Why investors will believe Veritas rather than Indiabulls

The public hue and cry raised by Indiabulls on an adverse report by an independent research firm Veritas is not going to get any kind of sympathy from the general Indian public or from an average investor. The fact is that the Indian public completely believes that most of the Indian promoters are not to be trusted. The ones to be trusted can be counted on one’s fingers. Indiabulls may save itself a lot of time and money by just ignoring the Veritas report and carry on with its business.

One has to just read the comments on the articles published by Firstpost on the Veritas-Indiabulls story to understand the cynicism of the public on Indian promoters. The public takes it for granted that the average promoter does not work for the shareholder and any amount of public posturing by promoters on their shareholder friendly stance will not help. The only solace is that the average investor will still invest in equity knowing fully well that he or she is in for a raw deal from promoters.

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[caption id=“attachment_416145” align=“alignleft” width=“380”]  Why is the general public or the average investor willing to entrust his or her vote or money to someone whom they do not trust?[/caption]

The investor has similar views on mutual funds. There is a general lack of trust on the fund industry, given the misselling that has happened in the past. However, despite the lack of trust the investor will invest in mutual funds, but selectively. The introduction of entry loads in mutual fund schemes, if passed by Sebi, will only add to the general lack of trust.

The lack of trust extends to the government and to the political class but that will not help anti-corruption political parties to get votes. The public will still vote for a political party that suffers from a lack of trust.

Why is the general public or the average investor willing to entrust his or her vote or money to someone whom they do not trust? It is difficult to find an answer to this question but what comes to the mind readily is that the voter is too busy fighting everyday issues to think on broader issues while the investor entrusts only a small fraction of his or her savings to the capital markets.

Bank deposits, at around Rs 62 lakh crore, form over 60 percent of India’s GDP. Direct equity participation by Indians is just 1.4 percent of total population as per an MCX study. Equity assets under management are just half of fixed income assets under management by mutual funds. The country’s largest provident fund, the Employees Provident Fund Organisation (EPFO) does not invest in equities. This data reveals the extent to which investors lack trust in capital markets.

Sebi, the mutual fund regulator, which is also trying to play the role of a promoting growth of the Indian capital markets, will have to address this lack of trust by the public in the capital markets. The Reserve Bank of India (RBI), on the other hand, has to make sure that the banking system is safe and sound, as the public has imposed extraordinary trust in the system. The fact that the banking system is highly regulated with one of the most stringent reserve ratios in the world (CRR + SLR = 27.75 percent of deposits) makes a depositor feel safer with banks.

Deposits up to Rs 1 lakh are also insured by the DICGC (Deposit Insurance and Credit Guarantee Corporation of India), leading to an additional safety factor for depositors.

Sebi has a tough task ahead. Any move by the capital market regulator will increase the lack of trust factor amongst investors while any move for investors will increase the frustration for capital market players on over-regulation. Sebi should however bat for the investor, as its primary role is to protect investors. Capital markets can take care of themselves.

Arjun Parthasarathy is the Editor of www.investorsareidiots.com, a web site for investors.