Why retail Investors have left the share market?

We recently showed how retail participation in Indian stock markets has been on a wane.

Here is another proof that retail investors have been pulling out of the markets.

An article in Business Standard has reported the findings of a study carried out by India's premier B-School Indian Institute of Management, Ahmedabad. What is a prominent feature of the shareholding pattern in India?

As per the study findings, the answer is concentrated ownership and control. From 2001 to 2011 December, the controlling shareholders have further increased their stake in the Nifty domestic companies. On the other hand, non-institution retail investors have witnessed their share going down.

It is worth noting that this trend is in line with the trend in the developed markets.

In our vie w, the global financial crisis of 2008 and the following economic instability have severely eroded the confidence of retail investors. And as such, their participation and shareholding has substantially declined over the decade. Moreover, poor corporate governance and weak regulatory oversight has also dented investor sentiments.

The above is from the mails I receive from Equitymaster.

Many theories have been propounded as to why retail investors are shying away form the share market.

I have been trading in shares since 1983 and can be considered as a very small investor.

I believe, the reason why retail share holders have left is because the government has allowed new issues to be made at a premium which has no bearing on the quality of the issue.

The promoters with the active connivance of merchant bankers hype up the issue and sell it to the retailers.

8 out 10 issues are bombed and the retail investor is left with a sick baby.

Earlier, most issues were made AT PAR or at a premium of 10 or 20 rupees.

In those days, even if you got one or two good shares you could become a lakhpati for they appreciated with time to the benefit of both the promoter and the shareholder.

Nowadays, the promoters do not care for the shareholder.

They want to make a killing in the IPO itself like killing the hen that lays the golden egg instead of waiting for the eggs.

An example is the case of DLF.

They came out with a public issue in July 2007.

The price of a Rs 2/- share was fixed at Rs 525/-

175 million shares were off loaded and the owner K P Singh raked in Rs 9187.5 crores.

The share reached a value of Rs 1210 in January 2008 and then collapsed and is now trading in the range 128 to 162.

Overnight he had made it to the Forbes's list of top 100 richest men in the world.

DLF is the same company which allowed Robert Vadra pocket a huge sum of money through a sham deal.

A second example is that of Reliance Power.

It came out with its issue in January 2008 at a issue price of Rs 450/- i.e at a premium of Rs 440/-

By 30th June 2008, it had tanked to Rs 120/-.

In contrast, Dr Reddy's issue came with a premium of Rs 40/- only.

If any shareholder purchased 100 shares during the Company’s IPO in August 1986, plus the 60% rights issue in August 1989, and held on to these till date, the person would be owning a total of 5,760 shares of Dr. Reddy’s Laboratories at a face value of Rs. 5 per share. Against a total outlay of Rs. 2,500 (Rs. 1,000 during the IPO and Rs. 1,500 to purchase 60 shares of the rights issue at Rs. 25 per share) that investor will have earned a total of Rs. 1.95 lakh as dividends, including the proposed total dividend of Rs. 6.25 per share for 2008-09. On 21st Oct, 2013, the Company’s share on BSE was being quoted at Rs. 2400. Thus, the value of this investor’s portfolio would have been Rs. 1.39 crores.

I should know because I had got 400 shares of Dr. Reddys in the initial IPO.

I used those shares whenever I had some large expenses to meet in my home.

I never had to ask anyone for money.

I do not have any shares of the company now.