of any Indian company’s total paidup capital. Investments over the threshold are subject to the approval of the company’s Board of Directors. There are ongoing calls to raise the limit further, which remain in constant debate among the policymakers, due to their concerns about potential destabilising effects of sudden capital withdrawal. In 2004, maximum allowed FII investment in government securities, including Treasury bills, was raised to USD 2 bn from USD 1.75 bn and in corporate bonds to USD 1.5 bn from just USD 0.5 bn. Hedging foreign currency exposures in the forward market is permitted. Although efforts to welcome FIIs are encouraging, the total amount of investment limits accorded to them is still meagre. Easing FII controls would accelerate the deepening and broadening of the capital markets, but this would require redressing capital account regulations aimed at preserving market stability in case portfolio positions are unwound.
76 2.23 Mutual funds are a viable longterm saving vehicle The landscape of the mutual fund industry has undergone significant changes since the establishment of the Unit Trust of India in 1964, which for decades held the monopoly. By the mid 1990s, barriers to entry were gradually dismantled, allowing domestic and foreign private institutions to enter the fray. Assets under management have grown to around USD 65 bn in September 2006 nearly 10per cent of GDP (see chart 2.4), quadrupling in value since 1993. At its current growth rate, the sector’s size will double over the next 10 years. CHART 2.4 ASSETS UNDER MANAGEMENT OF MUTUAL FUNDS HAVE SOARED
Source: Association of Mutual Funds of India
With intense competition came the adoption of measures to improve transparency. Restrictions on investment in debt instruments and money markets were loosened. A number of different schemes are now available in the market, which appeals to investors’ varying investment objectives and constraints. The listing of openended schemes allowed investors the flexibility to adjust their fund exposures, while regulations against fund managers’ use of derivatives have been relaxed, allowing them to hedge their positions.
77 Given the rapid growth of the industry in the past 3 years, can the Indian mutual fund industry be characterised as having come of age? Not when seen in the light of the low share of mutual funds in the household sector’s total investment pie. One promising development announced in the Budget in 2006 was the lifting of overseas investment limits by mutual funds to USD 3 bn from USD 2 bn. This will allow domestic fund managers to offer new opportunities in higheryielding funds, such as those dedicated to emerging markets and alternative investments (e.g. commodities), which are currently not available in the local market. Combined with rising percapita income, improving awareness of capital market investing and pension fund reforms will make mutual fund investing a viable longterm investment vehicle.
2.24 Stock Exchanges In India Stock Exchanges are an organised marketplace, either corporation or mutual organisation, where members of the organisation gather to trade company stocks and other securities. The members may act either as agents for their customers, or as principals for their own accounts. Stock exchanges also facilitate for the issue and redemption of securities and other financial instruments including the payment of income and dividends. The record keeping is central but trade is linked to such physical place because modern markets are computerised. The trade on an exchange is only by members and stock broker do have a seat on the exchange.
2.25 List of Stock Exchanges in India 1. Bombay Stock Exchange 2.National Stock Exchange 3. Regional Stock Exchanges 4. Ahmedabad 5. Bangalore6. Bhubaneshwar 7. Calcutta 8. Cochin 9. Coimbatore 10. Delhi 11. Guwahati 12. Hyderabad13. Jaipur 14. Ludhiana 15. Madhya Pradesh16. Madras17. Magadh 18 Mangalore 19. Meerut 20. OTC Exchange Of India 21.Pune 22.Saurashtra Kutch 23. UttarPradesh and 24. Vadodara . 78 III
PROFILE OF THE STUDY AREA AND TE SAMPLE OF INVESTORS PROFILE OF THE STUDY AREA AND TE SAMPLE OF INVESTORS
PART I This chapter is divided into two major Parts. Part I consists of the socio- economic profile of Trichirappalli and Part II consists of the personal profile of the investors of this study.
3.1 Profile of the study area Tiruchirapalli was originally a Chola citadel and later, during 1st millennium AD. Then it was occupied by other South Indian dynasties such as the Pallavas, and Pandyas. The Chola regained control over Tiruchirapalli during the 10th century. Urayur, which has a known history and tradition of about 2500 years, was the capital of Early Cholas. Later, after the fall of the Chola empire, it came under the direct conrol of the Madurai Nayak Dynasty which paid tribute to the Vijayanagara empire. The Rock Fort temple, the most famous landmark in Tiruchirapalli, was built by the Nayaks. The Madurai Nayak rulers changed their capital from Madurai to Tiruchirapalli, and back, several times. The city is home to Nagaraja Cholan and it has many historic temples, monuments, churches and mosques. It was the capital of the early Chola kings. The oldest human-built dam, Kallanai, was built by Karikala Cholan across the Kaveri River about 10 miles from Urayur. With regard to the centre of origin of iron, Sir William Larke, Director of the British Iron and Steel Federation, says - The centre of origin is variously placed in India, where there are historical traditions and remains indicating a highly developed iron culture. Hyderabad and Trichinopoly are considered by many to have been the centres of production of wootz. This steel was noted for centuries, being carried by
79 merchants from India to Damascus and Toledo.. Sir William gives the date of this origin of the iron age as 1400 to 1500 B.C.E Trichy was an important town in the days of the Later Cholas and of the Nayak kings, and during the early days of the British East India Company. The conquest of Tiruchirapalli by the British East India Company marked a major even step in the British conquest of India. The well-known Trichinopoly cigars are chiefly manufactured from Tobacco grown in the district at Dindigul. It was said that Winston Churchill developed a taste for the mildly aromatic Trichy cigar that was traded from Fort St George to Whitehall during the 2nd World War .One famous landmark in Tiruchirapalli is the Rock Fort, a big outcrop of rock, 83 metres in height. It is the only such outcrop of its kind. Because of it Trichy is also called as Rock City. On top of it is the Ucchi Pillayar Koil, a temple dedicated to the Hindu god Vinayaka (Ganesh), from where one can enjoy a panoramic view of Tiruchirapalli. The temple was also used as a military fort by the Nayaks for some time. On the southern face of the rock are several beautifully-carved cave temples of the Pallava period. On the eastern side is Sri Nandrudayan Vinayakar Temple, with Ganesha as the main deity. A large-sized Ganesha and depictions of other rare deities can be seen in this temple, which hosts festivals every year during the Vinayaka Chathurthi (birthday of Ganesha). Many Carnatic musicians have given concerts in this famous shrine. Around the rock temple is a busy commercial area, mainly known for its textiles and Burmese, Chinese, Japanese goods, known as Chatram. The Main Guard Gate is flooded on festive occasions such as Deepavali, Ramzan, Bakrid, Christmas, and Pongal with shoppers. Trichy is also famous for the number of Christian churches said to have the greatest number of churches in India. The most famous are Holy Redeemer's Church (Sagayamatha Kovil), Our Lady of Lourdes Church(built by Jesuits) near Chatram bus stand, and The Cathedral in Melapudur(built by
80 Jesuits), all more than a century and a half old. The most famous college in Trichy, St. Joseph's College was also built by the Jesuits, and so was St. Joseph's School, Trichy also is also famous for Arcot Nawab Masjid (one of the oldest), with its large water storage tank (Ahail)
Geography and climate The river Kaveri flowing through Trichy, as seen from Rockfort temple. The topology of Trichy is flat. It lies at an altitude of 78 m above sea level. The river Kaveri (also called Cauvery) and the river Coleroon (also called Kollidam) flow through Trichy, the latter forms the northern boundary of the city. The river Cauvery flows along WNW-SSE direction through the city. There are a few hills located within the city, the prominent among them are Golden Rock, Rock Fort, Kajamalai and in Thiruverumbur. There are a few reserve forests along the river Cauvery, located at the west and the north-west parts of the city. The southern and the south-western part of the district is dotted by several hills which are thought to be part of the Western Ghats. Eastern ghats also pass through the district. The soil here is considered to be very fertile. As two rivers flow through the city, the northern part of the city is greener than other areas of the city. Trichy has a moderate and pleasant climate, with humidity slightly above normal. The city experiences mild winters and humid summers. The timing of the monsoon in this part of the country has lately become unpredictable, with the rainy season starting from mid-October until early-November and the rains then extending until early or mid-January.
Demography As of 2009, Trichy had a population of 11,39,534. Males constitute 49.97% of the population and females 50.03%. Trichy has an average literacy rate of 91.45%. Male literacy is 94.17% and female literacy is 88.73%. In Trichy 9.59% of the population is under 6 years of age. The city's population is predominantly Hindu (with both Saivaite and Vaishnavaite), and there are 81 sizable population of Christians and Muslims. Sikhs and Jains are also present in smaller numbers as businessmen mainly. The most widely spoken language is Tamil, though there are also significantly large numbers of people speaking Telugu, Saurashtrian, Kannada and Thanjavur Marathi. The standard dialect is the Central Tamil dialect.[5][6] Madurai Tamil is also widely spoken. During the pre-independence era, Anglo-Indians, many of whom worked in the 'South-Indian Railways', started settling in 'Golden Rock- Township' and 'Crawford' located within the city. Crawford is considered as one of the expensive areas in the city. The place is predominantly Christian.
3.4 Economy Trichy is a major engineering hub and energy equipment and fabrication center of India.
BHEL - Bharat Heavy Electriclas Limited Bharat Heavy Electriclas Limited (BHEL) is ranked among the leading Power Plant Manufacturers in the world. At Tiruchirapalli, the High Pressure Boiler Plant of the Bharat Heavy Electricals Limited (BHEL) was setup in 1963. Now, it is one of the foremost manufacturing facilities within BHEL and it has 3 major plants namely, High Pressure Boiler Plant, Seamless Steel Tube Plant and Boiler Auxiliaries Plant. BHEL was set up during the period of K.Kamaraj, the then Chief Minister of Tamil Nadu and the statue of K.Kamaraj is there at the entrance of the Colony main Gate.
• A number of small scale industries have also sprung up in Trichy, mostly around Thuvakudi and Mathur.
• Leather Tanneries are located on the way to Pudukottai. Viralimalai, considered an industrial sub urban, has the factories.
82 • Manachanallur has numerous rice mills supplying polished rice all over Tamil Nadu and it is well known for the quality of the rise produced from its land.
• The economy of the city is driven to a certain extent by IT/ITES companies encouraged by the support from state government. A dedicated stretch of land has been identified and developed to increase the state's share in national IT/ITES exports. The government had begined its work for setting up IT park in the city. The economy of the city would be increased to a great extend if this park comes into working. Which would be finished in about one year.
• HCL has a carrier development centre in the city to guide the youth of the city. More over the city has many reputed MNC's are in the city, and still many to come.
3.5 Transportation a) Roadways Kaveri Bridge on NH 45 connects Trichy and Srirangam. Trichy is well connected to various parts of Tamil Nadu, by private and public bus services. There are two Bus Stands at Tiruchirappalli, as explained below: Chathiram (also called Chinthamani or Main Guard Gate Bus Stand) The Chathram (Main Guard Gate) bus stand, near Rock Fort temple, runs local and outstation (City-to-Town) bus services which connect people to nearby towns and villages such as Thuraiyur, Perambalur, Ariyalur, Cuddalore, Jeyankondacholapuram, Vriddhachalam, Chidambaram, Neyveli, and many. Bus services are frequent throughout the day and the night. The central bus stand runs long distance services to major cities and states of South India such as Tanjore,Chennai, Madurai, Coimbatore, Bangalore, Tirunelveli, Nagercoil, Tirupathi, Salem, Erode, Pudukkotai, Dindigul, Rameswaram, Theni, Tindivanam, Hosur, Vellore,Tiruvannamalai, Kumbakonam, Mayiladuthurai, Namakkal, also to other states. 83 b) National Highways passing through Tiruchirappalli On the road infrastructure Trichy will have four track highways from the city branching to destination Chennai, Madurai, Nagappattinam and Coimbatore. c) Railways Trichy is a hub of Southern Railway (India). Southern railway connect this central part of Tamil Nadu to various parts of India, notably regions in Kerala, Andhra Pradesh, West Bengal, Maharashtra, Karnataka, Delhi, and Madhya Pradesh. Trichy Railway Junction has five branches leading to Madurai, Rameswaram, Erode, Tanjore and Chennai and currently there are 4 platforms in operation. Platform no 5, 6, 7 is under gauge conversion which is to be finished and brought into working soon. Trichy is one of the busiest railway junctions in India. It has more than 200 train crossings per day in its division. It also has the record of a railway station to have broadgage next to Chennai. The railway station has been accredited with international standard, and the development is under process. The Electrification between Villupuram and Tiruchchirappali has been completed and service started with electric traction on the chord line. The double line is also approved for the same section and the work had started. This division has the press which supplies the printed unreserved ticket for Tamil Nadu railway stations. d) Airways Trichy has an International airport about eight kilometres from the city, which operates flights to several Indian cities, territories, and neighbouring countries including Malaysia, Singapore, Sri Lanka and the Gulf by Air Asia, Indian Airlines, Air India Express, Srilankan Airlines, Mihin
84 Lanka,Kingfisher Airlines,Paramount Airways. Trichy airport is the second largest airport in Tamil Nadu next to Chennai to get international connectivity to Colombo (Srilanka) in 1981. Nowadays, flights are operated to Gulf countries such as the United Arab Emirates and Kuwait. Plans are on to upgrade it to a full fledged international airport in the next three years.[7] The extended runway (8000 ft) was commissioned and further expansion to 12500 ft has started. The new terminal building is opened in 2009. Two aero bridge are opened to use. This is the second airport in Tamil Nadu to get it next to Chennai. An new Air Traffic Control Centre is also being planned to be constructed to cope up with growing air traffic in the region.
3.6 Administration The city is a Municipal Corporation. It also serves as the headquarters of the district with the same name. The city is headed by a Mayor, under whom the Deputy Mayor and several councilors elected by people representing work as administrative wards; as well as a corporation Commissioner of the rank of IAS to administer the city. The city has one Member of Parliament representing the Trichy constituency, Tiruchi (East) and Tiruchi (West) Srirangam, Musiri, Lalkudi and Thiruverambur assembly constituencies are part of Tiruchirappalli (Lok Sabha constituency) . The district is headed by the District Collector of the rank of IAS.
3.7 Stock Exchanges in Tamil Nadu There are two stock exchanges in Tamil Nadu. They are
1) Madras Stock Exchange Ltd (MSE) is a self regulatory organization having permanent recognition under the Securities Contracts (Regulations) Act, 1956, and the fist Stock Exchange in the southern part of the country. Established in the year 1937, the Exchange has a long history of service to the
85 nation and pioneered the development of the capital market in this part of the country by catering to the needs of the industrial entrepreneurs to raise capital for industrial promotion and providing investment opportunities to the public. The Exchange is a demutualised corporate entity pursuant to the MSE (Corporatisation and Demutualisation) Scheme, 2005 approved by the Securities and Exchange Board of India (SEBI). The stakeholders of the Exchange include Financial Institution of the Tamil Nadu State Government, leading corporate houses, high networth individuals and Trading Members of the Exchange. The Exchange is managed by the Board of Directors, representing the various stakeholders in the manner as stipulated in the Demutualisation Scheme. MSE has a strategic arrangement with the National Stock Exchange (NSE) which provides for the facility of trading by the members of MSE on NSE platform and also for trading of MSE listed companies on the NSE. Empowerment of the investors through education has been the focus of the Exchange. The Exchange has established an exclusive investment education centre named as the “MSE Institute of Capital Markets” to cater to the educational needs of the market participants. This Centre conducts regular and intensive training programmes, seminars and workshops throughout the State of Tamil Nadu & Pondicherry. The Exchange continuously holds monthly Investors’ Meet at its premises in Chennai on the third Saturday of every month. The Exchange also provides Depository Services as Depository Participant of CDSL and NSDL. MSE has set up subsidiary - MSE Financial Services Ltd., which is a Corporate Broking House, having membership of BSE and NSE and trading facilities are provided to the investors through the Members of MSE.
86 a) Trading Facilities The Exchange provides cost effective and efficient trading facilities through the Members of the Exchange, for which it has the following arrangements: b) Trading through the Subsidiary In terms of the guidelines issued by SEBI, the Exchange has floated a Subsidiary Company– MSE Financial Services Ltd., which is a corporate member of both NSE and BSE. The Members of the Stock Exchange are eligible to trade through the Subsidiary route, by registering themselves as Sub- brokers of MSEFSL. The contract notes are issued by the Subsidiary and the funds and securities of clients are directly handled by the Subsidiary, ensuring highest level of safety and security to the investors. c) MoU with NSE The Exchange has entered into an MoU with the National Stock Exchange Ltd (NSE) and the same is duly approved by SEBI, under which the members of MSE can access the trading platform of NSE and execute the trades. Under this arrangement, the members would issue contract notes of their own, as a member of MSE. The arrangement also provides for trading of MSE listed shares at NSE, subject to eligibility criteria. d) MSE - NSE Trading Operation 1) Enablement Application for NSE Trading Existing Members of MSE New Members 2) MSE contract note 3) MSE KYC Individual 4) MSE KYC Corporate 5) User id application
87 6) System Configuration for now terminal e) Investors Education The Madras Stock Exchange (MSE) has initiated various steps to promote education in securities markets and create investor awareness. MSE strongly believes that investors are the backbone of the securities market. They not only determine the level of activity in the securities market but also the level of activity in the economy. However, many investors may not possess adequate expertise/knowledge to take informed investment decisions. Some of them may not be aware of the complete risk-return profile of the different investment options. Some investors may not be fully aware of the precautions they should take while dealing with market intermediaries and dealing in different securities. They may not be familiar with the market mechanism and the practices as well as their rights and obligations. Against this MSE launched a comprehensive education campaign aimed at creating awareness among investors about securities market, under the aegis of “Investor Awareness Campaign” initiated by SEBI. The motto of the campaign is “an Educated Investor is a Protected Investor.” The structural foundation of the campaign is based on workshops that are being conducted all across the Tamilnadu with the continued and active participation of market participants, market intermediaries, Investors Associations etc. In order to further give an impetus to this initiative, the Exchange has established the MSE Institute of Capital Markets, as a separate wing exclusively for Education & Training in the Securities and Financial Markets. MSE offers Investor Services in the following Centres in Tamilnadu : T.Nagar Chennai, Mylapore Chennai, Virudhunagar, Karaikudi, and Tirunelveli
88 2) Coimbatore Stock Exchange Limited (CSX) is the youngest stock exchange in India. It was founded by K.G. Balakrishnan in the year 1996. It is now governed by the Governing Body which consists of the member brokers. The exchange also has Screen Based Trading (SBT) system which commenced operations on 9th of October, 1996. The system is equiped to handle 25,000 traders per day and 400 members. Each member has been given a computer terminal which is connected in a Local Area Network (LAN). a) Location Its trading hall consists of 19000 sq.ft area. The Exchange has successfully implemented Screen Based Trading (SBT) system and commenced its operations with effect from 9th October, 1996. The system is capable of handling 25,000 trades per day. All the members of the Exchange are connected in a Local Area Network (LAN). The system can be expanded to handle upto 400 members. The SBT system has been interfaced with the existing settlement system. The margins are monitored online on the SBT system. Each member is given a computer terminal, telephone connections which are accommodated in a cubicle. The communication facilities include the terminals of Reuters and Knight Ridder constantly updating economic and capital market related news. b) Coimbatore Stock Exchange Members Currently the segregation of Coimbatore Stock Exchange are as follows: Individual Members 136 Corporate Members 57 Chartered Accountants/ Company Secretaries 40 MBAs 17 Engineers 14 Cost Accountants 10 Post Graduates 20
89 PART II 3.2.01 Profile of Investors The study of investors preferences in capital market investment with special reference to Trichirappalli District was carried out by a personal interview of 300 investors with the help of a structured interview schedule. For the purpose of sample study Tiruchirappalli district was divided into three geographical regions namely the southern region, the central region, and the northern region. The southern region consists of the following places like Manikandam, Ramji Nagar, Enamam Kolathur, Navalpattu, and Manaparai. The central region consists of the following places in Trichy city like central bus stand, Puthur, Thillai Nagar, Chathiram bus stand, Srirangam and BHEL. The northen region consists of places like Tolgate, Samayapuram, Lalgudi, Jeeyapuram, Musiri, and Thottyam. A sample of 100 investors were selected from each of the three sample regions on simple random basis from the list of investors supplied by broker firms and mutual funds agents. The personal profile of respondents who participated in the survey are presented in tables below. It is arranged in the order of age, sex, marital status, educational qualification, occupation income, and savings. The sample places chosen for the study in Trichirappalli District is shown below in the Map.
90 MAP 3.1 TRICHIRAPPALLI DISTRICT
91 Personal Profile of Respondents Age wise distribution of respondents is shown in table 3.1 reveals that 29.7 per cent of investors are in the group of 36 to 45 years, 26.7 per cent are in the group of upto 35 years and 26 per cent are in the group of 46 to 55 years. Among three regions, the major group of investors in the southern region are upto 35 years (37 per cent) those in the central region are investors between 36 years and 45 years (37 per cent) and those in the northern region are investors between 46 and 55 years (36 per cent).
Table 3.1 AGE
Regions Factors All Trichy Southern Central Northern 37 22 21 80 Up to 35 (37.0) (22.0) (21.0) (26.7) 26 37 26 89 36 – 45 (26.0) (37.0) (26.0) (29.7) 20 22 36 78 46 – 55 (20.0) (22.0) (36.0) (26.0) 17 19 17 53 Above 55 (17.0) (19.0) (17.0) (17.6) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figure in parentheses are percentage of the respective totals Source: Interview Schedule
92 The classification of respondents according to sex shown in table 3.2 reveals that 85.3 per cent of them are male members and 14.7per cent are females. In the southern region, 78 per cent are male members while 89 per cent each are male members in the central and northern region.
Table 3.2 Sex
Regions Factors All Trichy Southern Central Northern 78 89 89 256 Male (78.0) (89.0) (89.0) (85.3) 22 11 11 44 Female (22.0) (11.0) (11.0) (14.7) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figure in parentheses are percentage of the respective totals Source: Interview Schedule
93 Distribution according to marital status shown in table 3.3 shows that 79 per cent investors are married, 16.3 per cent are unmarried and 2.3 per cent each belong to widow and divorced group.
Table 3.3 Marital Status Regions Factors All Trichy Southern Central Northern 70 84 83 237 Married (70.0) (84.0) (83.0) (79.0) 21 13 15 49 Unmarried (21.0) (13.0) (15.0) (16.3) 5 2 - 7 Widowed (5.0) (2.0) - (2.3) 4 1 2 7 Divorced (4.0) (1.0) (2.0) (2.3) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figure in parentheses are percentage of the respective totals Source: Interview Schedule
94 The distribution of respondents according to educational qualification shown in table 3.4 reveals that 38 percent are graduates and 26 percent are post-graduates and above. Professional degree holders constitute 23 percent of the total number of respondents. Slight regional difference is observed with regard to qualification of respondents.
Table 3.4 Education
Regions Factors All Trichy Southern Central Northern 14 12 13 39 Below Graduation (14.0) (12.0) (13.0) (13.0) 40 51 23 114 Graduation (40.0) (51.0) (23.0) (38.0) Post-graduation 26 14 38 78 and above (26.0) (14.0) (38.0) (26.0) Professional 20 23 26 69 Degree (20.0) (23.0) (26.0) (23.0) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figure in parentheses are percentage of the respective totals Source: Interview Schedule
95 Occupational distribution of the investors given in below Table 3.5 reveals that 45.3 percent of the respondents are employees, 20 percent are engaged in business or industry and about 14 percent are pensioners. Investors doing professional practice comes to 12.7 percent. A market difference is noted in the pattern of respondents managing business or industry in southern and northern regions.
Table 3.5 Occupation
Regions Factors All Trichy Southern Central Northern 41 46 49 136 Employee (41.0) (46.0) (49.0) (45.3) 11 13 14 38 Professional (11.0) (13.0) (14.0) (12.7) 27 22 11 60 Businessman/industrialist (27.0) (22.0) (11.0) (20.0) 12 15 14 41 Pensioner (12.0) (15.0) (14.0) (13.7) 9 4 12 25 Others (9.0) (4.0) (12.0) (8.3) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figure in parentheses are percentage of the respective totals Source: Interview Schedule
96 The distribution by income class of investors shown in table 3.6 reveals that 37.3 percent of them fall in the income group between Rs.100000 and Rs.200000, 33.3 per cent belong to the income group of Rs.200001 and Rs.500000 and 14.7 per cent have income between Rs.50001 and Rs.100000. On regional review it is observed that major part of respondents in each region is in the income group of Rs.100001 to 200000 and Rs.200001 and 500000. The average annual income of the whole sample amounted to Rs. 256083 while it is Rs.227250 in the southern region, Rs.267250 in the central and Rs.273750 in the northern region.
Table 3.6 Annual Income
Regions Factors All Trichy Southern Central Northern 2 4 5 11 Up to 50000 (2.0) (4.0) (5.0) (3.7) 23 13 8 44 50001-100000 (23.0) (13.0) (8.0) (14.7) 37 38 37 112 100001-200000 (37.0) (38.0) (37.0) (37.3) 31 31 38 100 200001-500000 (31.0) (31.0) (38.0) (33.3) 7 14 12 33 Above 500000 (7.0) (14.0) (12.0) (11.0) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figure in parentheses are percentage of the respective totals Source: Interview Schedule
97 Classification of investors according to their savings shown in Table 3.7 reveals that 33.7 per cent have savings between Rs.50001 to Rs.100000 whereas 30.3 per cent have savings above Rs.100000. Only 11.7 per cent of respondents have savings less than Rs.25000. In the southern region, 32 per cent respondents have saving between Rs.25001 to 50000 and 33 per cent have savings above 100000. While 28 per cent have savings between Rs.500001 to 100000 and 26 per cent have savings between Rs.25001 to 50000. In the northern region 40 per cent investors have savings between Rs.50001 – 100000 followed by 34 per cent in the savings group of above Rs.100000. Average annual savings of 300 investors came to Rs.81542 which is Rs.74300 in the southern region, Rs.82275 in the central region and Rs.88050 in the northern region.
Table 3.7 Annual Savings
Regions Factors All Trichy Southern Central Northern 3 2 4 9 Up to Rs. 1000 (3.0) (2.0) (4.0) (3.0) 8 11 7 26 Rs. 10001-25000 (8.0) (11.0) (7.0) (8.7.0) 32 26 15 73 Rs. 25001-50000 (32.0) (26.0) (15.0) (24.3) 33 28 40 101 Rs. 50001-100000 (33.0) (28.0) (40.0) (33.7) 24 33 34 91 Above Rs. 100000 (24.0) (33.0) (34.0) (30.3) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figure in parentheses are percentage of the respective totals Source: Interview Schedule 98 IV
ANALYSIS AND INTERPRETATION OF DATA ANALYSIS AND INTERPRETATION OF DATA
The investment scene in Trichirappalli in earlier years was characterised by the existence of banks, chit funds, post office savings schemes etc., But the emergence of capital market in Tamilnadu helped investors to divert their savings to corporate sector through capital market instruments. Madras Stock Exchange the first stock exchange in the Southern part of the country established in the year 1937, has a long history of service to the country by catering to the needs of the industrial entrepreneurs to raise capital for industrial promotion and providing investment opportunities to the public. The Coimbatore stock exchange Ltd which is the youngest stock exchange in India commenced its operations on 9th October 1996 has attracted a lot of investors to the main stream of capital market. Moreover, the socio-economic conditions that prevail in Trichirappalli due to literacy rate, influence of print and visual media, high rate of wages and inflow on foreign remittance have created an atmosphere conducive to the development of capital market. The vast reforms in the capital market initiated in line with economic liberalisation in the country have also helped to arouse the interest of investors. A comparative analysis of savings invested in capital market instruments and in other financial assets of 300 sample investors from Trichirappalli in presented in Table 4.1.01.
4.1.01 Level and pattern of capital market investment It can be seen from Table 4.1.01 that the total savings of the 300 investors in financial assets during the period from 1st April, 2008 to 31st March, 2009 aggregated Rs.1.53 crores. Nearly one – third of it was kept in capital market instruments and two thirds in other financial assets. Investors in the central region contributed a large portion of savings in financial assets amounting to Rs.58.38 lakhs while those of the southern and northern regions contributed Rs.53.58 lakhs and Rs.40.68 lakhs respectively. An analysis of the proportion of financial savings in capital market instruments among the three
99 regions shows that it is highest in the northern region (38.3 per cent) followed by central region (31.8 per cent) and southern region (26.1 per cent). The statistical significance of the difference in the savings pattern of investors in financial assets among three regions is tested with the help of ANOVA. The result of ANOVA is presented in Table 4.1.02.
Table - 4.1.01 The Annual Savings of Investors in Financial Assets Southern Central Northern All Nature of financial assets region region region Trichy Rs. Rs. Rs. Rs. 1062250 1859200 2050650 4972100 Capital market assets (26.1) (31.8) (38.3) (32.6) 3005402 3978312 3306938 10290652 Other financial assets (73.9) (68.2) (61.7) (67.4) Total saving in financial 4067652 5837512 5357588 15262752 assets (100.0) (100.0) (100.0) (100.0) Note: Figures in parenthesis are percentage of total savings in financial assets. Source: Interview Schedule.
Table – 4.1.02 Analysis of variance the annual savings of Investors in financial assets
Source of variance Sum of square df Variance F Between rows 914400200000 1 914400200000 2.568877 Between columns 2986858000000 2 1493429000000 1.572878 Error (chance) 4697962000000 2 2348981000000 - Total 8599221000000 5 - -
It is observed from Table 4.1.02 that F ratio is not significant at 5 per cent level of significance. Hence it may be concluded that there is no significant variation in the savings pattern of investors in financial assets among different regions.
100 4.1.03 Average Savings in Financial Assets Financial assets comprise capital market instruments and other assets like Bank deposits, post office savings schemes, government securities, insurance policies, provident funds, chit funds and others like public sector bonds, Kisan Vikas Patra etc. The average savings of investors in each of these financial assets are calculated and are presented in Table 4.1.03, which gives a more meaningful measure of comparison.
Table – 4.1.03 Average Annual Savings in Financial Assets
Southern Central Northern All Financial Assets region region region Trichy 10623 18592 20507 16574 Capital market instruments (26.1) (31.9) (38.3) (32.6) 11753 13584 10198 11845 Bank deposit (28.9) (23.3) (19.0) (23.3) 3466 4325 3319 3703 Post office savings (8.5) (7.4) (6.2) (7.3) 245 1820 105 722 Government securities (0.6) (3.1) (0.2) (1.4) 3422 7069 4096 4863 Insurance premium (8.4) (12.1) (7.6) (9.6) 3441 8277 6745 6154 Chit funds (8.5) (14.2) (12.6) (12.1) 4577 4282 7696 5519 Provident funds (11.3) (7.3) (14.4) (10.8) 3150 426 910 1496 Others (7.7) (0.7) (1.7) (2.9) 40677 58375 53576 50876 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
101 The average annual savings of investors in financial assets amounted to Rs.50876 for the whole sample, of which savings in capital market investment amounted to Rs.16574 (Table 4.1.03). Among other financial assets, the average savings in bank deposits were Rs.11845, chit funds was Rs.6154 and provident fund contribution was Rs.5519. Region – wise analysis shows that the average savings in capital market instruments top the list in northern and central regions with Rs.20507 and Rs.18592 respectively followed by bank deposits. But in the southern region, the average savings in bank deposits (Rs.11753) outweighed capital market investment (Rs.10623) and stood first. Savings in chit funds constituted another major element especially in the central and northern regions.
102 CHART – 4.1.01 AVERAGE ANNUAL SAVINGS IN FINANCIAL ASSETS
45
40
35
30
Southern region 25 Central region Northern region All Trichy 20 Percentage
15
10
5
0
ies rs eposit d Othe Chit funds Bank Provident funds Post office savings l market instruments Insurance premium Government securit Capita Financial Assets
103 4.1.04 Composition of Savings in Capital Market Capital market instruments consist of shares and debentures of corporate entities and mutual fund schemes of UTI and other public and private sector mutual funds. Subscription to shares and debentures is a direct form of investment in companies, while subscription to mutual fund schemes is an indirect way of corporate investment. Composition of savings of investors in different capital market instruments is depicted in Table 4.1.04. It is observed from Table 4.1.04 that 82.1 per cent of savings in capital market assets is in shares, 15.6 per cent in mutual fund schemes and only 2.3 per cent in debentures. The proportion of savings in shares is the highest in the central region. It is 90.5 per cent in the central region, 84.3 per cent in the northern region and 63 per cent in the southern region. An important highlight of this analysis is that debentures are the least preferred instrument in the capital market. Table – 4.1.04 Average Annual Savings in Capital Market Instruments
Central Capital market Southern Northern All Trichy region instruments region Rs. region Rs. Rs. Rs. 6696 16821 1727.6 13598 Shares (63.0) (90.5) (84.3) (82.1) 451 494 210 385 Debentures (4.3) (2.7) (1.0) (2.3) 3476 1277 3021 2591 Mutual fund schemes (32.7) (6.8) (14.7) (15.6) 10623 18592 20507 16574 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
104 CHART – 4.1.02 AVERAGE ANNUAL SAVINGS IN CAPITAL MARKET INSTRUMENTS
100
90
80
70 Shares Debentures 60 Mutual fund schemes
50
Percentage 40
30
20
10
0 Southern Central Northern All Trichy region region region
Capital market instruments
105 4.1.4A Comparative Assessment A comparative analysis of annual average income, savings, savings in financial assets, savings in capital market assets and savings in shares of the sample investors is exhibited in figure 4.0.01. It is evident from the figure that average income of investors is Rs.256083 and average savings is Rs.81542. The average savings in financial assets are Rs.50876 and average savings in capital market assets are Rs.16574 while average savings in shares is Rs.13598. The average savings are 31.84 per cent of average income and average savings in financial assets is 62.39 per cent of average savings. Also average savings in capital market assets is 32.58 per cent of average savings in financial assets while average savings in shares is 82 per cent of average savings in capital market assets is shown in the below graph 4.1.01.
Table – 4.1.4A Comparative Assessment of income and savings
Income / Savings Amount in Rs. Average Income 256083 Average Savings 81542 Average Savings & Financial Assets 50876 Average savings in capital market assets 16574 Average savings in shares 13598 Total 418673 Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
106 GRAPH – 4.1.01 COMPARATIVE ASSESSMENT OF INCOME AND SAVINGS
300000
250000
200000
150000 Amount in Rs. in Amount
100000
50000
0 Average Average Average Average Average Income Savings Savings & savings in savings in Financial capital market shares Assets assets Income / Savings
107 4.1.05 Market Experience of Investors Experience of investors in capital market is a vital factor for success in capital market investment. Long years of experience in capital market investment helps them to understand the complex behaviour of the market and adopt appropriate strategy so that their overall return from the investment will be maximum. Distribution of investors on the basis of experience in capital market investment is given in Table 4.1.05.
Table – 4.1.05 Distribution of Investors According to Experience in the Capital Market
Southern Central Northern All Market experience of investors region region region Trichy 16 19 23 58 Less than 3 years (16.0) (19.0) (23.0) (19.3) 20 28 18 66 3 to 5 years (20.0) (28.0) (18.0) (22.0) 37 28 22 87 6 to 10 years (37.0) (28.0) (22.0) (29.0) 27 25 37 89 More than 10 years (27.0) (25.0) (37.0) (29.7) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Chi-square value = 10.54, df = 6 Table value at 5 per cent level of significance = 12.59 Table 4.1.05 shows that 29.7 per cent of investors have experience above 10 years while 29 per cent have experience between 6 to 10 years. Hence it may be inferred that majority of the respondents are matured investors. Among the three regions, respondents having experience of more than five years are large in the southern region (64 per cent) followed by the
108 northern region (59 per cent) and the central region (53 per cent). The difference in the distribution of investors according to their market experience among the three regions is found to be insignificant when chi-square test is applied.
109 4.1.06 Active Participation in Capital Market Investors entering the capital market may not normally make active investment in the initial period for fear of incurring losses. They seldom make investments till they acquire sufficient knowledge and confidence in capital market. Once they are confident of success, they start actively investing in capital market, which in turn helps the development of capital market in the state. The active participation of investors in share market help to understand the pulse of both the primary and secondary markets. This enables them to divert their investments to more profitable shares. A distribution of investors on the basis of the period of their active participation in share market is exhibited in Table 4.1.06. Table – 4.1.06 Distribution of Investors Actively Investing in Shares
Southern Central Northern All Period of active investment region region region Trichy 21 28 28 77 Less than 3 years (21.0) (28.0) (28.0) (25.7) 28 30 21 79 3 to 5 years (28.0) (30.0) (21.0) (26.3) 32 22 26 80 6 to 10 years (32.0) (22.0) (26.0) (26.7) 19 20 25 64 More than 10 years (19.0) (20.0) (25.0) (21.3) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total Source: Interview Schedule Chi-square value = 5.84, df = 6 Table value at 5 per cent level of significance = 12.59 It is clear from Table 4.1.06 that 26.7 per cent of respondents have been actively participating in share market for a period of 6 to 10 years, 26.3 per cent for a period of 3 to 5 years and 25.7 per cent for a period less than 3 years. Remaining 21.3 per cent have been active for a period of more than 10 years. 110 On the whole, nearly half of the investors have been active in the share market for more than 5 years. On region – wise analysis, it is revealed that majority of respondents (51 per cent) in the southern and northern regions have been active for more than 5 years in the share market. However, only 42 per cent of respondents were active in the share market for more than 5 years in the central region. The inter – regional comparison shows that there is no significant difference in the period of active investment of investors among the three regions.
111 4.1.07 Active Investment in Debentures Debenture holders are interested in getting a steady income and are less prone to risk. Unlike dividend, payment of interest on debentures is mandatory on companies. Many corporate issue debentures of varying nature like partly convertible and fully convertible and offer attractive rates of interest. The period – wise distribution of investors who have been actively investing in debentures is given in Table 4.1.07. Table – 4.1.07 Distribution of Investors Actively Investing in Debentures
Southern Central Northern All Period of active investment region region region Trichy 0 3 0 3 Less than 3 years (0.0) (12.0) (0.0) (4.8) 4 10 6 20 3 to 5 years (20.0) (40.0) (35.3) (32.3) 9 5 7 21 6 to 10 years (45.0) (20.0) (41.2) (33.9) 7 7 4 18 More than 10 years (35.0) (28.0) (23.5) (29.0) 20 25 17 62 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. According to Table 4.1.07, 62 respondents have also invested in debentures constituted about 20 per cent of the sample. Of them 33.9 per cent have been actively investing between 6 and 10 years while 32.3 per cent have been active between 3 and 5 years and 29 per cent have been active for more than 10 years. Region-wise analysis shows that 80 per cent of debenture holders in the southern region and 64.7 per cent in the northern region have been active for more than 5 years. As regards the central region, majority of them (52 per cent) has been active for a period up to 5 years.
112 4.1.08 Active Investment in Mutual Fund Schemes Mutual fund scheme is an indirect form of investment in corporate securities. Mutual funds reduce the risk of shareholding by evolving schemes suitable to the preferences of the saver. Active involvement in mutual fund investment helps the investors to choose the most appropriate scheme. Table 4.1.08 shows the distribution of investors in mutual fund schemes according to the period of their active investment. Table – 4.1.08 Distribution of Investors Actively Investing in Mutual Fund Schemes
Southern Central Northern All Period of active investment region region region Trichy 14 5 12 31 Less than 3 years (29.2) (13.9) (23.1) (22.8) 9 11 14 34 3 to 5 years (18.7) (30.6) (26.9) (25.0) 12 14 15 41 6 to 10 years (25.0) (38.9) (28.8) (30.1) 13 6 11 30 More than 10 years (27.1) (16.7) (21.2) (22.1) 48 36 52 136 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. It can be seen from Table 4.1.08 that among the 300 respondents, 136 of them have been actively investing in mutual fund schemes also. 30.1 per cent of these respondents have been active in the market for 6 to 10 years, 22.1 per cent for more than 10 years and the rest for a period up to 5 years. In the southern and central regions, majority of the investors in mutual fund schemes have active investment for a period of more than 5 years, while majority in the central region has been active for a period up to 5 years.
113 4.1.09 Diversification of Investment Investors diversify their holding of securities to reduce the overall risk content of their investment. Combining securities having high risk with securities having low risk can reduce risk and thus the overall risk can be minimized. The level of diversification of investors in shares, debentures and mutual fund schemes is separately analysed and the results are presented in the following three heads.
Diversification in Shares Investment in shares is exposed to a high level of risk. In uncertain conditions, investors are not sure of getting dividends and capital gains. Therefore they resort to diversification of investment in shares by combining shares of companies in different regions, in different industries, or those producing different types of products with a view to reducing overall risk. The level of diversification of investors in shares is presented in Table 4.1.09. Table – 4.1.09 Level of Diversification in Shares
Southern Central Northern All Number of Companies region region region Trichy 29 32 36 97 1 to 5 (29.0) (32.0) (36.0) (32.3) 38 37 21 96 6 to 10 (38.0) (37.0) (21.0) (32.0) 22 19 23 64 11 to 20 (22.0) (19.0) (23.0) (21.3) 11 12 20 43 Above 20 (11.0) (12.0) (20.0) (14.3) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Chi-square value = 10.25, df = 6 Table value at 5 per cent level of significance = 12.59
114 Table 4.1.09 shows that 32.3 per cent of respondents are holding shares in only up to five companies, 32 per cent of them hold shares in 6 to 10 companies while the rest are holding shares in more than 10 companies. Hence majority of investors are exposed to unsystematic risk arising from inadequate diversification. On regional analysis, 38 per cent investors in the southern region have share holding in 6 to 10 companies while 29 per cent have investment in less than 5 companies. In the central region also, a similar trend prevails, 37 per cent of them have investment in 6 to 10 companies and 32 per cent have share holding in less than 5 companies. In the northern region, 36 per cent have shares in less than 5 companies. However, 43 per cent of respondents have a better shareholding in more than 10 companies. The variation in the distribution of investors according to the level of diversification is found to be statistically insignificant.
115 4.1.10 Diversification in Debentures Debentures are considered less risky assets. However, the gap in risk element among shares and debentures has been narrowed down with the issue of convertible debentures on a large scale. The investor uses his analytical power and discretion to choose the right type of debentures having desired duration, quality as judged by the credit rating companies and expected yield so as to reduce the level of risk. The extent of diversification in debentures of the respondents is given in Table 4.1.10.
Table – 4.1.10 Level of Diversification in Debentures
Southern Central Northern All Number of Companies region region region Trichy 13 18 12 43 1 to 5 (65.0) (72.0) (70.6) (69.4) 7 7 5 19 6 to 10 (35.0) (28.0) (29.4) (30.6) 20 25 17 62 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
The level of diversification in debentures is poor as evident from Table 4.1.10. Majority of respondents have debenture investment in less than 5 companies. Out of 62 debenture holders, 69.4 per cent have debenture holding in less than 5 companies and the remaining 30.6 per cent have holding in 6 to 10 companies. On a regional view, it is observed that 65 per cent of investors in the southern region, 72 per cent in the central region and 70.6 per cent in the northern region have a portfolio size in less than 5 companies.
116 4.1.11 Diversification in Mutual Fund Schemes Mutual funds help small investors in risk diversification and economies of scale in transaction cost through professional portfolio management. However, different schemes offered by mutual funds have different levels of risk. In general, growth funds seem to have the highest risk, income funds have the lowest risk and balanced funds have intermediate risk. The dismal performance and failure of many schemes of certain mutual fund organisations in recent times has made the investors aware that mutual funds too have turned out to be risky. The extent of diversification in mutual fund schemes by investors is depicted in Table 4.1.11. Table – 4.1.11 Level of Diversification in Mutual Fund Schemes
Southern Central Northern All No. of mutual fund schemes region region region Trichy 32 24 36 92 5-Jan (59.2) (75.0) (72.0) (67.7) 19 7 12 38 10-Jun (35.2) (21.9) (24.0) (27.9) 3 1 2 6 20-Nov (5.6) (3.1) (4.0) (4.4) 54 32 50 136 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. It is clear from Table 4.1.11 that 67.7 per cent of respondents are subject to inadequate level of diversification as they hold in less than 5 mutual fund schemes, while only 27.9 per cent of them have portfolio in 6 to 10 mutual fund schemes. Region-wise analysis shows that majority of investors in all the three regions have portfolio in less than 5 mutual fund schemes.
117 4.1.12 Size of Investment Size of investment represents the monetary value of different forms of investment. The bulk in size of investment held by investors in different capital market instruments shows the extent of confidence bestowed upon capital market by them. It is also guided by the preference of investors towards liquidity and profitability. The size of investment of respondents in different capital market instruments like shares, debentures and mutual fund schemes is studied separately in the following part.
Size of Investment in Shares The money value of investment in shares given in Table 4.1.12 shows that 28 per cent of respondents have investment in shares worth more than Rs.100000 at its original value. While 25.7 per cent have investment between Rs.50001 and 100000, 24.3 per cent have investment between Rs.25001 and 50000 and the remaining 22 per cent have investment up to Rs.25000. Region- wise analysis shows that 28 per cent of respondents in the southern region have investment in shares between Rs.250001 to 50000, while 26 per cent have investment between Rs.50001 to 100000. In the central region, the size of investment ranged between Rs.50001 and 100000 in respect of 29 per cent of respondents and above Rs.100000 in respect of 26 per cent of them. The size of investment is comparatively large in the northern region where 36 per cent of investors have investment exceeding Rs.100000. The variation in the size of investment among respondents of these regions is found to be insignificant when tested statistically.
118 Table – 4.1.12 Size of Investment in Shares
Southern Central Northern All Size of investment region region region Trichy 24 22 20 66 Upto Rs.25000 (24.0) (22.0) (20.0) (22.0) 28 23 22 73 Rs.25001 – 50000 (28.0) (23.0) (22.0) (24.3) 26 29 22 77 Rs.50001 – 100000 (26.0) (29.0) (22.0) (25.7) 22 26 36 84 Above Rs.100000 (22.0) (26.0) (36.0) (28.0) 100 100 100 100 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Chi-square value = 5.89, df = 6 Table value at 5 per cent level of significance = 12.59
119 4.1.13 Size of Investment in Debentures The size of investment in debentures of the respondents at its original value exhibited in Table 4.1.13 makes clear that majority of investors in debentures (58.1 per cent) have investment worth less than Rs.25000 and 29 per cent have investment between Rs.25001 and 50000. On region-wise analysis it is observed that about 95 per cent of investors in the southern and northern regions have investment in debentures worth less than Rs.50000. In the central region, 76 per cent of respondents have investment worth less than Rs.50000 while 20 per cent have investment ranging between Rs.50000 and Rs.100000 and the rest have investment of more than Rs.100000.
Table – 4.1.13 Size of Investment in Debentures
Southern Central Northern All Number of Companies region region region Trichy 9 15 12 36 Upto Rs.25000 (45.0) (60.0) (70.6) (58.1) 10 4 4 18 Rs.25001 – 50000 (50.0) (16.0) (23.5) (29.0) 1 5 1 7 Rs.50001 – 100000 (5.0) (20.0) (5.9) (11.3) 0 1 0 1 Above Rs.100000 (0.0) (40.0) (0.0) (1.6) 20 25 17 62 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
120 4.1.14 Size of Investment in Mutual Fund Schemes The size of investment of the respondents made in various mutual fund schemes presented in Table 4.1.14 reveals that 56.6 per cent of respondents have investment upto Rs.25000 whereas 27.9 per cent have investment between Rs.25001 and Rs.50000. Remaining 15.5 per cent have investment above Rs.50000. Region – wise distribution of the size of investment shows that majority of respondents in all the three regions have investment worth less than Rs.25000 and major part of the rest have investment between Rs.25001 and 50000. However, 21.9 per cent of the respondents of the central region have investment above Rs.50000.
Table – 4.1.14 Size of Investment in Mutual Fund Schemes
Southern Central Northern All Size of investment region region region Trichy 32 16 29 77 Upto Rs.25000 (59.3) (50.0) (58.0) (56.6) 16 9 13 38 Rs.25001 – 50000 (29.6) (28.1) (26.0) (27.6) 4 5 7 16 Rs.50001 – 100000 (7.4) (15.6) (14.0) (11.8) 2 2 1 5 Above Rs.100000 (3.7) (6.3) (2.0) (3.7) 54 32 50 136 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
121 4.1.15 Future Investment of Investors The continuance functioning of capital market depends on the confidence of investors. The difficulties faced by investors in the capital market will make them cautious about investing in future. If investors turn away from the capital market, the corporate sector will experience shortage of funds. Hence investor protection is of paramount importance for the development of capital market and corporate sector. The opinion of investors about future investment intentions in capital market is exhibited in Table 4.1.15.
Table – 4.1.15 Opinion of Investors about Future Investment in Capital Market Southern Central Northern All Willingness to invest region region region Trichy 61 50 47 158 Willing (61.0) (50.0) (47.0) (52.7) 39 50 53 142 Not willing (39.0) (50.0) (53.0) (47.3) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Chi-square value = 4.36, df = 2 Table value at 5 per cent level of significance = 5.99 The future investment intention of the respondents shows that of the total 300 sample respondents, 158 respondents are interested in making investments in future while the rest do not prefer to invest further in capital market instruments. Regionwise analysis shows that 61 per cent respondents in the southern region are interested in making fresh commitments in the capital market. In the central region 50 per cent of them are willing to make further investment while it is only 47 per cent in the northern region. This shows the growing disinterest of investors towards capital market investment. No significant variation is observed in the distribution of investors who are willing to invest in future.
122 CHART - 4.1.03 OPINION OF INVESTORS ABOUT FUTURE INVESTMENT IN CAPITAL MARKET
70
60
50
40 Willing Not willing
Percentage 30
20
10
0 Southern region Central region Northern region All Trichy
Willingness to invest
123 The investors who are willing to increase the size of their investment in future are asked to indicate their most preferred option of investment viz. shares, debentures or mutual fund schemes. A weighted score was constructed by assigning weights of 3, 2 and 1 respectively for the first, second and third ranks. The weighted scores and ranks indicating the preferences of investors are analysed and the result is depicted in Table 4.1.16. It can be seen from Table 4.1.16 that the most preferred type of investment is company shares (63.9 per cent) followed by mutual fund schemes (29.2 per cent) and debentures (6.9 per cent). Region wise analysis shows a similar preference among the respondents in the three regions. However, the propensity to invest in shares is high in the central region and low in the northern region while the propensity to invest in mutual fund schemes is high in the northern region and low in the central region.
124 4.1.16 Investment options preferred in future Table – 4.1.16 Investment options preferred in Future
Southern region Central region Northern region All Trichy
Types of investment score score score score ranking ranking ranking ranking Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted
170 140 124 434 Shares 1 1 1 1 (63.0) (67.6) (16.14) (63.9) 18 15 14 47 Debentures 3 3 3 3 (6.6) (7.3) (6.9) (69) Mutual fund 82 52 64 98 2 2 2 2 schemes (30.4) (25.1) (31.7) (29.2) 270 207 202 679 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. The investors who are not willing to make fresh investment in future are enquired about the reason for their lack of interest. They were asked to indicate the factors which discourage them in making further investment according to its gravity. The first three ranks are considered and a weighted score is constructed by assigning weights of 3, 2 and 1 respectively for the first, second and third ranks. The weighted scores and ranks showing major factors hindering investment in capital market are presented in Table 4.1.17.
125 4.1.17 Factors Hindering Capital Market Investment Table – 4.1.17 Factors Hindering capital market Investment
Southern Central Northern All Trichy region region region Factors hindering investment score score Score Score Ranking Ranking Ranking Ranking Ranking Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted 71 104 100 275 Increased risk 1 1 1 1 (32.7) (41.1) (37.2) (37.2) No promising 48 55 52 155 3 2 4 3 returns (22.1) (21.7) (19.3) (21.0) 36 33 59 128 Liquidity problems 4 4 2 4 (16.6) (13.0) (21.9) (17.3) 57 55 54 166 High volatility 2 2 3 2 (26.3) (21.7) (20.1) (22.5) 5 6 4 15 Others 5 5 5 5 (2.3) (2.4) (1.5) (2.0) 217 253 269 739 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
According to Table 4.1.17, the major factor responsible for the lack of interest in investing in capital market is increased risk (37.2 per cent) followed by high volatility in security prices (22.5 per cent) and no promising returns (21 per cent). The regional analyses show that respondents of all the three regions view increased risk as the main factor responsible for their lack of interest. Other prominent factors in the southern and central regions are high volatility and no promising returns while liquidity problem and high volatility are the major factors pointed out by respondents in the northern region. To verify the relative agreement of the factors hindering capital market investment among investors in the three regions of Trichy, the rank correlation coefficient of the
126 opinion of investors between different pairs of regions is calculated and the result of the analysis is exhibited in Table 4.1.18. From Table 4.1.18 the comparative ranking of the discouraging factors of investors between southern and central regions is 1.000, between southern and northern regions is 0.667 and between central and northern regions is 0.667. From this, it is evident that there exists perfect positive correlation in the views of investors between southern and central regions.
4.1.18 Rank correlation coefficient of factors Hindering Capital Market Investment
Table – 4.1.18 Rank Correlation Coefficient of Factors Hindering Capital Market Investment
Southern Central Northern All Regions region region region Trichy Southern region 1.000 - - - Central region 1.000* 1.000 - - Northern region 0.667 0.667 1.000 - All Trichy 0.975* 0.975* 0.7000 1.000 * Correlation is significant at 0.05 level.
127 4.1.19 Mode of Investment Investment in capital market can be made through any of the available three modes viz. primary market, secondary market or private placement. Opinion of investors about the most preferred mode of investment is collected and analysed and is presented in Table 4.1.19.
Table – 4.1.19 Mode of Investment Preferred by Investors
Southern Central Northern All Mode of Investment region region region Trichy 47 40 31 118 Primary market (47.0) (40.0) (31.0) (39.3) 49 57 66 172 Secondary market (49.0) (57.0) (66.0) (57.3) 4 3 3 10 Private placement (4.0) (3.0) (3.0) (3.3) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. As per Table 4.1.19, among the 300 investors, 57.3 per cent prefer to invest through secondary market, 39.3 per cent prefer primary market and only 3.3 per cent prefer private placement. A marked difference is observed in the mode of investment preferred by respondents in the three regions. In the southern region, 47 per cent of the respondents prefer to invest through primary market while only 40 per cent in the central region and 31 per cent in the northern region prefer primary market. Also, 49 per cent of the investors in the southern region prefer secondary market whereas 57 per cent in the central region and 66 per cent in the northern region prefer to make their dealings through the secondary market.
128 CHART – 4.1.04 MODE OF INVESTMENT PREFERRED BY INVESTORS
70
60
50
40 Primary market Secondary market Private placement
Percentage 30
20
10
0 Southern region Central region Northern region All Trichy
Mode of Investment
129 4.1.20 Investment Criteria in the Capital Market Investment in capital market is influenced by many factors. Some of the factors like quality of management, nature and type of the product and terms of issue are peculiar to the company while some other factors like policy of the government and general economic conditions are external in nature and are beyond the control of the company. The influence of these factors among investors before making investment is studied separately for primary market and secondary market the results of which are presented in the following part.
Investment Criteria in the Primary Market Investors can directly invest in capital market instruments through public issue. But before making investment through public issue they consider factors like nature and type of the product, nature of the industry to which the company belongs, terms of issue of securities, promoter’s track-record, members of the board of directors, equity participation by domestic and foreign financial institutions and major risk factors affecting the issuing company. To ascertain major investment criteria adopted by the respondents for investment in primary market they are asked to rank these factors in the order of their importance and a weighted score is calculated. It is presented in Table 4.1.20.
130 Table – 4.1.20 Investment Criteria in the Primary Market Southern Central Northern All Trichy region region region Investment criteria score score Score Score Ranking Ranking Ranking Ranking Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted Nature and type of 127 122 129 378 1 2 1 1 product (21.5) (22.1) (22.7) (22.1) Industry / sector to 91 134 75 300 which the company 4 1 5 2 (15.4) (24.3) (13.2) (17.6) belongs 127 44 103 274 Terms of issues 1 5 2 4 (21.5) (8.0) (18.1) (16.0) Promoter’s track 92 107 77 276 3 3 4 3 record (15.6) (19.4) (13.5) (16.1) 39 25 39 103 Board of directors 6 7 7 7 (6.6) (4.5) (6.9) (6.0) Equity participation 37 37 78 152 7 6 3 6 by FI/FIs (6.3) (6.7) (13.7) (8.9) 77 82 68 227 Risk factors 5 4 6 5 (13.1) (14.9) (12.0) (13.3) 590 551 569 1710 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. It can be seen from Table 4.1.20 that the most important criterion considered by investors in the primary market is the nature and type of the product (22.1 per cent). Other important factors are, industry or sector to which the company belongs (17.6 per cent), promoter’s track record (16.1 per cent) and terms of issue (16 per cent). Region-wise analysis of the opinion of respondents shows that in the southern region, terms of issue and nature and type of the product are the major criteria for investment in the primary market. In the central region, the major investment criteria are, industry or sector to which the company belongs and nature and type of the product whereas in the northern region, nature and type of product and terms of issue are the major factors governing investment decision in the primary market. An important 131 highlight of the analysis is that risk factors are not considered an important investment criterion by majority of respondents. To verify the comparative view of the investment criteria in the primary market among investors in different regions, the rank correlation coefficient of investment criteria of the different pairs of regions is calculated and presented in Table 4.1.21.
132 Table – 4.1.21 Rank Correlation Coefficient of Investment Criteria in the Primary Market
Southern Central Northern All Regions region region region Trichy Southern region 1.0000 Central region 0.559 1.000 Northern region 0.631 0.286 1.000 All Trichy 0.775* 0.929* 0.571 1.000 * Correlation is significant at the 0.05 level.
The extent of correlation of the investment criteria in the primary market among different regions given in Table 4.1.21 shows that the rank correlation coefficient is 0.559 between southern and central regions, 0.631 between southern and northern regions and 0.286 between central and northern regions. The degree of correlation is higher between southern and central regions. However, it is not found to be significant at the 0.05 level.
133 GRAPH – 4.1.02 INVESTMENT CRITERIA IN THE PRIMARY MARKET
30
25
20
Southern region Central region 15 Northern region All Trichy Percentage 10
5
0
s cord tor FI/FIs c issues rectors y k fa of di Ris d Terms of Boar the company belongs h Promoter's track re ty participation b Nature and type of product whic Equi o
ctor t
stry / se u Ind Investment criteria
134 4.1.22 Investment Criteria in the Secondary Market Stock market facilitates liquidity to the existing securities. In the stock market, purchase and sale of securities are made in conditions of free competition. The prices of securities fluctuate constantly and are guided by many factors. Similarly investment and disinvestment decisions of investors are governed by factors like change in government policy, advice given by brokers, periodicals and web sites, movement of market indices, market sentiments and on the basis of fundamental and technical analyses. The opinion of investors about the factors which influence them in taking investment decision through secondary market is analysed and presented in Table 4.1.22. Table – 4.1.22 Investment Criteria in the Secondary Market
Southern Northern Central region All Trichy region region
Investment criteria score score Score Score Ranking Ranking Ranking Ranking Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted
Change in govt. 80 81 54 215 4 4 6 6 policy (13.7) (14.8) (9.6) (12.7) 81 49 87 217 Advice of brokers 3 6 3 4 (13.9) (9.0) (15.4) (12.8) Advice of dailies / 78 78 60 216 5 5 5 5 periodicals (13.4) (14.3) (10.6) (12.8) 29 20 48 97 Advice of websites 8 8 7 8 (5.0) (3.7) (8.5) (5.7) 106 96 93 295 Movement of indices 1 1 2 2 (18.2) (17.6) (16.5) (17.4) 77 88 86 251 Market sentiments 6 3 4 3 (13.2) (16.1) (15.2) (14.8) Fundamental 99 96 107 302 2 1 1 1 analysis (17.0) (17.6) (18.9) (17.8) 32 38 30 100 Technical analysis 7 7 8 7 (5.5) (7.0) (5.3) (5.9) 582 546 565 1693 Total (100.0) (100.0) (100.0) -100.0 Note: Figures in parentheses are percentage to total. Source: Interview Schedule. 135 As per Table 4.1.22, fundamental analysis ranked first among the major factors considered for investment through secondary market with weighted score of 17.8 per cent while movement of market indices ranked second with a score of 17.4 per cent and market sentiments ranked third with a score of 14.8 per cent. The other important factors considered by investors include advice given by brokers and advice given by dailies and periodicals with a score of 12.8 per cent each. However technical analysis, an important tool of portfolio selection was not considered by majority of respondents. In the southern region, the first three ranks of respondents relate to movement of indices, fundamental analysis and advice of brokers respectively whereas movement of indices, fundamental analysis and market sentiments represent the first three ranks in the central region. In the northern region, fundamental analysis ranked first, movement of indices ranked second and advice of brokers ranked third. In order ascertain the degree of correlation in the view of investors in three regions regarding the investment criteria in the secondary market, the coefficient of correlation of their opinion is calculated and presented in Table 4.1.23.
136 GRAPH – 4.1.03 INVESTMENT CRITERIA IN THE SECONDARY MARKET
20
18
16
14
12 Southern region Central region 10 Northern region All Trichy
Percentage 8
6
4
2
0
iodicals ndices f brokers i o of websites nt of ntal analysis in govt. policy e e Advice Advice Market sentiments Technical analysis Movem Change of dailies / per Fundam
Advice Investment criteria
137 Table – 4.1.23 Rank Correlation Coefficient of Investment Criteria in the Secondary Market
Southern Central Northern All Regions region region region Trichy Southern region 1.000 Central region 0.778* 1.000 Northern region 0.857* 0.802* 1.000 All Trichy 0.810* 0.896* 0.952* 1.000 * Correlation is significant at the 0.05 level. The comparative relation of the views of respondents in the three regions expressed in terms of rank correlation coefficient shows that (Table 4.1.23) it is 0.778 between southern and central regions, 0.857 between southern and northern regions and 0.802 between central and northern regions. All these values are found to be significant at 5 per cent level. There is a higher degree of agreement in the views of investors between southern and northern regions since the value of correlation coefficient is highest among the three regions.
138 4.1.24 Motives Behind Capital Market Investment Investors make investment in the capital market with different motives like dividend income, capital gains, bonus and rights shares and tax benefits. The major motives of respondents ranked on the basis of weighted scores presented in Table 4.1.24 show that the main driving force behind investment in the capital market is capital gains (42.9 per cent) followed by dividend and interest income (28.6 per cent) and bonus shares (16.4 per cent) offered by companies. Regionwise analysis also shows a similar trend in the motives of investment among the respondents.
Table – 4.1.24 Motives Behind Capital Market Investment Southern Northern Central region All Trichy region region
Motives score score Score Score Ranking Ranking Ranking Ranking Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted
169 153 165 487 Dividend / interest 2 2 2 2 (29.5) (27.5) (28.8) (28.6) 236 241 253 730 Capital gains 1 1 1 1 (41.2) (43.4) (44.1) (42.9) 108 79 92 279 Bonus shares 3 3 3 3 (18.9) (12.2) (16.0) (16.4) 26 21 13 60 Rights shares 5 5 5 5 (4.5) (3.8) (2.2) (3.5) 34 62 51 147 Tax benefits 4 4 4 4 (5.9) (11.1) (8.9) (8.6) 573 556 574 1703 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
139 GRAPH – 4.1.04 MOTIVES BEHIND CAPITAL MARKET INVESTMENT
50
45
40
35
30 Southern region Central region 25 Northern region
Percentage All Trichy 20
15
10
5
0 Dividend / Capital Bonus Rights Tax interest gains shares shares benefits Motives
140 4.1.25 Factors Influencing Selection of Shares The success of every investors in capital market investment, especially investment in shares, depends upon his her ability to identify promising companies with growth potential which remain undervalued in nature. Such companies offer ample rewards to their investors. The selection of shares for investment is influenced by its book-value, market value, high-low price during a specific period, earning per share, price-earning ratio and market capitalisation. The responses of investors regarding the selection of shares for investment are ranked using weighted scores and are given Table 4.1.25.
Table – 4.1.25 Factors Considered before Investing in Company Shares
Southern Central Northern All Trichy region region region
Factors considered score score Score Score Ranking Ranking Ranking Ranking Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted
119 102 64 285 Book value 2 3 5 4 (20.6) (17.4) (10.8) (16.2) 131 137 123 391 Market value 1 1 3 1 (22.7) (23.4) (20.7) (22.3) 97 99 134 330 High-low price 4 4 1 3 (16.8) (16.9) (22.6) (18.8) 104 119 124 347 Earning per share 3 2 2 2 (18.0) (20.4) (20.9) (19.8) 76 79 102 257 Price earning ratio 5 5 4 5 (13.1) (13.5) (17.2) (14.6) 51 49 46 146 Market capitalisation 6 6 6 6 (8.8) (8.4) (7.8) (8.3) 578 585 593 1756 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
141 It can be seen from the table that three major factors considered by respondents before investment in shares are its market value, earnings per shares and high-low prices with weighted score of 22.3 per cent, 19.8 per cent and 18.8 per cent respectively. Among other factors, book value with a weighted score of 16.2 per cent and price earnings ratio with a score of 14.6 per cent are also prominent. On regional analysis it is observed that market value, book value and earnings per share are the major factors considered by respondents in the southern and central regions while high-low price, earning per share and market value are the main factors considered by those in the northern region. The comparative ranking of the factors considered by investors in the three regions before investing in company shares is analysed in terms of rank correlation coefficient and the results is presented in Table 4.1.26. Table 4.1.26 shows that the rank correlation coefficient is highest (0.943) among southern and central regions. It is found to be significant at 5 per cent level. The correlation coefficient among other regions is not found to be statistically significant. Table – 4.1.26 Rank Correlation Coefficient of Factors Considered for Investing in Company Shares Southern Central Northern Regions All Trichy region region region Southern region 1.000 Central region 0.943* 1.000 Northern region 0.314 0.486 1.000 All Trichy 0.829* 0.943* 0.714 1.000 * Correlation is significant at the 0.05 level.
142 GRAPH– 4.1.05 RANK CORRELATION COEFFICIENT OF FACTORS CONSIDERED FOR INVESTING IN COMPANY SHARES
25
20
15 Southern region Central region Northern region All Trichy Percentage 10
5
0
ice pr ation r share s pe rning ratio Book value g Market value High-low Earnin Price ea Market capitali Factors considered
143 4.1.27 Mode of Secondary market Operation Investors can enter into stock market transactions through the trading terminals of different stock exchanges. However, in places not connected by stock exchange terminals, investors continue to depend on the services of brokers and sub-brokers. In Trichy, investors make use of the wide network of terminals of BSE and NSE as well as the services of brokers and sub brokers. The method of secondary market operations preferred by respondents is given in Table 4.1.27.
Table – 4.1.27 Method of Secondary Market Operations Preferred by Investors Capital market Southern Central Northern All Trichy instruments region region region 47 67 57 171 NSE Terminal (47.0) (67.0) (57.0) (57.0) 28 23 33 84 BSE Terminal (28.0) (23.0) (33.0) (28.0) Stock brokers or sub 25 10 10 45 brokers (25.0) (10.0) (10.0) (15.0) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Chi-square value = 15.29, df = 4 Table value at 5 per cent level of significance = 9.49 As depicted in Table 4.1.27 it can be seen that among the 300 respondents 57 per cent prefer to deal through NSE terminal, 28 per cent prefer BSE terminal and the remaining 15 per cent prefer the service of brokers or sub – broker for executing their transactions. Among the three regions, only 47 per cent of respondents in the southern region prefer NSE terminal while 57 per cent in the northern region and 67 per cent in the central region prefer to deal through it. Also, 23 per cent of respondents in the central region, 28 per cent in 144 the southern region and 33 per cent in the northern region prefer to deal through BSE terminal. In the southern region, 25 per cent respondents prefer the services of brokers and sub-brokers while only 10 per cent each in the central and northern regions prefer their services. The difference in the distribution of investors according to the method of secondary market operations preferred is found to be significant statistically when chi-square test is applied.
145 CHART – 4.1.05 METHOD OF SECONDARY MARKET OPERATIONS PREFERRED BY INVESTORS
70 NSE Terminal BSE Terminal Stock brokers or sub brokers
60
50
40
Percentage 30
20
10
0 Southern region Central region Northern region All Trichy
Capital market instruments
146 4.1.28 Factors Influencing Selection of a Mutual Fund Scheme Mutual funds help investors to indirectly participate in corporate investment. At present there are 38 mutual fund companies operating in India and they offer a variety of schemes numbering more than 450. Before selecting a scheme for investment, investors consider a number of factors like type of the scheme, image and popularity of the asset management company or sponsor company, past performance, net asset value and advertisement and campaign. In order to ascertain the major factors considered by investors in Trichy before making investment in mutual fund scheme, they were asked to rank the factors in the order of their importance and a weighted score is calculated and given in Table 4.1.28. Table – 4.1.28 Factors Influencing Choice of Mutual Fund Scheme Southern Central Northern All Trichy region region region
Influencing g Factors score score Score Score Rankin Ranking Ranking Ranking Ranking Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted 136 (73 102 311 Type of scheme 1 4 2 2 (28.3) (18.1) (23.7) (23.7) Image and 75 74 63 212 popularity of 4 3 4 4 (15.6) (18.3) (14.6) (16.1) AMC / Sponsor 91 112 89 292 Past performance 3 1 3 3 (19.0) (27.7) (20.7) (22.2) 112 111 132 355 Net asset value 2 2 1 1 (23.3) (27.5) (30.6) (27.0) Advertisement & 66 34 45 145 5 5 5 5 Campaign (13.8) (8.4) (10.4) (11.0) 480 404 431 1315 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
147 It is evident from Table 4.1.28 that among the various factors considered by investors, net asset value (27 percentage) is the most important factor influencing the choice of a mutual fund scheme followed by type of scheme (23.7 percent) and past performance (22.2 percentage). A comparative analysis of the views of respondents in southern, central and northern regions show that type of schemes ranked first among respondents in the southern region whereas past performance ranked first in the central region and net asset value ranked first in the northern region. Major factors considered by investors in the southern region are type of scheme, net asset value and past performance while past performance, net asset value and image and popularity of asset management companies are the major factors considered by investors in the central region. For investors in the northern region, net asset value, type of scheme and past performance are the major guiding factors.
148 GRAPH – 4.1.06 FACTORS INFLUENCING CHOICE OF MUTUAL FUND SCHEME
35
30
25
20 Southern region Central region Northern region 15 All Trichy Percentage
10
5
0
e r ign a
set value s erformance p Type of schem AMC / Sponso Net a Past
Advertisement & Camp
Image and popularity of Influencing factors
149 4.1.29 Type of Schemes Mutual funds offer different type of schemes like growth scheme, income scheme, balanced scheme, etc. Each type of scheme has been designed with special features aimed to satisfy the tastes and preference of different classes of investors. The type of mutual fund schemes preferred by investors in Trichy analysed in Table 4.1.29 shows that out of the 250 respondents who have indicated their preferences for investing in mutual fund schemes, 38.8 per cent preferred growth schemes, 22.4 per cent preferred income schemes and 17.2 per cent preferred tax savings schemes. Analysis of preference of respondents in the southern region shows that 35.6 per cent respondents prefer growth schemes, 26.4 per cent prefer income schemes and 17.2 per cent prefer balanced schemes. In the central and northern regions, the preferred mutual fund schemes are growth schemes, tax saving schemes and income schemes. Growth schemes are the most preferred mutual fund schemes among respondents of all the three regions while sectorwise schemes are the least preferred among them. Table – 4.1.29 Type of Mutual Fund Schemes Preferred by Investors Type of Mutual Fund Southern Central Northern All Trichy Scheme region region region 31 32 34 97 Growth Scheme (35.6) (41.6) (39.5) (38.8) 23 16 17 56 Income Scheme (26.4) (20.8) (19.8) (22.4) 15 9 14 38 Balanced Scheme (17.2) (11.7) (16.3) (15.2) 9 3 4 16 Sector wise Scheme (10.4) (3.9) (4.6) (6.4) 9 17 7 43 Tax Savings Scheme (10.4) (22.0) (19.8) (17.2) 87 77 86 250 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. 150 CHART – 4.2.06 TYPE OF MUTUAL FUND SCHEMES PREFERRED BY INVESTORS
45
40
35
Southern region 30 Central region Northern region All Trichy 25
20 Percentage
15
10
5
0 Growth Income Balanced Sector wise Tax Savings Scheme Scheme Scheme Scheme Scheme Type of Mutual fund scheme
151 4.2 Determinants of capital market investment The individual investors are an indispensable part of the capital market. Their savings give sustenance to the capital market in general and corporate sector in particular. The investment decisions of investors in capital market instruments are influenced by a number of factors like age, sex, education, occupation, annual income, annual savings, period of market experience, etc. Among them four major factors are identified for further analysis. They are: ♦ Educational qualification ♦ Occupational status ♦ Annual income ♦ Period of market experience The influence of each of these factors upon the investment in capital market is studied separately and the results are presented in the following part.
4.2.01 Influence of education on the investment behaviour Investment in the capital market requires careful study of market conditions and performance of companies. Investors with good educational background are able to understand risk as well as return associated with various investment opportunities in the market. The investment decision based on the evaluation of available information helps them to minimise risk and to maximise returns. Therefore, level of education of investors is considered as a major determinant of quality of investment decision. The influence of education on various aspects of capital market investment is analysed below.
152 Period of Active Investment in Shares Table – 4.2.01 Education wise Distribution of Investors According to Period of Active Investment in Shares
Period of active investment Observed Education Less than 3 3 to 5 6 to 10 Above Total value of of investors years years years 10 years K.S. test Below 18 11 6 4 39 0.224 graduation (46.1) (28.2) (15.4) (10.3) (100.0) 25 36 29 24 114 Graduation 0.037 (21.9) (31.6) (25.4) (21.1) (100.0) Post- 9 23 28 18 78 graduation 0.141 (11.5) (29.5) (35.9) (23.1) (100.0) and above Professional 25 9 17 18 69 0.106 degree (36.2) (13.1) (24.6) (26.1) (100.0) 77 79 80 64 300 Total - (25.7) (26.3) (26.7) (21.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Critical value of K.S. test at 5 per cent level of significance = 0.457 The period of active investment in capital market shows the level of maturity attained by an investor. Investors with better education and long period of active investment are capable of taking good investment decisions. The level of education and period of active investment are analysed with respect to shares only since all the 300 respondents have investment in shares while only few have investment in debentures and mutual fund schemes. Educationwise distribution of investors according to period of their active investment in shares exhibited in Table 4.2.01 reveals that graduates represent the leading group having different periods of active investment. Majority of respondents have a comparative short period of active investment 25.7 per cent of the aggregate respondents have a period of active investment of less than 3 years while 26.3 per cent of them have active investment between 3 and 5 years, 26.7 per cent have active investment between 6 and 10 years and the remaining 21.3 per cent have active investment above 10 years. The period of 153 active investment among different educational groups shows that 25.7 per cent among undergraduates, 46.5 per cent among the graduates, 59 among postgraduates and 50.7 per cent among professional degree holders have a period of active investment of more than 5 years. It may be inferred from the above analysis that respondents having better education would like to stick on to capital market investment especially in shares. However variation in the period of active investment of different educational group of investors is not found statistically significant when Kolomogorov – Smimov test (K.S. test) is applied.
154 4.2.02 Level of Diversification in Shares The level of diversification in shares among different educational groups of investors is presented in Table 4.2.02. Table – 4.2.02 Education wise Distribution of Investors According to Level of Diversification in Shares
Level of Diversification in shares Observed Education Total value of of investors K.S. test 1 to 5 6 to 10 11 to 20 11 to Above 20 Above companies companies companies companies Below 22 13 3 1 39 0.254 graduation (56.4) (33.3) (7.7) (2.6) (100.0) 37 41 20 16 114 Graduation 0.041 (32.5) (36.0) (17.5) (14.0) (100.0) Post- 23 23 19 13 78 graduation 0.054 (29.5) (29.5) (24.3) (16.7) (100.0) and above Professional 15 19 22 13 69 0.151 degree (21.7) (27.5) (31.9) (18.9) (100.0) 97 96 64 43 300 Total - (32.4) (32.0) (21.3) (14.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Critical value of K.S. test at 5 per cent level of significance = 0.457 It can be seen from Table 4.2.02 that of the whole sample, 64.4 per cent of respondents have investment in shares of less than 10 companies only. The analysis of educationwise distribution shows that level of education of investors has a direct bearing on the level of diversification. Investors having a lower level of education have a relatively poorer level of diversification than those possessing higher levels of educational qualification. The level of diversification among different educational groups shows that only 10.3 per cent of undergraduate respondents hold shares in more than 10 companies. But it is 31.5 per cent in the case of graduates, 41 per cent in the case of post –
155 graduates and 50.8 per cent in the case of professionally qualified respondents. The influence of education of investors on the level of diversification in shares is found to be statistically insignificant.
156 4.2.03 Size of Investment in Shares Education wise distribution of respondents according to the size of their investment in shares is depicted in Table 4.2.03. Table – 4.2.03 Education wise Distribution of Invest According to Size of Investment in Shares
Size of investment in shares Observed Education Rs.2500 Rs.5000 Upto Above Total value of of investors 1 to 1 to Rs.5000 Rs.100000 K.S. test 50000 100000
Below 18 9 9 3 39 0.242 graduation (46.1) (23.1) (23.1) (7.7) (100.0) 25 31 32 26 114 Graduation 0.054 (21.9) (27.2) (28.1) (12.8) (100.0)
Post- 12 20 20 26 78 graduation 0.066 and above (15.4) (25.6) (25.7) (33.3) (100.0)
Professional 11 13 16 29 69 0.14 degree (16.0) (18.8) (23.2) (42.0) (100.0) 66 73 77 84 300 Total - (25.0) (24.3) (25.7) (28.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Critical value of K.S. test at 5 per cent level of significance = 0.457 It is evident from Table 4.2.03 that 28 per cent of the respondents have investment in shares above Rs.100000 and 25.7 per cent have investment between Rs.50000 and Rs.100000. On analysis it is revealed that the size of investment in shares is also influenced by the level of education of investors. The size of investment of respondents belonging to different levels of education shows that 30.8 per cent of undergraduates have investment above
157 Rs.50000 while 50.9 per cent of graduates, 59 per cent of post-graduates and 65.2 per cent of professional degree holders have investment in shares above Rs.50000. No significant variation is observed in the size of investment of different educational groups of investors when K.S. test is applied.
4.2.04 Future Investment Plan Table – 4.2.04 Education wise Distribution of Investors According to their Future Investment Plan
Willingness Not willing to Education of investors Willing to invest Total investment in in future future 19 20 39 Below graduation (48.7) (51.3) (100.0) 62 52 114 Graduation (54.4) (45.6) (100.0) 36 42 78 Post-graduation and above (46.2) (53.8) (100.0) 41 28 69 Professional degree (59.4) (40.6) (100.0) 158 142 300 Total (52.7) (47.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. The distribution of investors according to future investment plan among different educational groups shown in Table 4.2.04 reveals that out of the 300 respondents, 52.7 per cent are willing to make fresh investments in future. Among undergraduates, those willing to invest in future (48.7 per cent) are nearly equal to those who are not willing to invest (51.3 per cent) while a clear preference to invest in capital market instruments was shown by 59.4 per cent of professional degree holders. Majority of graduates are willing to invest in capital market (54.4 per cent) whereas majority of post-graduates are not willing to invest in capital market (53.8 per cent) in future.
158 4.2.05 Future Investment Options Investors who are willing to make fresh investments in future also indicated their preferred options like shares, debentures and mutual fund schemes. The most preferred options is shares followed by mutual fund schemes and debentures. Education wise distribution of future investment options of respondents given in Table 4.2.05 shows that the propensity to invest in shares is high among graduates and low among post-graduates while the propensity to invest in mutual fund schemes is high among post-graduates and low among graduates.
Table – 4.2.05 Education wise Distribution of Future Investment Options
Investment options Education of Mutual fund Total investors Shares Debentures schemes Below 46 5 30 81 graduation (56.8) (6.2) (37.0) (100.0) Graduation 152 21 86 259 (58.7) (8.1) (33.2) (100.0) Post – 87 12 69 168 graduation (51.8) (7.1) (41.1) (100.0) and above Professional 98 9 64 171 degree (57.3) (5.3) (37.4) (100.0) 383 47 249 679 Total (56.4) (6.9) (36.7) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
159 4.2.06 Reasons for the Lack of Interest in Future Investment The distribution of major factors responsible for the lack of interest in making future investment in capital market according to education of respondents is presented in Table 4.2.06.
Table – 4.2.06 Education wise Distribution of Factors Hindering Investment in Capital Market
Factors hindering investment in capital market Education No Increased Liquidity High Total of investors promising risk problem volatility returns
Below 47 26 20 17 110 graduation (42.7) (23.6) (18.2) (15.5) (100.0) 101 57 38 67 263 Graduation (38.4) (21.7) (14.4) (25.5) (100.0)
Post- 81 34 49 52 216 graduation and above (37.5) (15.7) (22.7) (24.1) (100.0)
Professional 46 38 21 45 150 degree (30.7) (25.3) (14.0) (30.0) (100.0) 275 155 128 181 739 Total (37.2) (21.0) (17.3) (24.5) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. It can be seen from Table 4.2.06 that increased risk is the important factor which discourages the investor against making fresh investments in future. In the case of undergraduate respondents, increased risk ranked first and lack of promising returns ranked second among the factors hindering future investment while among investors belonging to other groups, increased risk and high volatility are the major factors hindering future investment. 160 4.2.07 Mode of Investment The mode of investment preferred by different educational groups of investors given in Table 4.2.07 shows that majority of respondents prefer to invest through secondary market followed by primary market and private placement. On analysis it is observed that around 55 per cent of graduate and under graduate respondents prefer the medium of secondary market and around 39 per cent of them prefer to invest through the primary market. Post – graduates prefer these two channels in almost equal proportions. However, 66.7 per cent of professional degree holders prefer secondary market while only 31.9 per cent prefer primary market.
Table – 4.2.07 Education wise Distribution of Investors According to Mode of Investment
Mode of investment Education of investors Primary Secondary Private Total market market placement 15 22 2 39 Below graduation (38.5) (56.4) (5.1) (100.0) 45 63 6 114 Graduation (39.5) (55.3) (5.2) (100.0) 36 41 1 78 Post-graduation and above (46.1) (52.6) (1.3) (100.0) 22 46 1 69 Professional degree (31.9) (66.7) (1.4) (100.0) 118 172 10 300 Total (39.4) (57.3) (3.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
161 4.2.08 Criteria for Investment Decision The criteria adopted for taking investment decision by different educational groups are studied under two heads namely investment criteria in the primary market and investment criteria in the secondary market.
Investment Criteria in the Primary Market The investors try to explore the feasibility of the project of the issuing company before committing funds in that project. Among the major factors considered by investors include nature and type of the product, industry or sector to which the company belongs, terms of issue, promoter’s track – record, members in the board of directors, equity participation by domestic and foreign institutional investors, risk factors associated with the issue, etc. The criteria adopted for taking investment decision in the primary market by different educational groups of respondents based on the weighted scores is depicted in Table 4.2.08.
162 Table – 4.2.08 Education wise Distribution of Investment Criteria in the Primary Market Investment criteria in the primary market
Education of Total investors FI/FIs FI/FIs record Equity product product Risk factors Risk factors to which the the to which Terms of issue Members in the participation by participation board of director company belongs Promoter’s track- Promoter’s Industry or sector Nature and type of Nature Below 53 35 31 30 15 35 24 223 graduation (23.8) (15.7) (13.9) (13.4) (6.7) (15.7) (10.7) (100.0) 131 120 89 127 35 43 108 653 Graduation (20.0) (18.4) (13.6) (19.4) (15.3) (6.6) (16.5) (100.0) Post- 98 70 90 74 40 37 51 460 graduation (21.3) (15.2) (19.5) (16.1) (8.7) (8.0) (11.0) (100.0) and above Professional 96 75 64 45 13 37 47 377 degree (25.5) (19.9) (17.0) (11.9) (3.4) (9.8) (12.5) (100.0) 378 300 274 276 103 152 230 1713 Total (22.1) (17.5) (16.0) (16.1) (6.0) (8.9) (13.4) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. As per Table 4.2.08 major investment criteria adopted by the respondents are nature and type of the product (22.1 per cent), industry or sector to which the company belongs (17.5 per cent), promoter’s track-record (16.1 per cent) and terms of issue of securities (16 per cent). Educationwise analysis shows that undergraduates rank the nature and type of the products as first among the major factors followed by equity participation by domestic and foreign institutional investors and industry or sector to which the company belongs. Graduate respondents gave importance to nature and type of the product and promoter’s track-record while nature and type of the product and terms of issue figured high among post-graduates. In the case of professionally qualified respondents nature and type of the product and industry or sector to which the company belongs are the prominent investment criteria in the primary market.
163
4.2.09 Investment Criteria in the Secondary Market The investment criteria adopted by investors for making investment in the secondary market are different from those considered in the primary market. In the stock exchanges, investors can buy or sell securities at the prevailing market price. The factors considered by them before taking an investment decision are changes in government policy, investment advice of brokers, advice made by dailies or periodicals, advice made by financial websites, movement of market indices, market sentiments, fundamental analysis, technical analysis, etc. The major factors considered by different educational groups of respondents for taking investment decision in the secondary market, based on weighted scores, are depicted in Table 4.2.09. Table – 4.2.09 Education wise Distribution of Investment Criteria in the Secondary Market Investment Criteria in the Secondary Market
Education of investors Total indices Brokers or periodicals Advice made by financial websites financial websites Technical analysis Technical analysis Market Sentiments Market Sentiments Investment advice of Investment Movement of market Fundamental analysis Advice made by dailies Advice made by dailies Changes in govt. policy 42 34 36 17 23 26 29 12 219 Below graduation (19.2) (15.5) (16.4) (7.8) (10.5) (11.9) (13.2) (5.5) (100.0) 91 62 83 28 110 100 127 59 660 Graduation (13.8) (9.4) (12.6) (4.2) (16.7) (15.2) (19.2) (8.9) (100.0) Post-graduate and 50 68 51 37 79 62 78 12 437 above (11.4) (15.6) (11.7) (8.5) (18.1) (14.2) (17.8) (2.7) (100.0) Professional 32 53 46 15 83 63 68 31 391 degree (8.2) (13.6) (11.8) (3.8) (21.2) (16.1) (17.4) (7.9) (100.0) 215 217 216 97 295 251 302 114 1707 Total (12.6) (12.7) (12.6) (5.7) (17.3) (14.7) (17.7) (6.7) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
164 Table 4.2.09 shows that fundamental analysis is the most important factor considered by investors followed by movement of market indices and market sentiments. But, among the different educational groups, important factors considered by undergraduates are changes in government policy, advice given by dailies and periodicals and investment advice of brokers. Graduate respondents give importance to fundamental analysis, movement of market indices and market sentiments. Movement of market indices and fundamental analysis rank high among the major factors considered by post – graduate and professionally qualified respondents before taking investment decisions in the secondary market.
165 4.2.10 Motives behind Capital Market Investment Investors make investment in the capital market with different motives like income in the form of dividend or interest, capital gains, inducements like bonus shares or rights shares and income tax benefits. The distribution of motives behind capital market investment of different educational groups of respondents is shown in Table 4.2.10. Table – 4.2.10 Education wise Distribution of Investment Motives Investment motives Education of Dividend Capital Bonus Rights Tax Total investors or Interest gains shares shares benefits Below 69 83 29 14 23 218 graduation (31.7) (38.1) (13.3) (6.4) (10.5) (100.0) 189 271 113 15 59 647 Graduation (29.2) (41.9) (17.5) (2.3) (9.1) (100.0) Post-graduation 111 198 76 28 35 448 and above (24.8) (44.2) (17.0) (6.2) (7.8) (100.0) Professional 118 178 61 3 30 390 degree (30.3) (45.6) (15.6) (0.8) (7.7) (100.0) 487 730 279 60 147 1703 Total (28.6) (42.9) (16.4) (3.5) (8.6) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. According to Table 4.2.10, capital gains, dividend or interest income and bonus shares are the major motives of respondents behind capital market investment. Among undergraduates, capital gains top the list of major motives with a weighted score of 38.1 per cent followed by dividend or interest income (31.7 per cent) and bonus shares (13.3 per cent). In the case of graduates, post- graduates and professional degree holders, the order of preference of investment motives remained same as that of undergraduates. An important highlight of this analysis is that income tax benefits are not a major concern even among high income groups.
166 4.2.11 Factors Influencing Selection of a Share The performance of a company is reflected on the market by the market indicators like market price, book value, high – low price, earning per share, price – earning ratio and market capitalisation. Investors have to closely watch these market indicators before selecting a share for investment. The major factors considered for selection of a share by respondents belonging to different levels of education is presented in Table 4.2.11.
Table – 4.2.11 Education wise Distribution of Factors Considered for Investment in Shares Factors considered for investment in shares
Education of investors Total ratio share Market Book value Earning per Market value capitalization Price-earning High-low price High-low 39 56 59 26 35 13 228 Below graduation (17.1) (24.6) (25.9) (11.4) (15.4) (5.7) (100.0) 117 150 105 125 92 77 666 Graduation (175) (22.5) (15.8) (18.8) (13.8) (11.6) (100.0) Post-graduation 79 103 90 99 65 29 465 and above (17.0) (22.2) (19.3) (21.3) (14.0) (16.2) (100.0) Professional 50 82 76 97 65 30 400 degree (12.5) (20.5) (19.0) (24.3) (16.2) (7.5) (100.0) 285 391 330 347 257 149 1759 Total (16.2) (22.2) (18.8) (19.7) (14.6) (8.5) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. It can be seen from Table 4.2.11 that market value, earnings per share and high-low price are the major factors considered by majority of respondents in selecting a share for investment. Undergraduates give top priority to high- low price followed by market value and book value. But major factors considered by graduate investors are market value, earning per share and book 167 value. Post-graduates and professionally qualified respondents have primary importance to market value and then to earning per share and high-low price of the shares. Price-earning ratio has some influence among all the educational groups while market capitalisation is viewed as the least influencing factor for investment in shares.
168 4.2.12 Mode of Operation The method of operation in the secondary market preferred by respondents belonging to different educational groups depicted in Table 4.2.12 makes clear that, NSE terminals is the most preferred mode of operation followed by BSE terminal and the service of stock brokers. On analysis, it is observed that 56.4 per cent of undergraduate respondents prefer NSE terminal and 23.1 per cent prefer to deal through brokers. About 55 per cent of graduate and post-graduate respondents prefer NSE terminal while around 30 per cent prefer BSE terminal and around 15 per cent of them prefer broker’s services. However, 63.8 per cent of professional degree holders prefer NSE terminal, 24.6 per cent prefer BSE terminal and only 11.6 per cent prefer the services of brokers. An important highlight of the analysis is that the services of NSE terminals are preferred most by professional degree holders (63.8 per cent); the services of BSE terminals are preferred most by post – graduates (30.8 per cent) and the services of brokers are mostly preferred by undergraduates (20.5 per cent).
169 Table 4.2.12 Education wise distribution of investors according to their mode of operations in the secondary market
Education of Mode of operation investors NSE Terminal BSE Stock Total Terminal Brokers Below 22 9 8 39 graduation (56.4) (23.1) (20.5) (100.0) Graduation 63 34 17 114 (55.3) (29.8) (14.9) (100.0) Post – 42 24 12 78 graduation (53.8) (30.8) (15.4) (100.0) and above Professional 44 17 8 69 degree (63.8) (24.6) (11.6) (100.0) 171 84 45 300 Total (57.0) (28.2) (15.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule
4.1.13 Influence of Occupation on the Investment Behaviour Occupation influences the riskbearing capacities of investors. Investors like businessmen, industrialists and professional practitioners have relatively better risk bearing capacities than those in other occupational groups like employees, agriculturists and pensioners. Investors who are able to undertake risk can create folio of their own consisting of securities having better profit potential even if it results in higher element of risk. An analysis of the investment behaviour of different occupational groups of investors is attempted in the following part.
170 Period of Active Investment in Shares The distribution of the period of active investment in shares of respondents belonging to different occupational groups is presented in Table 4.2.13. Table – 4.2.13 Occupation wise Distribution of Investors According to Period of Investment in Shares Period of active investment Observed Occupation More Less than 3 3 to 5 6 to 10 Total value of of investors than 10 years years years K.S. test years Employee 35 38 38 25 136 0.03 (25.8) (27.9) (27.9) (18.4) (100.0) Professional 14 11 8 5 38 0.138 (36.8) (28.9) (21.1) (13.2) (100.0) Businessman 13 17 12 18 60 0.087 or (21.7) (28.3) (20.0) (30.0) (100.0) industrialist Pensioner 7 5 16 13 41 0.227 (17.1) (12.2) (39.0) (31.7) (100.0) Others 8 8 6 3 25 0.12 (32.0) (32.0) (24.0) (12.0) (100.0) 77 79 80 64 300 Total - (25.7) (26.3) (26.7) (21.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Critical value of K.S. test at 5 per cent level of significance = 0.457 From Table 4.2.13 it is observed that employee constitute leading group among various occupational groups of respondents followed by persons doing own business or industry. Of the whole sample, majority of respondents have had active investment for a period upto 5 years. Occupationwise analysis of the period of active investment in shares shows that majority of employees, professionals and persons having other occupation has active investment for a period only upto 5 years, while majority of pensioners have been active for a period of more than 5 years. 50 per cent of the respondents engaged in business or industry have active investment upto 5 years while majority of the 171 rest have active investment for more than 10 years. The period of active investment of various occupational groups of investors was not found to vary significantly when K.S. test is applied.
172 4.2.14 Level of Diversification in Shares Table – 4.2.14 Occupation wise Distribution of Investors According to Level of Diversification in Shares
Size of portfolio in shares
Occupation
of investors test Total Total 1 to 5 6 to 10 Observed 11 to 20 11 to Above 20 Above value of K.S. of K.S. value companies companies companies companies 51 44 27 14 136 Employee 0.055 (37.5) (32.3) (19.9) (10.3) (100.0) 12 10 12 4 38 Professional 0.064 (31.6) (26.3) (31.6) (10.5) (100.0) Businessman 14 20 13 13 60 or 0.09 (23.3) (33.3) (21.7) (21.7) (100.0) industrialist 9 12 10 10 41 Pensioner 0.131 (22.0) (29.2) (24.4) (24.4) (100.0) 11 10 2 2 25 Others 0.197 (44.0) (40.0) (8.0) (8.0) (100.0) 97 96 64 43 300 Total - (32.4) (32.0) (21.3) (14.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Critical value of K.S. test at 5 per cent level of significance = 0.457. The distribution of investors among different occupational groups according to the level of diversification in shares given in Table 4.2.14 reveals that of the whole sample, majority of them have portfolio in less than 10 companies. The leading group of respondents among different occupational groups constitutes employees. The vast majority of employees (69.8 per cent) and the respondents having other occupations (84 per cent) have a portfolio size of up to 10 companies. Majority of professionals (57.9 per cent), persons doing business or industry (56.6 per cent), and pensioners (51.2 per cent) have a portfolio size of not more than 10 companies. No significant difference is observed in the level of diversification of investors belonging to different occupational groups. 173 4.2.15 Size of Investment in Shares The size of investment in shares in relation to various occupational group of respondents is presented in Table 4.2.15. Table – 4.2.15 Occupation wise Distribution of Investors According to Size of Investment in Shares Size of investment in shares
Occupation of investors test Total Total Upto Upto Above Above Observed to 50000 Rs.25000 Rs.25001 Rs.50001 to 100000 value of K.S. of K.S. value Rs.100000 36 35 38 27 136 Employee 0.081 (26.5) (25.7) (27.9) (19.9) (100.0) 6 10 8 14 38 Professional 0.088 (15.8) (26.3) (21.1) (36.8) (100.0) Businessman 10 9 14 27 60 or 0.17 (16.7) (15.0) (23.3) (45.0) (100.0) industrialist 6 11 11 13 41 Pensioner 0.074 (14.7) (26.4) (26.8) (31.7) (100.0) 8 8 6 3 25 Others 0.177 (32.0) (32.0) (24.0) (12.0) (100.0) 66 73 77 84 300 Total - (22.0) (24.3) (25.7) (28.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Critical value of K.S. test at 5 per cent level of significance = 0.457. It is clear from Table 4.2.15 that 161 of the total 300 respondents have investment in shares worth more than Rs.50000 each. Among the different occupational groups, 68.3 per cent of respondents doing own business or industry, 57.9 per cent of professionals and 58.5 per cent of pensioners have a size of investment in shares above Rs.50000 each. A notable feature is that a sizable portion of respondents included in the above have investment of more than Rs.100000 each. However, major part of employees and respondents
174 belonging to other occupational groups have investment in shares upto Rs.50000 each only. The difference in the size of investment of various occupational groups of investors is not found to be significant when K.S. Test is applied.
175 4.2.16 Future Investment Plan The occupation wise distribution of respondents in accordance with their future investment plans depicted in Table 4.2.16 makes clear that majority of of respondents are willing to invest in capital market in future. An analysis of the willingness of different occupational groups of respondents reveal that majority of employees (50.7 per cent), professionals (63.2 per cent), businessmen or industrialists (51.7 per cent) and other occupational groups (68 per cent) are willing to commit funds in future. But it is equally important that 49.3 per cent of employees, 48.3 per cent of persons doing business or industry and 58.5 per cent of pensioners are unwilling to invest further in capital market instruments. Table – 4.2.16 Occupation wise Distribution of Investors According to their Future Investment Plan Willingness to invest in future Occupation of investors Total Willing Not Willing 69 67 136 Employee (50.7) (49.3) (100.0) 24 14 38 Professional (63.2) (36.8) (100.0) 31 29 60 Businessman or industrialist (51.7) (48.3) (100.0) 17 24 41 Pensioner (41.5) (58.5) (100.0) 17 8 25 Others (68.0) (32.0) (100.0) 158 142 300 Total (52.7) (47.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
176 4.2.17 Future Investment Options The distribution of investment options preferred by investors of different occupational groups who are willing to invest in capital market in future exhibited in Table 4.2.17 shows that of the whole sample, the most preferred type of security is shares followed by mutual fund schemes and debentures. Occupation wise analysis of future investment options of respondents shows that majority of employees and respondents belonging to other occupational groups prefer to invest in shares while majority of the rest preferred to invest in mutual fund schemes. Vast majority of pensioners and persons doing business or industry prefer to invest in shares and only a minority of them prefer mutual fund schemes. However, the leading group of professional practitioners prefer mutual fund schemes to shares. Table – 4.2.17 Occupation wise Distribution of Future Investment Option of Investors
Investment options of investors Mutual Occupation of investors Total Shares Debentures fund schemes 167 21 113 301 Employees (55.5) (7.0) (37.5) (100.0) 49 5 53 107 Professional (45.8) (4.7) (49.5) (100.0) 79 12 38 129 Businessman or industrialist (61.2) (9.3) (29.5) (100.0) 48 6 16 70 Pensioner (68.6) (8.6) (22.8) (100.0) 40 3 29 72 Others (55.5) (4.2) (40.3) (100.0) 383 47 249 679 Total (56.4) (6.90) (36.7) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
177 4.2.18 Reason for the Lack of Interest in Future Investment The reasons for the lack of interest to invest in capital market instruments in future given by various occupational groups of respondents are analysed in Table 4.2.18. Table – 4.2.18 Occupation wise Distribution of Factors Investment in Capital Market Factors hindering investment in capital market Occupation of No Increased Liquidity High Total investors promising risk problems volatility returns 126 70 54 79 329 Employee (38.3) (21.3) (16.4) (24.0) (100.0) 29 7 16 21 73 Professional (39.7) (9.6) (21.9) (28.8) (100.0) Businessman 58 43 18 37 156 or industrialist (37.2) (27.6) (11.5) (23.7) (100.0) 45 27 28 35 135 Pensioner (33.3) (20.0) (20.8) (25.9) (100.0) 17 8 12 9 46 Others (37.0) (17.4) (26.0) (19.6) (100.0) 275 155 128 181 739 Total (37.2) (21.0) (17.3) (24.5) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
It can be seen from Table 4.2.18 that increased risk and high volatility top the list of factors which are responsible for the lack of interest of respondents. Investors belonging to all occupational groups consider risk as the main discouraging factor while high volatility ranks second among professionals, pensioners and employees. Persons doing own business or industry view lack of promising returns as the second important factor while respondents in the other occupational groups feel liquidity problem as the second important factor which hinder future investment in capital market.
178 4.2.19 Mode of Investment Occupation wise distribution of respondents according to the mode of investment in the secondary market preferred by them presented in Table 4.2.19 shows that secondary market is the most preferred method followed by primary market and private placement. Of the total number of respondents 39.3 per cent prefer primary market, 57.4 per cent prefer the secondary market and the remaining 3.3 per cent prefer private placement. The preference in the mode of investment among employees, professionals and businessmen are found to be the same. However a slight deviation is observed in the preferred mode of investment among pensioners and respondents in other occupational group.
Table – 4.2.19 Occupation wise Distribution of Investors According to Mode of Investment Mode of investment Occupation of investors Primary Secondary Private Total market market Placement 54 79 3 136 Employee (39.7) (58.1) (2.2) (100.0) 15 22 1 38 Professional (39.5) (57.9) (2.6) (100.0) 23 36 1 60 Businessman or industrialist (38.3) (60.0) (1.7) (100.0) 16 22 3 41 Pensioner (39.0) (53.7) (7.3) (100.0) 10 13 2 25 Others (40.0) (52.0) (8.0) (100.0) 118 172 10 300 Total (39.3) (57.4) (3.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
179 4.2.20 Criteria for Investment Decision The criteria adopted by investors before taking investment decision in the primary market are different from the criteria adopted by them in the secondary market. Therefore, it is separately analysed for different occupational groups of investors and is presented in the following part.
Table – 4.2.20 Occupation wise Distribution of Investment Criteria in the Primary Market Investment criteria in the primary market
Occupation of Total investors record product by FI / FIs by FI / FIs Risk factors Risk factors to which the the to which Terms of issue Members in the company belongs Promoter’s track- Promoter’s Industry or sector board of directors Nature and type of Nature Equity participation Equity participation 171 116 123 127 51 73 117 778 Employee (22.0) (14.9) (15.8) (16.3) (6.6) (9.4) (15.0) (100.0) 51 58 35 24 0 25 28 221 Professional (23.1) (26.2) (15.8) (10.9) (0.0) (11.3) (12.7) (100.0) Businessman or 70 66 40 55 26 27 54 338 industrialist (20.7) (19.5) (11.8) (16.3) (7.7) (8.0) (16.0) (100.0) 50 40 49 47 13 12 19 230 Pensioner (21.7) (17.4) (21.3) (20.4) (5.7) (5.2) (8.3) (100.0) 13 36 20 27 23 15 12 146 Others (18.9 (24.6) (13.7) (18.5) (15.8) (10.3) (8.2) (100.0) ) 378 300 274 276 103 152 230 1713 Total (22.1) (17.5) (16.0) (16.1) (6.0) (8.9) (13.4) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
180 4.2.21 Investment Criteria in the Primary Market Primary market continued to be the most popular medium of investment among investors till the introduction of screen based trading through various trading terminals of major stock exchanges. The investment criteria in the primary market adopted by different occupational groups of investors shown in Table 4.2.20 shows that in general, nature and type of the product is viewed as the most important criterion in the primary market. The other prominent factors applied for investment decisions in the primary market include industry or sector to which the company belongs, promoter’s track-record and terms of issue. The occupation wise analysis reveals that employees gave more importance to nature and type of the product followed by promoter’s track record and terms of issue while professionals give importance to the industry or sector to which the company belongs, nature and type of the product and terms on which the issue is made. Nature and type of the product ranked high among businessmen, pensioners and other occupational groups. Industry or sector to which the company belongs ranked second among businessmen while terms of issue ranked second among pensioners and other occupational groups. The risk factors are given some importance by employees and businessmen. The other factors like members in the board of directors and equity participation by domestic and foreign institutional investors have not exerted much influence among the respondents of different occupational groups in taking investment decision.
Investment Criteria in the Secondary Market The distribution of investment criteria in the secondary market among different occupational groups of respondents is given in Table 4.2.21.
181 Table – 4.2.21 Occupation wise Distribution of Investment Criteria in the Secondary Market
Investment Criteria in the Secondary Market
Occupation Total of investors policy indices brokers analysis analysis eriodicals eriodicals dailies and p Fundamental Fundamental Advice made by Advice made by Changes in govt. Changes financial websites websites financial Terminal analysis analysis Terminal Market Sentiments Market Investment advice of advice Investment Movement of market of market Movement 87 100 81 40 126 123 155 50 762 Employee (11.4) (13.1) (10.6) (5.3) (16.5) (16.2) (20.3) (6.6) (100.0) 18 28 29 9 44 27 47 20 222 Professional (8.1) (12.6) (13.0) (4.1) (19.8) (12.2) (21.2) (9.0) (100.0) Businessman 53 32 46 26 62 61 42 28 350 or (15.2) (9.2) (13.1) (7.4) (17.7) (17.4) (12.0) (8.0) (100.0) industrialist 37 27 32 17 49 26 31 7 226 Pensioner (16.4) (11.9) (14.2) (7.5) (21.7) (11.5) (13.7) (3.1) (100.0) 20 30 28 5 14 14 27 9 147 Others (13.6) (20.4) (19.1) (3.4) (9.5) (9.5) (18.4) (6.1) (100.0) 215 217 216 97 295 251 302 114 1707 Total (12.6) (12.7) (12.6) (5.7) (17.3) (14.7) (17.7) (6.7) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. It can be seen from Table 4.2.21 that fundamental analysis, movement of market indices and market sentiments are the important factors considered in general by respondents for basing their investment decisions in the secondary market. A good number of employee respondents have considered the above factors in their investment decisions. As regards professionals, fundamental analysis, movement of market indices and advice given by periodicals are the important investment criteria while businessmen and industrialists give preference to movement of market indices, market sentiments and changes in government policy rather than scientific tools like fundamental analysis or technical analysis. Movement of market indices and changes in government 182 policy rank high among pensioners while other groups give importance to investment advice of brokers and advice of dailies and periodicals. Among the various investment criteria, fundamental analysis is given top priority by employees and professionals only. Technical analysis is one among the least considered investment criteria. Therefore, it is inferred that investors in the secondary market are mainly influenced by market trends.
183 4.2.22 Motives Behind Capital Market Investment The motives behind making investment in the capital market by different occupational groups of respondents presented in Table 4.2.22 reveals that capital gains rank first among the major motives followed by dividend or interest income, bonus shares and tax benefits. On analysis it becomes evident that capital gains and dividend or interest benefits are the prime motives of all the occupational groups of respondents. A sizable portion of businessmen and the others aim at bonus shares while investing in capital market. But tax benefits have not received much attention from any occupational groups of respondents. Table 4.2.22 Occupation wise Distribution of Investment Motives
Investment motives Occupation Dividend Capital Bonus Rights Tax of investors Total or interest gains shares shares benefits Employee 224 330 115 21 76 766 (29.2) (43.1) (15.1) (2.7) (9.9) (100.0) Professional 69 93 33 6 19 220 (31.4) (42.3) (15.0) (2.7) (8.6) (100.0) Businessman 85 148 63 13 25 334 or (25.4) (44.3) (18.9) (3.9) (7.5) (100.0) industrialist Pensioner 66 99 42 16 18 241 (27.4) (41.1) (17.4) (6.6) (7.5) (100.0) Others 43 60 26 4 9 142 (30.3) (42.3) (18.3) (2.8) (6.3) (100.0) 487 730 279 60 147 1703 Total (28.6) (42.9) (16.4) (3.5) (8.6) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule
184 4.2.23 Factors influencing Selection of a Share The major factors considered for selection of shares by respondents belonging to various occupational groups are given in Table 4.2.23. From Table 4.2.23 it is evident that market price is the important factor based on which investors take investment decision on shares. It ranks first among respondents belonging.
Table 4.2.23 Occupation wise Distribution of Factors Considered for Investment in Shares
Factors considered for investment in shares Occupation High- Earnin Price- Market Book Market of investors low g per earning capitali- Total value value price share ratio sation Employee 135 180 154 167 111 54 801 (16.9) (22.5) (19.2) (20.8) (13.9) (6.7) (100.0) Professional 24 58 40 49 35 20 226 (10.6) (25.7) (17.7) (21.7) (15.5) (8.8) (100.0) Businessman 63 67 70 60 51 35 346 or (18.2) (19.4) (20.2) (17.4) (14.7) (10.1) (100.0) industrialist Pensioner 39 51 37 48 37 26 238 (16.4) (21.4) (15.5) (20.2) (15.6) (10.9) (100.0) Others 24 35 29 23 23 14 148 (16.2) (23.7) (19.6) (15.5) (15.5) (9.5) (100.0) 285 391 330 347 257 149 1759 Total (16.2) (22.2) (18.8) (19.7) (14.6) (8.5) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule To all the occupational groups except persons doing business or industry. Among employees and professionals, earning per share and high-low price are the other two important factors. High-low price ranked first, market value ranked second and book value ranked third among businessman. Earning 185 per share and book value are other important factors considered by pensioners while in the case of other group the other major factors are high-low price and book value. Respondents belonging to all the occupational groups give some attention to price earning ratio, a scientific tool of investment analysis while market capitalization is given some importance by pensioners, businessmen and industrialists.
186 4.2.24 Mode of Operation The distribution of investors among different occupational groups according to the mode of operation preferred in the secondary market as depicted in Table 4.2.24 shows that in general, majority of respondents prefer to perform their operations through NSE terminal. Among the different occupational groups, the preference for NSE terminal is high among the businessmen (63.4 per cent) and low among the other groups (40 per cent). BSE terminal is also a popular mode of operation as evident from the preferences shown by more than 25 per cent of respondents from various occupational groups. The services of brokers and sub-brokers are the least preferred by the respondents. However, 24 per cent of investors in the other occupational groups opted for their services.
Table 4.2.24 Occupation wise Distribution of Investors According to Mode of Operation in Secondary Market
Mode of operations Occupational of NSE Stock investors BSE terminal Total terminal broker Employee 77 38 21 136 (56.6) (27.9) (15.5) (100.0) Professional 22 10 6 38 (57.9) (26.3) (15.8) (100.0) Businessman or 38 17 5 60 industrialist (63.4) (28.3) (8.3) (100.0) Pensioner 24 10 7 41 (58.5) (24.4) (17.1) (100.0) Others 10 9 6 25 (40.0) (36.0) (24.0) (100.0) 171 84 45 300 Total (57.0) (28.0) (15.0) (100.0) Note: Figures in parentheses are percentage to total Source: Interview Schedule
187 4.2.25 Influence of Personal Income on the Investment Behaviour Income received by investors is another major determinant of investment behaviour. The investment pattern, liquidity preference and level of diversification of portfolios depend on the income of investors. Income also satisfies the speculative motive in that investors having a high level of income could take advantage of available investment opportunities. For the purpose of the study, investors are classified into five groups, viz. investors having annual income upto Rs.50000, Rs.50001 to Rs.100000, Rs100001 to 200000 to 500000 and above But for analysis they are rearranged into four income groups, the upper middle income group and the high income group. Investors with income upto Rs.100000 are brought under the low income group; those having income between Rs.100001 to 200000 are included in the upper middle income group and investors having income above Rs.500000 are included in the high income group.
Period of Active Investment in Shares The incomewise distribution of the respondents having different periods of active investment in shares is presented in Table 4.2.25. It can be seen from Table 4.2.25 that the middle income group represents the leading group among respondents having different levels of income. Respondents belonging to lower income groups have shorter periods of active investment than those who have higher levels of income. Investors with active investment of more than 5 years represent only 26.1 per cent of low income groups while it represents 45.6 per cent in the case of respondents belonging to middle income group. The proportion of respondents having active investment for more than 5 years is 57 per cent among the upper middle income group and 60.6 per cent among the high income group. No significant variation is found in the period of active investment of different income group of investors.
188
Table 4.2.25 Income wise Distribution of Investors According to Period of Active Investment in Shares
Period of active investment Observed Income group of Less More 3 to 5 6 to 10 value of investors than 3 than 10 Total years years K.S. test years years Low income group 22 17 12 4 55 0.189 (40.0) (30.9) (21.8) (7.3) (100.0) 0.189 Middle income 26 35 31 20 112 0.035 group (23.2) (31.2) (27.7) (17.9) (100.0) Upper middle 23 20 26 31 100 0.097 income group (23.0) (20.0) (26.0) (31.0) (100.0) High income group 6 7 11 9 33 0.126 (18.2) (21.2) (33.3) (27.3) (100.0) 77 79 80 64 300 Total (25.7) (26.3) (26.7) (21.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Critical value of K.S. test 5 per cent level of significance = 0.457
189 4.2.26 Level of Diversification in Shares The size of portfolio in shares among different income groups of respondents exhibited in Table 4.2.26 reveals that size of portfolio increases with rise in the level of income of the respondents. In the low income group only 3.6 per cent of respondents have investment in shares of more than 10 companies while it is 22.3 per cent among respondents in the middle income group. But majority of respondents (53 per cent) in the upper middle income group and vast majority (81.8 per cent) in the high income group have a portfolio in more than 10 companies. Hence it is observed that there is significant difference in the level of diversification in shares of high income group of investors which is confirmed by K.S. test.
Table 4.2.26 Income wise Distribution of Investors According to the Level of Diversification in Shares
Level of diversification in shares 11 to Observed Income group of 1 to 5 6 to 10 20 Above 20 value of investors compan compa Total compa companies K.S. test ies nies nies Low income group 33 20 0 2 55 0.32 (60.0) (36.4) (0.0) (3.6) (100.0) Middle income 41 46 22 3 112 0.133 group (36.6) (41.1) (19.6) (2.7) (100.0) Upper middle 20 27 30 23 100 0.173 income group (20.0) (27.0) (30.0) (23.0) (100.0) High income group 3 3 12 15 33 0.462 (9.1) (9.1) (36.4) (45.4) (100.0) 97 96 64 43 300 Total (32.4) (32.0) (21.3) (14.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule Critical value of K.S. test 5 per cent level of significance = 0.457 190 4.2.27 Size of Investment in Shares The distribution of the size of investment in shares among different income groups of respondents depicted in Table 4.2.27 shows that the size of investment of respondents is also directly related to their annual income. Among the low income group of respondents, 54.5 per cent have investment in shares upto Rs.25000 and 27.3 per cent have investment between Rs.25001 and Rs.50000. In the case of middle income group, only 21.4 per cent of respondents have investment size upto Rs.25000 while 37.5 per cent have investment between Rs.25001 and Rs.50000. As regards the upper middle income group of respondents, 35 per cent have investment between Rs.50001 and Rs.100000 and 40 per cent have investment above Rs.100000. One of the major highlights of this analysis is that 91 per cent of respondents in the high income group have investment in shares exceeding Rs.10000. The difference in size of investment of high income group of investors from the general pattern is found to be statistically significant.
191 Table 4.2.27 Income wise Distribution of Investors According to the Size of Investment in Shares
Size of investment in shares Rs. Rs. Observed Income group of Upto Above 25001 50001 value of investors Rs. Rs. Total to to K.S. test 25000 100000 50000 100000 Low income 30 15 6 4 55 0.355 group (54.5) (27.3) (10.9) (7.3) (100.0) Middle income 24 42 36 10 112 0.191 group (21.4) (37.5) (32.2) (8.9) (100.0) Upper middle 10 15 35 40 100 0.213 income group (10.0) (15.0) (35.0) (40.0) (100.0) High income 2 1 0 30 33 0.629 group (6.0) (3.0) (0.0) (91.0) (100.0) 66 73 77 84 300 Total (22.0) (24.3) (25.7) (28.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule Critical value of K.S. test 5 per cent level of significance = 0.457
192 4.2.28 Future Investment Plan The future investment plan of investors belonging to different levels of income shown in Table 4.2.28 reveals that majority of respondents belonging to all groups are willing to make fresh investments in future. However, an almost equal proportion are unwilling to invest further in the capital market. Irrespective of the income level, a general reluctance is found in investing in the capital market in future.
Table 4.2.28 Income wise Distribution of Investors According to their Future Investment plan
Income group of Willingness to invest in future Total investors Willing Not willing Low income group 28 27 55 (50.9) (49.1) Middle income group 62 50 112 (55.4) (44.6) (100.0) Upper middle income 50 50 100 group (50.0) (50.0) (100.0) High income group 18 15 33 (54.5) (45.5) (100.0) 158 142 (300) Total (52.7) (47.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule
193 4.2.29 Future Investment Option The respondents willing to make investment in capital market in future belonging to different income groups are distributed according to their future investment options. It is given in Table 4.2.29. From Table 4.2.29, it can be seen that respondents belonging to different income groups prefer investment in shares followed by mutual fund schemes and debentures. The future investment plan of investors are rather disheartening to the capital market. As it is revealed in Table 4.2.28 majority of respondents in all groups have plans to make fresh investments in future. But in certain groups as many are unwilling to invest in capital market. However, investors in the high income group, prefer to invest mostly in shares. The preference to invest in mutual fund scheme is high among the middle income group. Another fact revealed by the analysis is that the tendency to invest in debentures increases in accordance with the increase in the level of income of respondents.
Table 4.2.29 Income wise Distribution of Future Investment Option of Investors
Investment option Income group of Mutual Total investors Shares Debentures fund schemes 68 6 47 121 Low income group (56.2) (5.0) (38.8) (100.0) 144 13 107 264 Middle income group (54.5) (4.9) (40.5) (100.0) Upper middle income 123 17 80 220 group (55.9) (7.7) (36.4) (100.0) 48 11 15 74 High income group (64.9) (14.8) (20.3) (100.0) 383 47 249 679 Total (56.0) (7.6) (36.4) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule 194 4.2.30 Reasons for the Lack of Interest in Future Investment The major factors which stand in the way of making fresh investment in capital market by respondents having different levels of income are analysed and the result is presented in Table 4.2.30. From Table 4.2.30 it can be seen that in general, increased risk is the major factor which discourages the respondents from making fresh investment in the capital market. Other reasons are high volatility and lack of promising returns. Increased risk is considered a major problem by respondents belonging to all income groups but it is more intensive in the low income group. High volatility ranks as second major problem and lack of promising returns as the next major problem among respondents belonging to the low income group, middle income group and high income group while lack of promising returns and high volatility rank second and third in upper middle income group.
Table 4.2.30 Income wise Distribution of Factors Hindering Investment in Capital Market
Factors hindering investment in capital market Income group of No Increased Liquidity High Total investors promising risk problems volatility returns 61 24 23 36 144 Low income group (42.3) (16.7) (16.0) (25.0) (100.0) Middle income 98 53 49 60 260 group (37.7) (20.4) (18.8) (23.1) (100.0) Upper middle 84 62 47 60 253 income group (33.2) (24.5) (18.6) (23.7) (100.0) 32 16 9 25 82 High income group (39.0) (19.5) (11.0) (30.5) (100.0) 275 155 128 181 739 Total (37.2) (21.0) (17.3) (24.5) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule
195 4.2.31 Mode of Investment The distribution of different income groups of respondents according to the mode of capital market operations preferred by them presented in Table 4.2.31 shows that the major group of respondents prefers to invest through secondary market. A good number of respondents prefer primary market and only a minority of them prefer private placement. It is observed that 47.3 per cent of respondents in the low income group preferred to invest through secondary market while 45.4 per cent prefer income group prefer to make their investments through secondary market; only 33.3 per cent of them prefer primary market. Hence a shift in favour of secondary market is noticed in the high income group of respondents compared to low income groups.
Table 4.2.31 Income wise Distribution of Investors According to Mode of Investment
Mode of investment Income group of investors Primary Secondary Private Total market market placement 25 26 4 55 Low income group (45.4) (47.3) (7.3) (100.0) 43 66 3 112 Middle income group (38.4) (58.9) (2.7) (100.0) 39 59 2 100 Upper middle income group (39.0) (59.0) (2.0) (100.0) 11 21 1 33 High income group (33.3) (63.7) (3.0) (100.0) 118 21 1 33 Total (39.3) (57.4) (3.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule
196 4.2.32 Criteria for Investment Decision The investment criteria adopted by respondents among different income groups are studied separately under two subdivisions namely investment criteria in the primary market and investment criteria in the secondary market.
Investment Criteria in the Primary Market The investment criteria adopted by investors belonging to various income groups in the primary market, is depicted in Table 4.2.32. From Table 4.2.32 it is observed that in the primary market investors in general consider the nature and type of the product, industry or sector to which the company belongs, promoter’s track record, and terms of issue as the major investment criteria. Nature and type of the product has the highest rank among all the income group and upper middle income group consider terms of issue as the second important criterion while the middle and high income groups give more importance to the type of industry or sector to which the company belongs. Promoter’s track record is also considered as an important criteria by respondents belonging to different income groups. An important feature observed is that many respondents in the lower income group give due weightage to the influence of risk factors while those in the higher income groups relegated its significance in investment decisions. Equity participation by domestic and foreign institutional investors and the reputation of the members in the board of directors and the reputation of the members in the board of directors are the least considered by investors in the primary market.
197 Table 4.2.32 Income wise Distribution of Investment Criteria in the Primary Market
Investment criteria in the primary market Industry or Income group Nature and Promoter’s Members in Equity sector to which Terms of Risk of investors type of track the board of participation Total the company issue factors product record directors by FI/FIIs belongs Low income 74 43 50 49 16 29 49 310 group (23.9) (13.9) (16.1) (15.8) (5.2) (9.3) (15.8) (100.0) Middle income 139 126 95 103 33 51 99 646 group (21.5) (19.5) (14.7) (16.0) (5.1) (7.9) (15.3) (100.0) Upper middle 125 95 107 91 39 53 63 573 income group (21.8) (16.6) (18.7) (15.9) (6.8) (9.2) (11.0) (100.0) High income 40 36 22 33 15 19 19 184 group (21.7) (19.6) (12.0) (17.9) (8.2) (10.3) (10.3) (100.0) 378 300 274 276 103 152 230 1713 Total (22.1) (17.5) (16.0) (16.1) (6.0) (8.9) (13.4) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule
198 4.2.33 Investment Criteria in the Secondary Market The distribution of investment criteria in the secondary market according to the level of income of respondents presented in Table 4.2.33 reveals that investors in general consider fundamental analysis, movement of market indices and market sentiments as the main criteria for investment in the secondary market. Fundamental analysis ranks first and movement of market indices rank second among the lower, middle and upper middle income groups of respondents while movement of market indices rank first and market sentiments rank second among respondents in the high income group. Respondents in the lower income group give higher priority to fundamental analysis than those in the higher income groups. It is also observed that technical analysis is used as a tool for investment to those belonging to the lower income groups. From this it may be inferred that the investment criteria adopted by investors in the lower income group are different from those in the higher income groups. Among other investment criteria, change in the policy of the government, investment advice of brokers and advice given by periodicals and dailies are also important. Investment advice of brokers is mainly sought by upper middle income group while advice of the print media is resorted to by lower income group of respondents.
199 Table 4.2.33 Income wise Distribution of Investment Criteria in the Secondary Market
Investment Criteria the Secondary Market Income group Investment Advice made Advice made Movement Changes in Market Fundament Technical of investors advice of by dailies or by financial of market Total govt. policy sentiments al analysis analysis brokers periodicals web sites indices Low income 50 28 47 7 54 47 61 13 307 group (16.3) (9.1) (15.3) (2.3) (17.6) (15.3) (19.9) (4.2) (100.0) Middle income 78 88 80 39 111 88 112 47 643 group (12.1) (13.7) (12.4) (6.1) (17.3) (13.7) (17.4) (7.3) (100.0) Upper middle 66 82 68 43 91 80 103 36 569 income group (11.6) (14.4) (12.0) (7.6) (16.0) (14.0) (18.1) (6.3) (100.0) High income 21 19 21 8 39 36 26 18 188 group (11.2) (10.1) (11.2) (4.3) (20.7) (19.1) (13.8) (9.6) (100.0) 215 217 216 97 295 251 302 114 1707 Total (12.6) (12.7) (12.6) (5.7) (17.3) (14.7) (17.7) (6.7) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule
200 4.2.34 Motives behind Capital Market Investment The analysis of the major motives behind capital market investment among different income groups of respondents given in Table 4.2.34 shows that for the whole sample, capital gains represent the dominant investment motive followed by dividend or interest income, bonus shares and tax benefits. It is revealed from detailed analysis that motive for capital gains tend to increase with increase in the level of income. Among respondents in the middle and higher income groups, there is conspicuous difference between preference towards capital gains and dividend income compared to those in the low income group. Another fact revealed from the table is that tax benefits as a motive for capital market investment failed to evoke much response among the high income group of respondents even though the burden of tax rests more heavily on their shoulders.
Table 4.2.34 Income wise Distribution of Investment Motives
Income Investment motives group of Dividend Capital Bonus Rights Tax Total investors or interest gains shares shares benefits Low income 98 116 53 17 26 310 group (31.6) (37.4) (17.1) (5.5) (8.4) (100.0) Middle 177 278 103 24 58 640 income group (27.6) (43.4) (16.1) (3.8) (9.1) (100.0) Upper middle 157 251 90 17 54 569 income group (27.6) (44.1) (15.8) (3.0) (9.5) (100.0) High income 55 85 33 2 9 184 group (29.9) (46.2) (17.9) (1.1) (4.9) (100.0) 487 730 279 60 147 1703 Total (28.6) (42.9) (16.4) (3.5) (8.6) (100.0) Note: Figures in parentheses are percentage to total Source: Interview Schedule.
201 4.2.35 Factors Influencing Selection of a Share The factors considered by different income groups of respondents for investing in shares are depicted in Table 4.2.35. Among the various factors, market value is ranked first by respondents belonging to low and middle income groups followed by earning per share and high-low price. But, upper middle income group of respondents give importance to earning per share, market value and high – low price. The respondents in the high income group consider high-low price and market price as more decisive factors. Among other factors, book value is mainly considered by low, middle and high income groups of respondents. Book value and earning per share are equally preferred by the high income group. Factors like price-earning ratio and market capitalization are less considered by respondents especially those belonging to higher income groups.
Table 4.2.35 Income wise Distribution of Factors Considered for Investing in Shares
Income group Factors considered for investing in shares of investors Book Marke High- Earning Price- Market Total value t value low per earning capitali-sation price share ratio Low income 46 80 55 59 45 31 316 group (14.6) (25.3) (18.7) (14.2) (9.8) (100.0) Middle income 114 135 118 119 111 64 661 group (17.2) (20.4) (17.9) (18.0) (16.8) (9.7) (100.0) Upper middle 92 134 105 136 80 43 590 income group (15.6) (22.7) (17.8) (23.0) (13.6) (7.3) (100.0) High income 33 42 52 33 21 11 192 group (17.2) (21.9) (27.1) (17.2) (10.9) (5.7) (100.0) 285 391 330 347 257 149 1759 Total (16.2) (22.2) (18.8) (19.7) (14.6) (8.5) (100.0) Note: Figures in parentheses are percentage to total Source: Interview Schedule.
202 4.2.36 Mode of Operation The method of secondary market operation preferred by respondents belonging to different income groups exhibited in Table 4.2.36 clearly shows that NSE terminal is the most preferred and services of brokers is the least preferred method of secondary market operation. It is observed from the analysis that high income group of respondents prefer NSE terminal the most (78.8 per cent) and BSE terminal the least (18.2 per cent). Among respondents who preferred BSE terminal, middle income group represents the leading group while the services of brokers are preferred mostly by low income group of respondents.
Table 4.2.36 Income wise Distribution of Investors According to Mode of Operation in Secondary Market
Mode of operation Income group of investors NSE BSE Stock Total terminal terminal broker Low income group 30 14 11 55 (54.5) (25.5) (20.0) (100.0) Middle income group 57 39 16 112 (50.9) (34.8) (14.3) (100.0) Upper middle income group 58 25 17 100 (58.0) (25.0) (17.0) (100.0) High income group 26 6 1 33 (78.8) (18.2) (3.0) (100.0) 171 84 45 300 Total (57.0) (28.0) (15.0) (100.0) Note: Figures in parentheses are percentage to total Source: Interview Schedule.
203 4.2.37 Influence of Market Experience On The Investment Behaviour Market experience equip investors with more insight and maturity in taking investment decisions. Experienced investors are able to understand the pulse of the market which enables them to revise their portfolio by incorporating securities having profit potentiality. In this part, an attempt is made to study the influence of market experience on the investment behaviour of investors in the capital market.
Period of Active Investment in Shares The period of active investment in shares of respondents is analysed with their experience in capital market investment and the results are presented in Table 4.2.37.
Table 4.2.37 Market Experience Distribution of Investors According to Period of Active Investment in Shares
Period of Active investment Market experience of Less than 3 3 to 5 6 to 10 More than investors Total years years years 10 years Less than 3 years 58 - - - 58 (100.0) (100.0) 3 to 5 years 8 58 - - 66 (12.1) (87.9) (100.0) 6 to 10 years 7 15 66 - 88 (8.0) (17.0) (75.0) (100.0) More than 10 years 4 6 14 64 88 (4.5) (6.8) (15.9) (72.8) (100.0) 77 79 80 64 300 Total (25.7) (26.3) (26.7) (21.3) (100.0) Note: Figures in parentheses are percentage to total Source: Interview Schedule.
Table 4.2.37 shows that majority of the respondents have a market experience of more than 5 years. On analysis it is observed that majority of respondents in general start active investment in shares shortly after they make their first investment in the capital market. The entire respondents who have less than 3 years of experience and 87.9 per cent of those who have 3 to 5 years 204 of experience have active investment having equal periods of time. Similarly, 75 per cent of investor having market experience of 6 to 10 years and 72.7 per cent having market experience of more than 10 years have the same period of active investment. It is found that vast majority of respondents having different periods of market experience also have similar periods of active investment in shares.
4.2.38 Level of Diversification in Shares The level of diversification in shares of respondents having different periods of market experience is analysed in Table 4.2.38. It can be seen from Table 4.2.38 that majority of the respondents have investment in less than 10 companies. The analysis of the level of diversification based on the market experience of investors shows that vast majority of respondents having market experience of more than 10 years have a portfolio size of more than 10 companies. Among respondents having experience of less than 3 years in capital market investment, 18.9 per cent have investment in more than 10 companies while only 12.1 per cent of those having experience between 3 and 5 years have the same level of portfolio. However, 36.4 per cent the respondents having experience between 6 and 10 years and 63.6 per cent of respondents having experience beyond 10 years have investment in more than 10 companies. Therefore it may be concluded that the level of diversification among respondents having short periods of experience. The difference in the level of diversification in shares of investors having varying periods of market experience is found to be statistically insignificant.
205 Table 4.2.38 Market Experience Distribution of Investors According to Level of Diversification in Shares
Period of Active investment Market experience of Less than 3 3 to 5 6 to 10 More than investors Total years years years 10 years Less than 3 years 58 - - - 58 (100.0) (100.0) 3 to 5 years 8 58 - - 66 (12.1) (87.9) (100.0) 6 to 10 years 7 15 66 - 88 (8.0) (17.0) (75.0) (100.0) More than 10 years 4 6 14 64 88 (4.5) (6.8) (15.9) (72.8) (100.0) 77 79 80 64 300 Total (25.7) (26.3) (26.7) (21.3) (100.0) Note: Figures in parentheses are percentage to total Source: Interview Schedule.
206 4.2.39 Size of Investment in Shares The size of investment in shares of respondents having different periods of market experience exhibited in Table 4.2.39 shows that size of investment of respondents has a direct relation with market experience. 67.2 per cent of respondents having experience of less than 3 years and 60.6 per cent of respondents having experience between 3 and 5 years have investment of upto Rs. 50000 in shares whereas 58 per cent having experience between 6 and 10 years have investment of more than Rs. 50000. The size of investment of respondents having experience of more than 10 years shows that 73.8 per cent of them have investment of more than Rs. 50000 of which 47.7 per cent have investment above Rs. 100000. No significant variation was observed in the size of investment of investors having different periods market experience.
Table 4.2.39 Market Experience wise Distribution of Investors According to Size of Investment in Shares
Size of investment in shares Rs. Rs. Up to Above observed Market experience of 25001 50001 Rs. Rs. Total value of investors to to 25000 100000 K.S. test 50000 100000 26 13 13 6 58 Less than 3 years 0.228 (44.8) (22.4) (22.4) (10.4) (100.0) 21 19 16 10 66 3 to 5 years 0.143 (31.8) (28.8) (24.2) (15.2) (100.0) 28 25 26 88 6 to 10 years 9 (10.2) 0.118 (31.8) (28.4) (29.6) (100.0) 13 23 42 88 More than 10 years 10 (11.4) 0.202 (14.8) (26.1) (47.7) (100.0) 66 73 77 84 300 Total (22.0) (24.3) (25.7) (28.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Critical value of K.S. test at 5 per cent level of significance = 0.457 207 4.2.40 Future Investment Plan The willingness of respondents to invest in capital market in future is analysed with respect to their market experience the result of which is shown in Table 4.2.40. Table 4.2.40 reveals that majority of respondents in all the groups, except those having experience of more than 10 years are willing to invest in capital market instruments in future. The proportion of respondents who are willing to invest in future are high among investors having experience between 3 and 5 years (59.1 per cent) followed by investors with experience of less than 3 years (56.9 per cent). But 46.6 percent of respondents having experience between 6 and 10 years and 55.7 percent of those having experience above 10 years are unwilling to make future commitment in capital market. Hence it may be concluded that investors having more experience are les interested making fresh investments in the capital market in future.
Table 4.2.40 Market Experience wise Distribution of Investors According to Future Investment Plan
Experience of Willingness to invest in future Total investors Willing Not willing 33 25 58 Less than 3 years (56.9) (43.1) (100.0) 39 27 66 3 to 5 years (59.10) (40.9) (100.0) 47 41 88 6 to 10 years (53.4) (46.6) (100.0) More than 10 39 49 88 years (44.3) (55.7) (100.0) 158 142 300 Total (52.7) (47.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule 208 4.2.41 Future Investment Options The future investment options of investors having different periods of market experience are presented in Table 4.2.41.
Table 4.2.41 Market Experience wise Distribution of Future Investment Option of Investors
Future investment options Mutual Market experience Shares Debentures fund Total of investors schemes 80 8 49 137 Less than 3 years (58.4) (5.8) (35.8) (100.0) 99 8 70 177 3 to 5 years (55.9) (4.5) (39.6) (100.0) 109 19 79 2.7 6 to 10 years (52.6) (9.2) (38.2) (100.0) 95 12 51 158 More than 10 years (60.1) (7.6) (32.3) (100.0) 383 47 249 679 Total (56.0) (7.6) (36.4) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
It can be seen from the table that respondents having different periods of market experience have similar investment options. Majority of respondents belonging to all groups prefer to invest in shares followed by mutual funds and debentures. Respondents having experience of less than 3 years and more than 10 years give more importance to shares than to the other two groups. However, the difference in preference for investment in shares is not very significant among respondents belonging to different groups.
209 4.2.42 Reasons for the Lack of interest in Future Investment The reasons behind lack of interest in investing in capital market among investors having different periods of market experience shown in Table 4.2.42 reveals that increased risk is the major deterrent against making investment in capital market. Its impact is increasingly felt by respondents having experience of less than 5 years. The other discouraging factors influencing respondents having less experience are lack of promising returns and high volatility in prices. Respondents having experience between 6 and 10 years view liquidity problem and high volatility as other major hindrances while high volatility stand second and lack of promising returns stand third among respondents having more than 10 years experience.
Table 4.2.42 Market Experience wise Distribution of Factors Hindering Investment in Capital Market
Factors hindering investment in capital market Market Increased No Liquidity High Total experience risk promising problems volatility of investors returns Less than 3 63 25 17 25 130 years (48.5) (19.2) (13.1) (19.2) (100.0) 55 30 24 28 137 3 to5 years (40.2) (21.9) (17.5) (20.4) (100.0) 6 to 10 82 53 33 78 246 years (33.3) (21.6) (13.4) (31.7) (100.0) 275 155 128 181 739 Total (37.2) (21.0) (17.3) (24.5) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule
210 4.2.43 Mode of Investment The preferred modes of capital market investment among respondents having different periods of market experience are depicted in Table 4.2.43. From Table 4.2.43 it can be seen that respondents having different periods of market experience prefer to invest through secondary market followed by primary market and private placement. Majority its of respondents having varying market experience except those having experience between 6 and 10 years prefer the secondary market. But an almost equal number of respondents having experience between 6 and 10 years prefer the primary market and secondary market alike. It is also observed that a higher portion of respondents having experience of less than 3 years and more than 10 years prefer to invest in the secondary market.
Table 4.2.43 Market Experience wise Distribution of Investors According to Mode of Investment
Mode of Investment Market Primary Secondary Private Total experience of market market placement investors 21 36 1 58 Less than 3 years (36.2) (62.1) (1.7) (100.0) 25 37 4 66 3 to 5 years (37.9) (56.1) (6.0) (100.0) 42 43 3 88 6 to 10 years (47.7) (48.9) (3.4) (100.0) 30 56 2 88 More than 10 years (34.1) (63.6) (2.3) (100.0) 118 172 10 300 Total (39.3) (57.4) (3.3) (100.0) Note: Figures in parentheses are percentage to total Source: Interview Schedule
211 4.2.44 Criteria for Investment Decision The major investment criteria considered by different groups of investors based on market experience in the primary market and secondary market are separately dealt with in the following part.
Investment Criteria in the Primary Market The major factors considered for investment decision in the primary market by respondents having different market experience are presented in Table 4.2.44. It is revealed from Table 4.2.44 that the nature and type of the product ranked high among respondents having different market experience except those having experience of less than 3 years. Investors having experience of less than 3 years give important to the industry or sector to which the company belongs (20.4 percent) and the nature and type of the product (18.4 percent) and promoter’s track-record (16. 5 percent). Nature and type of the product and industry or sector to which the company belongs are viewed as the other important criteria for investment decision by respondents having market experience between 3 and 5 years and between 6 and 10 years.
212 Table 4.2.44 Market Experience Distribution of Investment Criteria in the Primary Market
Investment Criteria in the Primary Market Industry or Equity promoter’s Members in Market experience Nature and type of sector to which Terms of participatio Risk track the board of Total of investment product the company issue n by factors record directors belongs FI/FIIS 49 37 309 Less than 3 years 57 (18.4) 63 (20.4) 35 (11.3) 51 (16.5) 17 (5.5) (15.9) (12.0) (100.0) 95 69 65 58 8 38 59 392 3 to 5 years (24.2) (17.6) (16.6) (14.8) (2.0) (9.7) (15.1) (100.0) 118 85 78 84 34 42 69 510 6 to 10 years (23.1) (16.7) (15.3) (16.5) (6.7) (8.2) (13.5) (100.0) 108 83 96 83 44 23 65 502 More than 10 years (21.5) (16.5) (19.1) (16.5) (8.8) (4.6) (13.0) (100.0) 378 300 274 276 103 152 230 1713 Total (22.1) (17.5) (16.0) (16.1) (6.0) (8.9) (13.4) (100.0) Note: Figures on parentheses are percentage to total Source: Interview Schedule
213 The respondents having experience of more than 10 years give prominence to factors like the nature and type of the product, terms of issue and industry or sector to which the company belongs. Risk factors also some influence among investors belonging to different groups. Equity participation by domestic or foreign institutional investors is taken to have some significance among respondents having less than three years experience.
4.2.45 Investment Criteria in the secondary Market The investment criteria in the secondary market by respondents having different market experience is exhibited in Table 4.2.45. It is evident from Table 4.2.45 that respondents having experience of less than 3 years and between 3 and 5 years give importance to fundamental analysis, changes in government policy and movement of market indices. The investors having experience of more than 5 years view movement of market indices as the most decisive one followed by fundamental analysis and market sentiments. Investment advice of brokers and advice given by print media are mainly considered by respondents with experience between 6 and 10 years. The use of fundamental analysis is high among investors having less market experience. But respondents with long experience do not give much importance to fundamental analysis. Their investment decision is mainly influenced by market factors.
214 Table 4.2.45 Market Experience wise Distribution of Investment Criteria in the Secondary Market
Investment Criteria in the secondary Market Advice Advice Market Investmen Movement Market Changes in made by made by fundamental Technica experience of t advice of of market sentiment Total govt. policy dailies or financial analysis l analysis investors brokers indices s periodicals web sites
less than 3 49 35 35 16 48 46 66 26 321 years (15.3) (10.9) (10.9) (5.0) (14.9) (147.3) (20.6) (8.1) (100.0) 57 49 47 30 51 50 77 24 385 3 to 5 years (14.8) (12.7) (12.2) (7.8) (13.3) (13.0) (20.0) (6.2) (100.0) 54 72 73 25 93 73 88 35 513 6 to 10 years (10.5) (14.0) (14.2) (4.9) (18.1) (14.3) (17.2) (6.8) (100.0)
More than 10 55 61 61 26 103 82 71 29 448 years (11.3) (12.5) (12.5) (5.3) (21.1) (16.8) (14.6) (5.9) (100.0) 215 217 216 97 295 251 302 114 1707 Total (12.6) (12.7) (12.6) (5.7) (17.3) (14.7) (17.7) (6.7) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule
215 4.2.46 Motives behind Capital Market Investment Table 4.2.46 shows the major investment motives of respondents having different periods of market experience. Capital gains rank high among the major motives of the respondents followed by motives for dividend or interest incomes and bonus shares. Motives for capital gains are high among respondents having more than 10 years experience and less than 3 years experience while the motive for dividend or interest is high among respondents having experience from 3 to 5 years. Tax benefits also figure as a motive among some respondents.
Table 4.2.46 Market Experience wise Distribution of Investment Motives
Investment motives Market Dividend experience Capital Bonus Right Tax of Total of gains shares shares shares interest investors Less than 93 142 47 8 28 318 3 years (29.3) (44.6) (14.8) (2.5) (8.8) (100.0) 3 to 5 120 146 69 9 41 385 years (31.2) (37.9) (17.9) (2.3) (10.7) (100.0) 6 to 10 136 213 73 28 44 494 years (27.5) (43.1) (14.8) (5.7) (8.9) (100.0) More than 138 229 90 15 34 506 10 years (27.3) (45.2) (17.8) (3.0) (6.7) (100.0) 487 730 279 60 147 1703 Total (28.6) (42.9) (16.4) (3.5) (8.6) (100.0) Note: Figures in parentheses are percentage to total Source: Interview Schedule.
216 4.2.47 Factors Influencing Selection of Shares The distribution of major factors considered relevant for investing in shares by respondents having different periods of marke6t experience as given in Table 4.2.47 shows that market value is the most influencial factor among respondents of all groups except those having more than 10 years of experience. They view earnings per share as the dominant criterion for decision making. High-low price and book value are other major factors which influence the selection of shares. Price-earning ratio also has some influence among respondents while market capitalisation does not have much influence among them.
Table 4.2.47 Market Experience wise Distribution of Factors Considered for Investment in Shares
Factors consider for investment in shares Market High- Earnin Price- experienc Book Marke Market low g per earnin Total e of value t value capitalisation price share g ratio investors Less than 47 82 62 66 54 27 338 3 years (13.9) (24.3) (18.3) (19.5) (16.0) (8.0) (100.0) 3 to 5 79 85 71 61 55 39 390 years (20.3) (21.8) (18.2) (15.6) (14.1) (10.0) (100.0) 6 to 10 83 112 101 101 72 42 511 years (16.2) (19.8) (19.8) (19.8) (14.1) (8.2) (100.0) More than 76 112 96 119 76 41 520 10 years (14.6) (21.5) (18.5) (22.9) (14.6) (7.9) (100.0) 285 391 330 347 257 149 1759 Total (16.2) (22.2) (18.8) (14.6) (14.6) (8.5) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule.
217 4.2.48 Mode of Operation The mode of operation preferred by respondents having different market experience presented in Table 4.2.48 reveals that NSE terminal is preferred by majority of respondents. Respondents having experience below 3 years and above 10 years prefer NSE terminal the most and BSE terminal the least. Among investors having market experience of less than 3 years, 72.4 per cent prefer NSE terminal and 19 per cent prefer BSE terminal while it is 63.6 per cent and 25 percent respectively among investors having market experience of more than 10 years.
Table 4.2.48 Market Experience wise Distribution of Investors According to Mode of Operation in secondary Market
Mode of operation Market NSE BSE experience of Stock broker Total terminal terminal investors Less than 3 years 42 11 5 58 (72.4) (19.0) (8.6) (100.0) 3 to 5 years 30 24 12 66 (45.4) (36.4) (18.2) (100.0) 6 to 10 years 43 27 8 88 (48.9) (30.7)` (20.4) (100.0) More than 10 years 56 22 10 88 (63.6) (25.0) (11.4) (100.0) 171 84 45 300 Total (57.0) (28.0) (15.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Borker’s services continue to enjoy the preference of investors even on a lower level, in spite of vast spread of trading terminals of national level stock exchanges. 18.2 percent investors having experience between 3 and 5 years and 20.4 percent investors having experience between 6 and 10 years prefer to invest through stock broker.
218 4.3.01 Overall experience of investors in capital market investment Investment Performance of Investors Investors deploy their savings with the sole objective of getting a reasonable return. The return from capital market investment depends on several factors. There is no single strategy which offers success in capital market investment. The investors have to select and formulate their own theory, plan or method, based on their temperament, capabilities, objectives and the given situation for successful investment. It takes time, patience, hard work and perseverance to achieve success. The overall experience of respondents in Trichy from capital market investment is analysed and presented in Table 4.3.01. From Table 4.3.01 it is observed that 6 percent of respondents consider capital market investment as highly rewarding and 49.7 percent consider it as moderately rewarding. But for 26 percent it was not rewarding, for 14.7 percent it resulted in loss and to the remaining 3.6 percent, investment in capital market resulted in heavy loss. On regionwise analysis, 45 percent of respondents in the southern region observe capital market investment as moderately rewarding, 21 percent opine it as not rewarding Chi-square value = 4.77, df =6 Table value at 5 per cent level of significance =12.59 while 16 per cent has suffered loss as a result of investing in capital market. In the northern region also, 51 per cent view it as moderately rewarding while 25 per cent consider it as not rewarding. The different in the overall experience of investors in three regions is found insignificant when chi-square test is applied. To ensure accuracy in the result of statistical analysis investors who suffered loss and heavy loss are clubbed together.
219 Table 4.3.01 Overall Experience of Investors in Capital Market Investment
Overall Southern Central Northern All Trichy experience region region region Highly 5 5 8 18 rewarding (5.0) (5.0) (8.0) (6.0) Moderately 45 53 51 149 rewarding (45.0) (53.0) (51.0) (49.7) Not 32 21 25 78 rewarding (32.0) (21.0) (25.0) (26.0) Resulted in 15 16 13 44 loss (15.0) (16.0) (13.0) (14.7) Resulted in 3 5 3 11 heavy loss (3.0) (5.0) (3.0) (3.6) Total 100 100 100 300 number of (100.0) (100.0) (100.0) (100.0) investors
Note: Figures in parentheses are percentage to total Source: Interview Schedule. The overall experience of investors is further analysed in terms of major variables like education, occupation, annual income and market experience of investors. The impact of each of these variables in investment performance is studied separately and results are given in the following section. For the purpose of analysis the investment performance of investors has been restructured into three levels namely, rewarding, not rewarding and resulted in loss. The investors who have received high rewards and moderate rewards are grouped under the head rewarding, those who have resulted in loss and heavy loss are grouped under the head, resulted in loss.
220 CHART - 4.3.01 OVERALL EXPERIENCE OF INVESTORS IN CAPITAL MARKET INVESTMENT
60
50
40
Southern region Central region 30 Northern region All Trichy Percentage
20
10
0 Highly Moderately Not rewarding Resulted in Resulted in rewarding rewarding loss heavy loss
Overall experience
221 4.3.02 Impact of Education on Investment Performance Education of investors is a major determinant on investment performance. Investors with good education and wide reading on investment- related literature are able to identify securities with growth potential. They are also able to perceive changes happening in the capital market and adopt suitable modification in their portfolio. The result of the analysis of investment performance of respondents having different levels of education is exhibited in Table 4.3.02.
Table 4.3.02 Education wise distribution of Investors According to Overall Experience in Capital Market Investment
Education of Not Resulted in Rewarding Total investors rewarding loss 20 11 8 39 Below gradiation (51.3) (28.2) (20.5) (100.0) 68 24 22 114 Graduation (59.7) (21.0) (19.3) (100.0) Post-graduation 48 24 6 78 and above (61.5) (30.8) (7.7) (100.0) 31 19 19 69 Professional degree (45.0) (27.5) (27.5) (100.0) Total number of 167 78 55 300 investors (55.7) (26.0) (18.3) (100.0) Note: Figures in parentheses are percentage to total Source: Interview Schedule. Chi-square value = 12.43, d f =8 Table value at 5 per cent level of significance = 12.59 It can be seen from Table 4.3.02 that graduates represent the major group of respondents. 59.7 percent investors in this group have received either moderate or high reward while 21 per cent have not received any benefit and 19.3 per cent of respondents in this group have suffered loss from investing in
222 capital market. Among undergraduates, 51.3 per cent have found capital market as rewarding and 28.2 percent have found it not rewarding. In the case of post- graduates, 61.5 percent have had high or moderate rewards whereas 30.8 per cent have received no rewards. The performance of professional degree holders is poor in capital market compared to other educational groups of investors. only 45 percent of them considered capital market as rewarding while 27.5 percent pointed out it as not rewarding and for another 27.5 percent it has resulted in loss. On the whole, it is observed that investment performance of investors increase with their level of education except in the case of professionally qualified investors. However, it is found to be statistically insignificant.
223 4.3.03 Impact of Occupation on Investment performance Occupation is another factor influencing the investment performance. Investors having occupation in areas related to capital market have a better level of awareness and perception about capital market investment. In the case of certain occupational groups, where relatively more free time is available and tension free atmosphere prevails, investors can devote more attention to investment analysis and portfolio management. The investment performance of such investors will be comparatively better than other investors. The occupation wise distribution of investors according to overall experience in capital market is given in Table 4.3.03. It can be seen from Table 4.3.03 that among the whole sample 55.7 percent considered capital market investment as rewarding, 26 percent consider it as not rewarding and for the test it has resulted in loss. Among the different occupational groups, employees constitute the major group and their investment performance is the best among different occupational groups. Majority of employees (60.3 percent) view capital market investment as rewarding, 25 percent view it as not rewarding and for the remaining, 24.7 per cent it resulted in loss. Around 55 per cent of professionals and businessmen observe capital market as rewarding in nature, about 23 per cent view it has resulted in loss and around 21 per cent observed it as not rewarding. The performance of pensioners and other occupational groups in the capital market is comparatively poor. 48.8 percent of pensioners find it as rewarding and 36.6 percent find it as not rewarding. The respective figures are 44 percent and 32 percent among other occupational group. Among the different occupational groups, employees have fared well while other groups have fared rather poorly. No significant difference is in the investment performance of different occupational groups of investors where chi-square test is applied.
224 Table 4.3.03 Occupation wise Distribution of Investors According to Overall Experience in Capital Market Investment
Occupation of Not Resulted in Rewarding Total investors rewarding loss Employee 82 34 20 136 (60.3) (25.0) (14.7) (100.0) Professional 21 8 9 38 (55.3) (21.0) (23.7) (100.0) Businessman or 33 13 14 60 Industrialist (55.0) (21.7) (23.3) (100.0) Pensioner 20 15 6 41 (48.0) (36.6) (14.6) (100.0) Others 11 8 6 25 (44.0) (32.0) (24.0) (100.0) Total number 167 78 55 300 of investors (55.7) (26.0) (18.3) (100.0)
Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Chi-square value = 7.58, d f =8 Table value at 5 percent level of significance =15.51
225 GRAPH - 4.3.01 OCCUPATION WISE DISTRIBUTION OF INVESTORS ACCORDING TO OVERALL EXPERIENCE IN CAPITAL MARKET INVESTMENT
70
60
50
40 Rewarding Not rewarding Resulted in loss
Percentage 30
20
10
0
l ee st y na li io s Others Emplo Pensioner Profes
Businessman or Industria
Occupation of investors
226 4.3.04 Impact of Income on Investment Performance The level of income has a direct influence on savings and the investment pattern of investors. Investors with high income could construct and hold a portfolio of large size so that they could reduce the unsystematic risk arising out of inadequate diversification. As such investors are having large funds at their disposal, they could take advantage of the profitable investment opportunities arising in the market. For the purpose of analysis the investors are classified into four groups. Investors having annual income upto Rs. 100000 are included in the low income group, those having annual income between Rs. 100001 and 200000 are treated as middle income group, those having annual income in the range of Rs. 200001 to 500000 are brought under high income group. The overall experience of different income groups of respondents is presented in Table 4.3.04.
Table 4.3.04 Income wise Distribution of Investors According to Overall Experience in Capital Market Investment
Income group Not Resulted in Rewarding Total of investors rewarding loss Low income 36 13 6 55 group (65.5) (23.6) (10.9) (100.0) Middle income 55 34 23 112 group (49.1) (30.4) (20.5) (100.0) Upper middle 56 26 18 100 income group (56.0) (26.0) (18.0) (100.0) High income 20 5 8 33 group (60.6) (15.2) (24.2) (100.0) Total number 167 78 55 300 of investors (55.7) (26.0) (18.3) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Chi-square value = 6.97, d f= 6 Table value at 5 per cent level of significance = 12.59
227 It can be seen from Table 4.3.04 that among the 300 respondents, the middle income group dominates with 112 respondents followed by upper middle income group with 100 respondents. In the middle income group, 49.1 per cent of respondents opine that capital market investment is rewarding in nature while 30.4 per cent opine it as not rewarding and for the remaining 20.5 per cent, it has resulted in loss. Vast majority of low income group (65.5 percent) point out that investment in capital market is rewarding and 23.6 pointed out that it is not rewarding. 56 percent of upper middle income group respondents view it as rewarding and 26 percent of respondents view it as not rewarding while 60.6 per cent of respondents in the high income group consider it as rewarding and for 24.2 per cent it resulted in loss. The comparison of the overall performance among different income group of respondents reveals that the level of income does not exert considerable influence on their performance. When tested statistically, calculated value of chi-square is less than the table value. Hence the inference is found correct.
228 GRAPH - 4.3.02 INCOMEWISE DISTRIBUTION OF INVESTORS ACCORDING TO OVERALL EXPERIENCE IN CAPITAL MARKET INVESTMENT
70 Rewarding Not rewarding Resulted in loss 60
50
40
30 Percentage
20
10
0 Low income Middle income Upper middle High income group group income group group
Income group of investors
229 4.3.05 Impact of Market Experience on Investment Performance Market experience of investors is a major factor which exerts considerable influence on their investment performance. Investors having long market experience can locate the pitfalls in the market through better investment analysis. This helps them in portfolio revision by substituting securities having better growth potential. Thus overall return from their investment can be improved. Table 4.3.05 shows the market experience wise distribution of overall performance of investors.
Table 4.3.05 Market Experience wise Distribution of Investors According to overall performance in Capital Market Investment
Market Not Resulted in experience of Rewarding Total rewarding loss investors Less that 3 41 9 8 58 years (70.7) (15.5) (13.3) (100.0) 33 22 11 66 3 to 5 years (50.0) (33.3) (16.7) (100.0) 45 25 18 88 6 to 10 years (51.1) (28.4) (20.5) (100.0) 48 22 18 88 Above 10 years (54.5) (25.0) (20.5) (100.0) Total number 167 78 55 300 of investors (55.7) (26.0) (18.3) (100.0)
Note: Figures in parentheses are percentage to total. Source : Interview Schedule. Chi-square value = 8.31,df =6 Table value at 5 per vent level of significance =12.59 From Table 4.3.13 it is revealed that majority of respondents have more than 5 years experience in the capital market. Vast majority of respondents
230 (70.7 per cent ) having less than 3 years market as rewarding, 15.5 per cent have found it as not rewarding and 13.8 per cent have found it as incurring loss. 50 per cent of respondents having experience between 3 and 5 years observed that capital market investment is rewarding while 33.3 per cent observed it as not rewarding. Among investors having experience between 6 and 10 years, 51.1 per cent opine that capital market offers sufficient rewards whereas 28.4 per cent opined it is not sufficiently rewarding in nature. Majority of respondent (54.5 per cent) having more than 10 years experience are of the view that capital market investment is rewarding while 25 per cent are of the view that it is not rewarding. The difference in the investment performance of respondents having varying period of market experience is found to be statistically insignificant.
231 4.3.06 Suggestions of Investors for Improving Capital Market It is observed from the above discussion that individual investors are facing numerous difficulties in the capital market. Therefore effective measures are necessary to control the malpractices and unethical conduct of different market participants with a view to repose the confidence of small investors. Investors themselves have put forward a number of suggestions for improving the operation of capital market which are depicted in Table 4.3.06.
Table 4.3.06 Suggestions of Investors for Improving Capital Market Operations
southern Central Northern All Suggestions of investors region region region Trichy Demutualise major stock 16 6 25 47 exchanges (16.0) (6.0) (25.0) (15.7) Improve transparency in 32 19 12 63 capital market operations (32.0) (19.0) (12.0) (21.0) Introduction of rolling 15 13 16 44 settlement to more shares (15.0) (13.0) (16.0) (14.7) Control excessive speculation 14 24 20 58 and price(rigging by share (14.0) (24.0) (20.0) (19.3) brokers Give more powers to SEBI 23 38 27 88 on investor protection (23.0) (38.0) (27.0) (29.3) 100 100 100 300 Total number of investors (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. From Table 4.3.06 it is observed that 29.3 per cent of respondents suggest that more powers should to give to SEBI on investor protection in order raise the quality of services available to investors while 21 per cent point out the urgency of improving transparency in capital market operations. 19.3
232 percent of respondents wanted to control excessive speculation and price rigging by share brokers in stock exchanges. The other recommendations include demutualising major stock exchanges (15.7 per cent) and introduction if rolling settlement to more number of shares (14.7 percent). Among the three regions, 32 percent of investors in the southern region demand improved transparency in capital market operations and 23 per vent suggested to give more powers to SEBI on investor protection. In the central region, 38 per cent of respondents advise to give more powers to SEBI on investor protection and 24 per cent advise to control excessive speculation and price rigging by share brokers. Investors in the northern region suggest to give more powers to SEBI on investor protection (27 per cent), demutualise major stock exchanges (25 per cent) and to control excessive speculation and price rigging by share brokers (20 per cent). From the above analysis it is found that, the level of education, occupational status, annual income and market experience have no significant influence on the investment performance of investors.
233 GRAPH - 4.3.03 SUGGESTIONS OF INVESTORS FOR IMPROVING CAPITAL MARKET OPERATIONS
50
45
40
35
30 Southern region Central region 25 Northern region All Trichy
Percentage 20
15
10
5
0 Demutualise Improve Introduction of Control excessive Give more powers major stock transparency in rolling settlement speculation and to SEBI on exchanges capital market to more shares price(rigging by investor operations share brokers protection
Suggestions of investors
234 4.3.07 Options for moving out of capital market investment Capital market investment is risky venture whether investors are a seasoned or a market analyst. If this is investors first turn around the stock market floor, they need to realize first and foremost that all types of investments bears a risk of some sort. Investors will find all kinds of investment products available to them once they enter the world of stock trading today and the market analysis community. The stock market is a very volatile place where one day investors will be making and the other they will be losing money. So what is the other options for investors to move out from capital market investment. The following Table 4.3.07 reveals the options of investors for moving out of capital market investment.
Table 4.03.07 Options for moving out of capital market investment
Options of Southern Central Northern All Trichy investment region region region 16 13 20 49 Bank (16.0) (13.0) (20.0) (16.3) 23 24 25 72 Real estate (23.0) (24.0) (25.0) (24.0) 27 Bullion 32 38 97 (27.0) Market (32.0) (38.0) (32.3)
4 6 3 13 Antique (4.0) (6.0) (3.0) (4.3) 25 19 25 69 Insurance (25.0) (19.0) (25.0) (23.1) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0) Note: Figures in parentheses are percentage to total. Source: Interview Schedule. It is seen from the table 4.3.07 that 32.3 percent of the investors on the whole in Trichirappalli opted for Bullion market. On region wise analysis Southern region shows 32.0, from the northern region 27.0 and central region
235 38.0 percent move to Bullion market. 24.0 per cent of the respondents of All Trichy move out to real estate where 23.0 per cent from southern region, 25.0 percent from the northern region, and 24.00 per cent of respondents from the central region opted to move out to real estate. Where as 23.1 per cent of respondents in Trichy preferred to Insurance. On regional analysis southern and northern region have 25.0 per cent and 19.0 per cent in central region move to insurance. Hence it is clearly observed that majority of the respondents prefer to move out from capital market investment to Bullion market as the first option, real estate as the second and insurance as the third option.
236 CHART - 4.03.02 OPTIONS FOR MOVING OUT OF CAPITAL MARKET INVESTMENT
40
35
30
25
20 Southern region Central region
Percentage Northern region All Trichy 15
10
5
0 Bank Real estate Bullion Antique Insurance Market
Options of investment
237 Table 4.3.08 Reasons for moving out of capital market investment
Southern Central Northern Reasons All Trichy region region region Safety of the 20 14 23 57 Principal (20.0) (14.0) (23.0) (19.00) Stability of 26 23 26 75 return (26.0) (23.0) (26.0) (25.0) Profitability 40 51 38 129 (40.0) (51.0) (38.0) (43.0) Liquidity 14 12 13 39 (14.0) (12.0) (13.0) (13.0) 100 100 100 300 Total (100.0) (100.0) (100.0) (100.0)
Note: Figures in parentheses are percentage to total. Source: Interview Schedule. Table 4.3.08 reveals that 129 respondents out of 300 express that the first reason for moving out of capital market investment is profitability. On region wise analysis 40.0 percent of the respondents from southern region, 38.0 percent from northern region and 51.0 per cent from the central region express profitability is the first reason for moving out of capital market investments. 75 respondents out of 300 express that the second reason for moving out of capital market investment is the stability of return. On region wise analyses show that 26 per cent from Southern and Northern region and 23 per cent from central region say that stability of return is the second reason for moving out of capital market investment. Whereas 57 respondents out of 300 respondents revealed that safety of the principal is the third reason for moving out of capital market investment. On region wise analysis 20 per cent from southern region 14 per cent central region and 23 per cent from northern region of respondents say that the third region for moving out of capital market investment is the safety of a principal. From the above analysis it was found that majority of the
238 respondents express their reason for moving out of capital market investment is profitability. It was seen from the above table that 51 per cent of the respondents from central region say that the first reason to move out of capital market investment is profitability, stability of the return and safety of the principal respectively.
239 GRAPH - 4.3.04 REASONS FOR MOVING OUT OF CAPITAL MARKET INVESTMENT
60
50 Safety of the Principal Stability of return Portability
40
30 Percentage
20
10
0 Southern Central Northern All Trichy region region region Reasons
240 V
SUMMARY OF FINDINGS, CONCLUSION AND SUGGESTIONS SUMMARY OF FINDINGS, CONCLUSION AND SUGGESTIONS
A well organised and will regulated capital market is an essential prerequisite for the economic development of a country like India. Individual investors represent a vital element for the functioning of capital market. But they are experiencing a number of difficulties from different market participants which are causing them much confusion. If this trend continues, it will result in their massive withdrawal from the capital market. This may adversely affect mobilisation of resources by corporate bodies through capital market which may ultimately impair the economic development of the country. Hence government and policy makers have to think seriously to ensure confidence about capital market investment in the mind of investors. For this they need information relating to the characteristics of investors, level of awareness faced and effectiveness of redress measures available to them and based on such information government and policy makers should frame suitable policies to ensure investor protection. The present study has been made with this end in view.
Specific objectives of the study The following are the specific objectives of the study: 1. To Analyse the level and pattern, diversification and size of capital market investment. 2. To identify the mode of investment preferred by investors and the factors influencing the choice of mutual fund scheme. 3. To study the overall experience of investors in the capital market investment. 4. To find out the options of investors from moving out of capital market investment and the reason for it and
241 5. To Make recommendations/suggestions for improving the attractiveness of capital market investment.
Methodology of the study The study is conducted in two stages. In the first stage, secondary data from the publications of Government of India, Government of Tamil Nadu, Central Statistical Organisation, Reserve Bank of India, Stock Exchanges and Securities and Exchange Board of India, relevant reports, periodicals and newspapers are collected and analysed. In the second stage, primary data are collected from 300 individual investors from Trichy through a sample survey. A structured interview schedule is used for this purpose. For the purpose of the study Tiruchirappalli district is divided into three geographical regions- the southern region, the central region, and the northern region. The southern region consists of the following places like Manikandam, Ramji Nagar, Enamam Kolathur, Navalpattu, and Manaparai. The central region consists of the following places in Trichy city like central bus stand, Puthur, Thillai Nagar, Chathiram bus stand, Srirangam and BHEL. The northen region consists of places like Tolgate, Samayapuram, Lalgudi, Jeeyapuram, Musiri, and Thottyam. A sample of 100 individual investors is selected at random from each of the selected region from the list of investors supplied by shares brokers and mutual fund agents. The collected data are analysed with the help of computer keeping the objective of the study in view. Appropriate mathematical and statistical tools like averages, percentages, compound growth rates, analysis of variance, chi-square test, K.S. test and rank correlation coefficient are put to use.
242 I. Summary of Chapters The presentation of the study is made in five chapters. The first chapter deals with introduction nature, need significance and objectives of the study. It also deals with sample design, method of data collection, tools of analysis and limitations of the study. The second chapter deals with the, review of literature available in earlier studies about the evolution and growth of capital market investment in India. It covers the trend in resource mobilisation in the primary market, major indicators of stock market development, growth in the investor population in the country and their geographic distribution. The third chapter portrays the socio-economic profile of Trichy and the personal profile of investors who have participated in the sample survey. It traces location of Trichy, its physical features, population, literacy, agricultural and industrial scenes, transport and communication network, and other related information. The characteristics of investors viz., age, sex, educational qualification, occupational status, annual income and savings are also presented in this chapter. The fourth chapter extensively deals with the analysis of the level and pattern of investment in capital market in Trichy. The period of market experience, the extent of diversification of portfolios size of investment and future investment plans of investors are analysed in detail. The investment criteria in the primary and secondary market and the motives behind investing in capital market, are also dealt with in this chapter. The factors, which influence the investment behavior of investors. The major determinants of investment behaviour identified are the educational qualification of investors, their occupational status, the level of annual income and the extent of market experience of investors. The impact of each of these variables on the investment behaviour of investors is analysed in detail and presented seperately.
243 It also examines the overall experience of investors from capital market investment, their concern about Indian capital market and suggestions to improve the functioning of capital market and if the investors decide to move out of capital market investment, what will be the next options and why are also presented in this chapter. Chapter five gives a summary of the findings of the study and suggestions for improving the functioning of capital market in India.
II. Profile of Investors 1. According to the survey result,26.7 percent investors are aged under 36 years, 29.7 percent are between 36 and 45 years, 26 percent are between 46 and 55 years and the remaining 17.6 percent are above 55 years. 2. The classification of respondents on the basis of sex shows that vast majority of them (85.3 percent) are male investors. 3. Distribution of respondents on the basis of marital status reveal that 79 percent are married, 16.3 percent are unmarried and 2.3 percent each belonged to widowed and divorced group. 4. The distribution of investors according to educational qualifications reveal that 13 percent are undergraduates, 38 percent are graduates, 26 percent are post-graduates and the remaining 23 percent are professional degree holders. 5. Among the sample investors, 45.3 percent are employees, 20 percent are engaged in own business or industry, 12.7 percent are professional practitioners, 13.7 percent are pensioners and 8.3 percent are engaged in other occupations. 6. The income wise classification of respondents shows that 18.4 percent have annual income between Rs.100000, 37.3 percent have annual income between Rs.100001 and 200000, 33.3 percent have annual income between Rs. 200001 and 500000 and 11 per cent have annual income above Rs. 500000.
244 7. Annual savings of 11.7 to per cent of investors are upto Rs.25000, those of 24.3 percent between Rs. 25001 and 50000,33.7 percent between Rs. 50001 and 100000 and those of 30.3 percent are above Rs. 100000.
III. Level and pattern capital Market investment 1. Total savings of the 300 sample investors in financial assets aggregated Rs.1.53 crores. Nearly one third of it is kept in capital market instruments and the balance in other financial assets. Total savings in financial assets of investors in the central region amounts to Rs. 58.58 lakhs while it is Rs. 53.58 lakhs in the northern region and Rs. 40.68 lakhs in the southern region. 2. Average annual savings of investors in financial assets for the hole sample amounts to Rs. 50876 while it is Rs. 40677 in the southern region Rs. 58375 in the central region and Rs. 53576 in the northern reion. 3. Average annual savings in capital market instruments came to Rs.16574 for the whole sample. In the southern region it is Rs. 10623 while it is Rs. 18592 in the central region and Rs. 20507 in the northern region. 4. Bank deposits represent the other major financial assets followed by chit funds and provident fund contribution. The average annual savings of respondents in bank deposits amounts to Rs. 11845 while it is Rs.6154 in chit funds and Rs. 5519 in provident fund. 5. Among the various capital market instruments, shares dominate the others. The average annual saving in shares is Rs.13598, which is Rs. 2591 in mutual fund schemes and Rs. 385 in debentures. The average annual saving in shares is Rs. 6696 in the southern region, Rs. 16821 in the central region and Rs. 17276 in the northern region. 6. As regards market experience, majority of investors have a better market experience . 58.7 percent respondents have market experience of more than 5 years. Respondents having experience of more than 5 years are
245 high in the southern region (64 percent) and low in the central region (53 percent) 7. Majority of investors have a relativity shorter period of active investment in shares. 52 percent of investors have a period of active investment of less than 5 years while the remaining 48 percent have more than 5 years of active investment in shares. Among the three regions, 58percent investors in the central region have active investment in shares for less than 5 years while it is 49 percent each in the southern and northern regions. 8. Regarding active investment in debentures, majority of investors have comparatively longer period of active investment. 62.9 percent of them have been active for more than 5 years. Regionwise analysis shows that 80 percent investors in the southern region, 64.7 percent investors in the northern region and 48 percent investors in the central region have a period of investment for more than 5 years. 9. The distribution of investors actively investing in mutual fund schemes shows that 52.2 percent of them have a period of active investment for more than 5 years . Among the three regions, 55.6 percent investors in the central region have active investment for more than five years while it is 52.1 percent in the southern region and 50 percent in northern region 10. Majority of respondents are exposed to unsystematic risk arising from inadequate diversification in shares. Of the whole sample, only 35.6 percent of respondents have a portfolio size of more than 10 companies, which is 31 percent in the central region 33 percent in the southern region and 43 percent in the northern region. 11. The level of diversification in debentures is relatively poor. Out of the 62 debenture holders,43 have debenture holdings in 6 to 10 companies.
246 12. Majority of he investors in mutual fund schemes are also subjected to unsystematic risk due to adequate diversification. Of the whole sample 67.7 percent have investment in less than 5 mutual fund schemes. It is 75 percent in the central region, 72 percent in the northern region and 59.2 percent in the southern region. 13. The size of investment in shares of majority investors is comparatively better. 53.7 percent have investment in shares worth more than Rs.50000. In the northern region, 58 percent have investment above Rs 50000, which is 55 percent in the central region, and 48 percent in the southern region. 14. The size of investment in debentures is relatively poor. 87.1 percent investors have investment in debenture upto Rs.50000 only that is 95 percent in the southern region, 94.1 percent in the northern region and 76 percent in the central region. 15. Majority of investors have relatively small investment in mutual funds 56.6 percent of respondents have investment upto Rs. 25000, 27.9 percent have investment between Rs. 25001 and RS. 50000 and the rest have investment Rs.50000. Among the three regions, 59.3 percent in the northern region 58 percent in the northern region and 50 percent in the central region have investment upto Rs. 25000 only. 16. The future investment intention of investors show that 158 among the total 300 respondents are interested in investing in capital market instruments in future. The number of investors willing to invest in future is high in the southern region (61 percent ) and low in the northern region (47 percent) 17. The most preferred option of future investment in capital market is equity shares followed by mutual fund schemes and debentures. The interest among investors to invest in shares is high in the central region to invest in shares is high in the central region and low in the northern
247 region, while the readiness to invest in mutual funds is high in the northern region and low in the central region. 18. The respondents who are not interested in investing in capital market instruments in future considered increased risk, high volatility in security prices and lack of promising returns as the major factors responsible for their lack of interest. 19. The most preferred mode of capital market investment is secondary market. Out of the 300 respondents,172 of them preferred to invest through secondary market, 118 preferred primary market and 10 preferred private placement. 66 percent investors in the northern region preferred to invest through secondary market whole it is 57 per cent in the central region and 49 percent in the southern region. 20. The most important investment criterion considered by investors in the primary market is the nature and type of the product followed by the industry or sector to which the company belongs, promoter’s track record and terms of issue of securities. Risk factor was not considered and important investment criterion by investors in the primary market. 21. The first important criterion for investment in the secondary market is the result of fundamental analysis followed by movement of market indices, market sentiments and advice made by brokers, dailies and periodicals. Technical analysis, an important tool of portfolio selection was not considered by majority of respondents. 22. Among the major motives of making investment in the capital market, expectation of capital gains ranked first, dividend or interest ranked second and bonus shares ranked third. 23. Market value, earning per share, high-low price and book value are the major factors considered by respondents for investment in shares . Scientific factors like price-earning ratio and market capitalisation is not given much importance by the respondents.
248 24. Market value, book value and earning per share are the major factors influencing investors in the southern and central regions while high-low price, earning per share and market value are the guiding factors of respondents in the northern region. 25. NSE terminal is the most preferred method of secondary market operation of the respondents. 57 percent of the respondents prefer NSE terminal while 28 percent prefer BSE terminal and 15 percent prefer the services of brokers. 26. The prominent factors influencing the selection of a mutual fund scheme are its net asset value, type of the scheme and past performance of the mutual funds. Among the three regions, the type of schemes ranked as the first criterion among investors in the southern region where as its past performance in the central region and net asset value in the northern region. 27. Among the various mutual fund schemes, growth schemes are the most preferred followed by income schemes and tax saving schemes.22.4 percent prefer income schemes, 17.2 percent prefer tax savings schemes, 15.2 percent prefer balanced schemes and the rest prefer sector-wise schemes.
IV. Determinants of Capital Market Investment The major factors that influence the investment behaviour of investors in capital market are the level of their education, occupational status, size of annual income and period of market experience. The influence of each of these factors upon the investment behaviour of investors is studied separately and major findings presented under four heads.
A. Education 1. Investors with high levels of education continue to invest in capital market. 59 percent investors having post-graduate qualification have
249 more than 5 years of active investment which is50.7 percent among professional degree holders, 46.5 percent among professional degree holders , 46.5 percent among graduates and 25.7n percent among undergraduates. 2. Investors with lower levels of education have a poorer level of diversification than those possessing higher educational qualifications. Only 10.3 per cent undergraduate investors hold shares in more than 10 companies. But 31.5 percent of professional degree holders have investment in more than 10 companies. 3. The level of education of investors also influences the size of investment in shares. Among undergraduates, only 30.8 percent hold investment in shares worth graduates, 58.9 percent among professional degree holders. 4. Among the different educational groups of investors, professional degree holder are more interested in investing in capital market. 59.4 percent of professional degree holders are interested in investing in future while it is 54.4 percent among graduates,48.7 percent among undergraduates and 46.2 percent among post-graduates. 5. Increased risk is the most important factor which discourages investors of all educational groups of investors, particularly among graduates and professionals degree holders. Investment in mutual fund schemes is mostly preferred by post-graduate investors. 6. Increased risk is the most important factor which discourages investors of all educational groups against making further investments in capital market. Lack of promising returns is the second factor pointed out by all educational groups except other occupational group of investors. High volatility in prices ranked second among other occupational group of investors. 7. Majority of investors of all educational groups prefer secondary market for channellising their investment in the capital market. The preference
250 of secondary market is high among professional degree holders (66.7percent) while the preference of primary market is high among post-graduates(46.1 percent) 8. Nature and type of the product is the major investment criterion considered by investors of all educational groups for making investment in the primary market. Industry or sector to which the company belong is the second major criterion among undergraduates and professionally qualified investors while promoter’s track record and terms of issues are thesecond major factor considered by graduates and post-graduates respectively. 9. There is considerable difference in the major investment criteria in the secondary market among different educational groups of investors . Undergraduate investors give importance to changes in government policy and advice of dailies and periodicals while graduate investors give prominence to fundamental analysis followed by movement of market indices. As regards post-graduates and professionally qualified investors, movement of market indices and fundamental analysis are the prime concerns while investing in the secondary market. 10. Capital gain is the major motive for investing in capital market among all educational groups of investors, followed by expectation of dividend or interest income and bonus shares. 11. Among the major factors considered for investment in shares, market value is the most important by graduate and post-graduate investors while high-low price is considered the most important factor by undergraduates and earning per share by professional degree holders. Market value is the second important factor considered by undergraduates and professional degree while earning per shares the second important factor considered by graduates and post-graduates.
251 12. Among the different methods of secondary market operations, professional degree holders mostly prefer NSE terminals.63.8 percent among them prefer to invest through NSE terminal, which is56.4 percent among undergraduates, 55.3 percent among graduates and 53.8 percent among post-graduates. Those who prefer BSE terminal include30.8 percent of post-graduates,29.8 percent of graduates and24.6 percent of professional degree holders. Mostly undergraduates (20.5 percent ) prefer the services of brokers.
B. Occupational status 13. Investors belonging to the occupational group of pensioners have a relatively long period of market experience. Vast majority of investors(70.7 percent ) in this group have active investment in shares for more than 5 year. Among other occupational groups, 50 percent of employees have active investment for more than 5 years but it is only 34.3 percent among professional group and 36 percent among other occupational group. 14. Pensioners represent the occupational group of investors having a better level of diversification in shares than other groups.48.8 percent of them have investment in more than 10 companies while it is 43.4 percent among businessmen, 42.1 percent among professional practitioners, 30.2 percent among employees and16 percent among other occupational group. 15. The size of investment in shares is high among investors doing own business or industry and low among other occupational group of investors. 68.3 per cent of businessmen have investment in shares worth more than Rs.50000 which is 58.5 percent among pensioners, 57.9 percent among professional practitioners and 47.8 percent among employees But only 36 percent investors in the other occupational group have the same level of investment.
252 16. Majority of investors belonging to all occupational groups except pensioners is willing to invest further in capital market instruments. 68 percent investors of other occupational group, 63.2 percent of professionals, 51.7 percent of businessmen and50.7 percent of employees have intention to invest in ruture while it is only 41.5 percent among investors belonging to retired hands. 17. Pensioners represent the leading occupational group who prefer to invest in shares followed by businessmen, employees, other occupational group and professional practitioners. professional practitioners represent the leading group who prefers to invest in mutual fund schemes. 18. Increased risk is the major concern of investors who are reluctant to invest further in capital market instruments. It is ranked first among all occupational groups of investors. High volatility in prices is the second major concern of employees, professionals and pensioners while lack of promising returns is the second major concern of businessmen. According to other occupational group of investors liquidity problem is the second major discouraging factor. 19. Investment in secondary market is mostly preferred by investors doing own business or industry while primary market is mostly preferred by other occupational group of investors. 60 percent of businessmen prefer to invest through secondary market while 40 percent of other occupational group prefer the primary market. 20. All occupational groups of investors except professionals view the nature and type of the product as the first important criteria for investment in the primary market. Professionals give priority to the industry or sector to which the company belongs. Terms of issue is ranked second by pensioners and other occupational group while industry or sector to which the company belongs is ranked second by
253 businessmen, and promoters track record is ranked second by employees. 21. The major criteria for investing through secondary market shows that employees and professionals mostly consider the result of fundamental analysis while businessmen and pensioners mostly consider movement of market indices. Investment advice of brokers is the prime factor among the other occupational group of investors. Movement of market indices is ranked second by employees and professionals while market sentiments is ranked second by investors doing own business. pensioners view changes in the government policy as the second factor whereas advice of other occupational group. 22. Capital gain represent the first major motive for investing in capital market, dividend or interest income represents the second major motive and bonus shares represent the third major motive among all occupational groups. 23. The criteria followed for investing in share show that market value of shares is ranked first by all occupational groups except businessmen. Investors doing own business rank high-low price as the first major factor, by employees, professionals and pensioners while market value is ranked second by businessmen and high-low price by other occupational group of investors. 24. Trading through NSE terminal is mostly preferred by businessmen and scarcely preferred by other occupational group. 63.4 percent of businessmen prefer to invest through NSE terminal while it is only 40 percent among other occupational group of investors. However, other occupational group of investors represents the leading group which prefers investment through BSE terminal (36 percent ) and services of brokers (24 percent ) the most.
254 C. Annual Income 1. High income group of investors prefer to stick on to capital market investment for long compared to low income group. 60.6 percent investors in the high income group have active investment for more than 5 years which is 57 percent among upper middle income group, 45.6 percent among middle income group and 29.1 percent among low income group. 2. The extent of diversification in shares is influenced by the level of income of investors. Only 3.6 percent in low income group have investment in shares of more than 10 companies, while it is 22.3 percent among upper middle income group and 81.8 percent among high income group. 3. The size of investment in shares is also influenced by the level of income of investors. In the case of low income group of investors, only 18.2 percent have investment above Rs.50000 whereas 41.1 percent of middle income group and 75 percent of upper middle income group have the same level of investment. But 91 percent investors in the high income group have investment in shares above Rs. 100000 and the remaining 9 percent have investment below Rs.50000. 4. Majority of all income groups of investors is willing to invest in capital market in future. The number of investors who are willing to invest in future is high among middle income group (55.4 percent ) followed by high income group (54.5percent) low income group (50.9percent )and upper middle income group (50 percent). 5. Among the various capital market investments, shares are preferred by all income groups of investors. The preference for share is relatively high in the high income group. 6. All income groups of investors who are not willing to invest in capital market in future consider increased risk as the most important
255 discouraging factor against making further investment in capital market. High volatility in prices is considered the second major discouraging factor by low income group, middle income group and high income group while lack of promising returns is the second hindering factor among upper middle income group of investors. 7. A shift in favour of secondary market investment is noticed in the high income group compared to the low income group of investors. 63.7 percent of investors in high income group preferred to invest through secondary market which is 59 percent in upper middle income group,58.9 percent in middle income group and only 47.3 percent among low income group. 8. The major investment criterion in the primary market is the nature and type of the product among all income groups of investors. Terms of issue is the second major criterion among low income group and upper middle income group while industry or sector to which the company belongs represents the second main criterion among middle and high income groups of investors. 9. Result of fundamental analysis is the most important criterion for taking investment decisions in the secondary market among all income groups except the high income group of investors. Movement of market indices is ranked first by high income group while the same is ranked second by other income group of investors. Market sentiments is the second main criterion of high income group of investors. 10. Motive for earning through capital gains tends to increase with increase in the level of income of investors. Capital gain is the major motive and dividend or interest income is the next important motive among all income groups of investors. In the lower income group only a small difference in preference is observed between capital gain and dividend
256 or interest income while it tends to widen among higher income groups of investors. 11. Market value represents the major determinant for taking investment decision on shares among low income group and middle income group of respondents. It is ranked first among them while earning per share ranked first among upper middle income group. The high income group of investors gave prime consideration to high –low price of shares. Earning per share ranked second among low income group and middle income group and market value ranked second among upper middle income group and high income group of investors. 12. Majority of all income groups of investors prefer to invest through NSE terminal. But NSE terminal is preferred mostly by high income group of investors (78.8 percent). Middle income group of invest through BSE terminal the most while services of brokers are mostly preferred by low income group.
D. Market Experience 1. Investors in general start actively investing in shares shortly after they enter the capital market. The entire respondents who have market experience of less than 3 years and 87.9 percent of those who have 3 to 5 years experience have active investment for the sane periods of time. Similarly, 75 per cent investors having market experience of 6 to 10 years and 72.7 per cent of investors having market experience of more than 10 years have the same period of active investment. 2. Investors having long years of market experience have a better level of diversification than those having a short period of market experience. 63.6 percent investors having market experience of more than 10 years hold investment in more than 10 companies while it is only 36.4 percent among investors having experience between 6 and 10 years, 12.1
257 percent having experience between 3 and 5 years and 18.9 percent in the case of investors having experience of less than 3 years. 3. The size of investment in shares bears a direct influence on the market experience of investors. 32.8 percent investors having experience of less than 3 years hold investment worth more than 50000, which is 39.4 percent among investors having experience between 6 and 10 years and 73.8 percent among those having experience of more than 10 years. 4. Majority of investors having different periods of market experience except those having more than 10 years experience are willing to invest in capital market in future. 59.1 percent investors having experience between 3 and 5 years are willing to invest in capital market in future while it is 56.9 percent among investors having experience of less than 3 years, 53.4 per cent among those having experience of 6 and 10 years and 44.3 percent among those having experience of more than 10 years. 5. Shares represent the most preferred capital market instrument for future investment among investors having different periods of market experience. Shares was mostly preferred by investors having market experience of more than 10 years and those having less than three years experience. A among those who prefer to invest in mutual fund schemes, the leading groups are investors having experience between 3 and5 years and between 6 and 10 years. 6. All groups of investors having different periods of market experience consider increased risk as the major deterrent against making future investment in capital market, lack of promising returns is the second major factor discouraging the investors having experience below 3 years and those having experience between 3 and 5 years. Liquidity problem is ranked second by investors having experience between 6 and 10 years while high volatility in price is ranked second by investors having experience of more than 10 years.
258 7. Majority of investors having varying periods of market experience except those having experience between 6 and 10 years mostly prefers to invest through the secondary market. 63.6 percent investors having experience above 10 years prefer secondary market, which is 62.1 percent among those having experience of less than 3 years and 56.1 percent among those having experience between 3 and 5 years . But only48.9 percent investors having experience of 6 to 10 years prefer to invest through the secondary market. Investors having experience between 6 and 10 years represent the leading group who prefer to invest through primary market. 8. The major factors considered for investment decision in the primary market show that the nature and type of the product ranked high among respondents having different market experience except those having less than three years. Investors having experience of less than three years gave importance to industry or sector to which the company belongs. 9. The investment criteria in the secondary market shows that the result of fundamental analysis is ranked first by investors having experience of less than three years and between 3 and 5 years. Movement of market indices is ranked the first criterion by investors having market experience between 6 and 10 years. Change in the policy of the Government is ranked the second criterion by investors having experience below three years and between 3 and 5 years while the result of fundamental analysis is ranked second by investors having experience of 6 to 10 years and market sentiments is ranked second by investors having experience above 10 years. 10. Capital gains is the major motive of investors having different periods of market experience. The motive for capital gain is high among investors having more than 10 years experience and less than 3 years experience.
259 The motive for dividend is high among those having experience between 3 and 5 years. 11. The major factors considered relevant for investing in shares by respondents having different periods of market experience show that market value is the most influential factor among all groups of investors except those having experience of more than 10 years. Earning per share is the dominant criterion for decision making among them. High-low price and book value are the other major factors which influence selection of shares. 12. NSE terminal is the most preferred mode of secondary market operation among investors having loss than three years experience and more than 10 years experience. 72.4 percent of investors having market experience of less than 3 years and 63.3 percent of investors having market experience of more than 10 years prefer NSE terminal while it is 45.4 percent among those having experience of 3 and 5 years and 48.9 percent having experience of 6 to 10 years. BSE terminal is mostly preferred by investors having experience between 3 and 5 years (36.4 percent ) while mostly investors having experience between 6 and 10 years (20.4 percent) prefer service of brokers.
VI. Overall experience of investors on capital market 1. Overall experience of capital market investment shows that 55.7 percent investors have experienced it as rewarding. Among the others, 26 percent investors view it as not rewarding and for the rest it has resulted in loss. Among the three regions, 59 percent investors in the northern region and 58 percent in the central region observe capital market investment to be rewarding while it is 50 percent in the southern region. 2. Their level of education influences the performance of investors in the capital market. 51.3 percent undergraduate investors consider capital
260 market investment as rewarding which are59.7 percent among graduate investors and 61.5 percent among post-graduate investors. 3. Among the different occupational groups of investors, employees fared well in capital market. 60.3 percent investors in this group found capital market investment rewarding while only around 55 percent investors each among professionals and businessmen expressed the same opinion. The performance of pensioners and others were relatively poor. 4. The investment performance of low income group is better than the other income groups of investors. Among the low income group of respondents 65.5 percent observed capital market investment as rewarding which is 60.6 percent among the high income group, 56 percent among the upper middle income group and 49 percent among middle income group. 5. The investment performance of investors having market experience of less than 3 years is found to be relatively better. 70.7 percent investors among them found capital market investment rewarding. Among others, 54.5 percent investors having experience above 10 years, 51.1 percent investors having experience between 6 and 10 years and 50 percent investors having experience between 3 and 5 years view it as rewarding. 6. The primary suggestion put forward by the respondents for improving capital market operations is to provide more powers to SEBI to ensure investor protection. 29.3 percent investors hold this opinion while 21 percent suggested improved transparency in capital market operations, 19.3 percent pointed out the need of controlling excessive speculation and price rigging by share brokers and 14.7 percent recommended the introduction of rolling settlement to more number of shares. 7. The majority of the respondents i.e. 32.3 per cent expressed that Bullion market is the first option in case if they want to move out from capital market investment followed by real estate and Insurance.
261 8. 43 per cent of the respondents expressed that profitability is the first reason to move out from capital market investment, stability of return and safety of the principal respectively.
262 CONCLUSION
Based on the findings of the study, following conclusion have been arrived at. Indian capital market is one among the oldest and largest capital market of the world. It began to develop since independence and underwent rapid growth during the eighties and nineties. The volume of resources mobilised in the primary market has increased significantly. But the savings of household sector mobilised through shares and debentures account for a meagre portion of savings in financial assets. As a result of reforms initiated as part of liberalisation measures in the nineties, the stock market has achieved all round development in terms of number of listed companies etc. The number of investing households and individual investors has also increased significantly. Mutual funds have emerged as an investment vehicle and have become popular among investors. Among the various mutual fund scheme offered to investors, growth scheme is the most preferred by them. Introduction of screen based trading, establishment of depositories and dematerialisation, rolling settlement, derivatives trading etc. are the major developments in the capital market. It has resulted in better transparency in dealings, improvement in market infrastructure, ease of operation and quick settlement of transactions. Among the various capital market instruments available, shares are the most preferred instruments among investors followed by mutual fund schemes and debentures. Investors approach the capital market mainly with the motive of earning capital gains. Majority of investors have an experience of more than five years in capital market investment. But they have a relatively short period of active investment in share. Among the various methods of investment in capital market, majority of investors prefer investment through the secondary market.
263 The investors who are willing to invest in capital market instruments in future are relatively more in number than those who are not willing to invest in future. Investors in general are exposed to unsystematic risk arising from inadequate diversification in capital market assets. Nature and type of the product is the major factor considered by investors before making investment through the primary market. The investment decisions in the secondary market are primarily based on the result of fundamental analysis and movement of market indices. NSE terminal is the most preferred mode of secondary market operation. In spite of the wide spread of on line trading terminals, a small fraction of investors continue to depend on the services of brokers and sub-brokers. Market reforms like the establishment of deposition screen based of, and the introduction of rolling settlement are largely welcomed long the investor. The overall experience of investors on capital market investment is that it is rewarding to majority of investors. Investors mainly suggested the extension of more powers to SEBI on investor protection with a view to improving capital market operations. To conclude having analysed the investors’ preferences in capital market investment in Trichirappalli district, it was found that it went through a very difficult phase in its growth to maturity. The governmental and other organisations responsible for its mode of functioning have to bear in mind that commercial organisations can no longer function as islands warding off competitions and challenges from well managed counterparts in the global village. Every agency involved in the capital market, including stock brokers, should plan their strategies for profit on a long time basis, slow and steady accumulation of profit, not a comparative big lump by depriving the investors hard earned savings that are staked at the capital market. The potential investors must be properly educated and guided so that more money kept idle
264 or invested in other fields will flow to the capital market. If and when it happens, the Indian capital market will be on par with developed capital markets of other developed countries.
265 SUGGESTION FOR IMPROVEMENT
The following suggestions have been put forward on the basis of the major findings of the study for improving the condition of individual investors in the capital market. 1. Investors have suffered a lot due to investment in vanishing companies. Existing SEBI regulations are too inadequate to effectively deal with such companies. Such regulations should be made more stringent. The promoters and directors of such companies should be made personally responsible for the loss and should be permanently banned from promoting another company. 2. There are instances of diversion of funds mobilised through public issue. Hence an arrangement for monitoring the post issue working of the company must be made by SEBI. 3. The investors are misled by sensational advertisements about public issue. Such advertisements must be edited and vetted on the basis of advertisements code of SEBI. 4. Stringent action must be taken by SEBI against those companies which make unnecessary delay in despatch of allotment letters and refund orders. 5. The introduction of free-pricing norms by SEBI has given an opportunity to many fraudulent company promoters to charge excessive premium on capital issues. They enter into unholy alliance with brokers and artificially inflate the price on the eve of capital issues. Hence it is suggested to reintroduce the Capital Issues (Control)Act and the post of controller of Capital Issues for screening the public issues. Alternatively, the introduction of safety net system whereby the company undertakes to buy back the shares if the price falls below a certain minimum level is suggested.
266 6. Speculation is becoming rampant among the investors. Facility of on line trading through terminals has made these more convenient, creating a client culture among the investors. Hence more number of scrips should be brought under compulsory rolling settlement to check unhealthy speculation. SEBI should try to improve the trading on financial derivatives and introduce more varieties of derivatives in the market. 7. Every stock exchange should set up an efficient market surveillance system on the line of NSE to curb excessive price volatility price rigging. 8. There must be an effective mechanism in the stock exchange to be vigilant over the price sensitive information affecting the company. This will help in reducing the practice of insider trading. The existing regulation in this regard has failed to serve its purpose. 9. Increased risk is a major factor which discourages investors from committing fresh funds in the capital market. Hence appropriate risk awareness programmes through print and visual media should be provided to improve the risk perception of investors. 10. Majority of investors are subjected to unsystematic risk arising out of inadequate diversification. Hence the small investors should be encouraged to invest in mutual fund schemes through effective advertisements. 11. In the case of delay in payment of dividend declared by companies, provision should be made for the payment of interest for the period of delay. 12. The process of compulsory dematerialisation of securities must be extended to more number of companies so that delay in transfer of securities and the problem of bad delivery can be effectively checked.
267 13. Committees represented by member broken manage all this took exchanges in the country except National stock Exchange. Naturally such committees are hesitant to take disciplinary action against member brokers. Hence these stock exchanges should be reconstituted in the pattern of NSE so that brokers will not exert undue influence on the working of stock exchanges. 14. The rules relating to buy back of shares should be made more attractive to the advantage of investors. They should be given the option to return the shares. 15. Share application forms and prospectus should be printed in regional languages also. This will help investors understand the issue highlights and risk factors more clearly. 16. Poor portfolio management is the major grievance of investors in mutual funds. This is inspite of the professional management of the funds. Hence efficiency audit should be made mandatory. 17. At present there are 38 mutual fund companies operating in India and they have offered more than 450 mutual fund schemes to investors. Hence a separate independent body with statutory powers must be set up for the regulation of mutual funds in India for protecting the interest of investors.
Scope for further study There is a paucity of authentic information relating to individual investors in the country. Therefore periodic studies at national and state level must be made to gather information about them.
268
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QUESTIONNAIRE
AN INQUIRY INTO THE INVESTORS’ PREFERENCES IN CAPITAL MARKET INVESTMENT WITH THE SPECIAL REFERENCE TO TIRUCHIRAPPALLI - DISTRICT Dear Sir/Madam, I am pleased to inform you that I am pursuing Ph.D., program through the Department of Commerce of St. Joseph’s College (Autonomous), Tiruchirappalli. Besides being a research scholar I am working as a Lecturer in Management Studies at St. Joseph’s Institute of Management, St. Joseph’s College. The intent of the present data collection is to use the collected data for Academic purpose only and I promise you that it shall not be used for any other purpose. Hence I request you to fill up the questionnaire and return to me.
Thanking you. Yours sincerely,
(J. Michael Sammanasu)
I. PERSONAL PROFILE (PLEASE TICK) 1. Name (Optional) :
2. Age : 1. Upto – 30 2. 31- 40 3. 41-50 4. 51 – 60 5. Above 60 3. Sex : 1. Male 2. Female 4. Marital status : 1. Married 2. Unmarried 3. Widowed 4. Divorced
5. Education : 1. Below graduation 2. Graduation 3. Post graduation 4. Professional degree
6. Occupation
1. Employee : (i) Govt (ii) PSU’s (iii) Private 2. Professional : (i) Lawyer (ii) Doctor (iii) IT Professional (iv) Charted / Cost Accountant (v) Engineer (vi) Academician 3. Business man / industrialist : 4. Pensioner : 5. Others (Specify) : (i) Retired (ii) Non-Pensioner (iii) Farmer (iv) Trader (v) Senior Citizens 7. Annual Income : 1. Upto 50,000 2. 50001-100000 3. 100001-20000 4. 200001-500000 5. Above 500000
8. Annual Savings : 1. Upto Rs.10000 2. Rs.10001-25000 3. Rs.250001-50000 4. Rs.50001-100000 5. Above Rs. 100000
II. LEVEL AND PATTERN OF INVESTMENT
2.1 What is your average savings in each Financial asset? (Specify the amount) a) Capital market instruments (Shares-debentures & bonds) Rs. b) Bank deposit Rs. c) Post office savings Rs. d) Government security Rs. e) Insurance premium Rs. f) Chit funds Rs. g) Provident funds Rs. h) Others (specify) Rs. 2.2 How many years of market experiences do you have in the capital market?
1. Less than 3 years 2. 3 to 5 years 3. 6 to 10 years 4. More than 10 years
2.3 How long have you been in share market investment?
1. Less than 3 years 2. 3 to 5 years 3. 6 to 10 years 4. More than 10 year
2.4 How long have you been in debenture market investment?
1. Less than 3 years 2. 3 to 5 years 3. 6 to 10 years 4. More than 10 years
2.5 What is your period of investment in mutual fund schemes?
1. Less than 3 years 2. 3 to 5 years 3. 6 to 10 years 4. More than 10 years
2.6 State your ranking of investment in capital market (1 - 3)
1. Shares 2. Mutual funds 3. Debentures
III. DIVERSIFICATION OF INVESTMENT (PLEASE TICK)
3.1 How many companies your existing portfolio has?
1. 1 to 5 2. 6 to 10 3. 11 to 20 4. Above 20
3.2 Rank your investment in the following sectors (1 – 8)
1. Capital goods 2. Bank 3. Fast moving consumer goods 4. IT 5. Consumer Goods 6. Health care 7. Auto 8. Metal
3.3 Have you diversified your debenture investment?
1. Yes 2. No
3.4 If Yes….. How many companies do you have in your Portfolio?
1. 1 to 5 2. 6 to 10
3.5 What is your level of diversification in mutual fund schemes?
1. Less than 5 2. 6-10 3. 11-15 4. Above 15
IV. SIZE OF INVESTMENT
4.1 What is your size of Annual Investment in shares? (please tick)
1. Upto Rs.25000 2. Rs.25001-50000 3. Rs.50001-100000 4. Above Rs.100000
4.2 What is your size of Annual investment in Debentures?
1. Upto Rs.25000 2. Rs.25001-50000 3. Rs.50001-100000 4. Above Rs.100000
4.3 What is your Annual size of investment in Mutual Fund Schemes? (please tick)
1. Upto Rs.25000 2. Rs.25001-50000 3. Rs.50001-100000 4. Above Rs.100000
4.4 State your preferred Investment opinion for Future (please rank)
1. Shares 2. Debentures 3. Mutual Fund schemes
4.5 Rank the factors that Hinder your Investment Plans / Expansion etc.,
1. Incurrent risk 2. No promising return 3. Liquidity problems 4. High volatility
5. Others (please specify)…
V. MODE OF INVESTMENT PREFERRED BY INVESTORS (PLEASE TICK)
5.1 What is the mode of investment preferred by you?
1. Primary market 2. Secondary market 3. Private placement
5.2 Rank the most important criterion considered by you while operating in the Primary Market (1 – 7)
1. Nature and type of product 2. Industry / Sector to which the company belongs 3. Terms of issues 4. Promoter’s track record 5. Board of directors 6. Equity participation by FI / FIIs 7. Risk factors
5.3 Will you continue with your investment in Capital Market? If Yes… Will you drastically change your strategy?
1. Yes 2. No
5.4 Which factors do influence you to take investment decision in secondary market? (Rank in the order of preference)
1. Change in government policy 2. Advice of brokers 3. Advice of dailies/periodicals 4. Advice of websites 5. Movement of indices 6. Market sentiments
5.5 What factors influence / motivate you in the selection of shares?
1. Dividend 2. Capital gains 3. Bonus shares 4. Rights shares 5. Tax benefits
5.6 What factors do you consider while investing in company shares? (Please tick)
1. Book value 2. Market value 3. High-low price 4. Earning per share 5. Price earning ratio 6. Market capitalization
5.7 What mode of trading do you prefer for Secondary Market Operations?
1. NSE terminal 2. BSE terminal 3. Stock brokers or sub brokers
VI. WHAT FACTORS INFLUENCE YOUR CHOICE OF MUTUAL FUND SCHEME (PLEASE RANK THEM) (1 – 5)
6.1 1. Type of scheme 2. Image and popularity of Asset management company (AMC) / sponsor 3. Past performance 4. Net asset value 5. Advertising and campaign
6.2 Which mutual funds scheme do you prefer to invest? (Please tick)
1. Growth scheme 2. Income scheme 3. Balanced scheme 4. Sector wise scheme 5. Tax savings scheme 6. Index fund 7. Special investment plan (SIP)
VII. OVER ALL EXPERIENCE OF INVESTORS ON INVESTMENT (PLEASE TICK ANY ONE)
1. Highly rewarding 2. Moderately rewarding 3. Not rewarding 4. Resulted in loss 5. Resulted in heavy loss
VIII. WHAT ARE YOUR SUGGESTIONS FOR IMPROVING THE ATTRACTIVENESS OF CAPITAL MARKET INVESTMENT (Please tick)
1. Demutualise major stock exchanges 2. Improve transparency in investment operations 3. Introduction of rolling settlement to more shares 4. Control excessive speculation and price (rigging by share brokers) 5. Give more powers to SEBI on investors protection 6. Please specify your suggestions
IX. If you decide to move out of Capital Market Investment what will be your next options and why?
1. Bank 2. Real Estate 3. Bullion Market 4. Antiquities 5. Insurance
Why (Please tick)
1. Safety of the principal 2. Stability of return 3. Profitability 4. Liquidity
5. Any other…