The Story of Indian Stock Market unfolding – Part II By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

March 15, 2016 | Posted by bobbysrinivasan << back to blog

This is an ongoing conversation between the student and his Professor.

Student: Professor, tell me what role these four parties play and how important is their role?

Professor: The rules regarding stake holding of promoters of listed private sector companies to reduce their holdings to 76% by end June 2013, seemed to have had a big impact on the ownership of stocks. I provide you have some data which of course is a few months old. Nevertheless it will tell you as to who is controlling the market.

Promoters 51%

Foreign Institutional Investor (FII) 20%

Domestic Institutions Investor (DII) 10%

Retail Investor (RI) 9%

Unclassified 10%

Student: I can understand why the FII, DII and RI will participate in the market every day but then why is the presence of promoters relevant?

Professor: There are several reasons why the promoters unload then stocks. Recently many promoters hypothecated their stocks to raise money for their operations. This is a distress signal. Banks loaded with the non-performing assets are not probably extending further credits to them. Recently Suzlon Energy promoters sold shares to pay off debt. This is often referred to as balance sheet recession where in the assets are sold to pay off the liability. Gitanjali Gems were pledged by the promoters to meet their liquidity needs. Kingfish airlines had massive debts and they exchanged debt with their shareholdings. This way they reduced their debt.

Student: How does this mechanism work? I don’t have clarity.

Professor: The stocks FIIs picked from the promoters did better than those picked by retail investor. A good 67% of retail investor added holdings have lost value in the last year. For example, Geodesic a stock promoted by the promoters, their ownership dropped from 25% to 10%. The retail investors picked up and their holdings jumped from 32 to 55%. Subsequently the stock dropped 85% in value.

Student: Are you saying that the retail investor is a sucker, wasting their money buying worthless stocks.

Professor: Don’t generalize, but bear in mind that stock market is not a fair game. Retail investor should know what he is doing? His homework must be accurate.

Student: What about the basis of retail investor decision making?

Professor: Generally they are poorly informed lot. They don’t read papers regularly and they act quite emotionally and arbitrarily. They rely on friend and brokers advise. Record shows that 8 out of 10 retail investor loose money in the market. Their decision making is warped because of inadequate data support.

Student: What about the FIIs?

Professor: The FIIs are well equipped with both data and analysis which help them pick winners. The FIIs have tremendous money power and they can ride over short-term losses and wait until the profit is available to them. The Indian Stock market is extremely volatile. A small amount of money coming in can push up the market significantly or vice versa.

The uninformed retail investor is exposed to risk which he or she cannot handle. He is unsuited to this market and its volatility. Retail investors are told wrongly that Stock market investment is for a long term. They neither have the patience nor the conviction to stay in the game. They always enter and exit at the wrong time.

Student: Professor, I will be much obliged, f you can explain how the market function on a daily basis and how these different players engage themselves in the market.

Professor: Sure. Wait for my next blog.

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