The success of the Bharat Bond issue where PSU bonds were sold through an exchange-traded fund (ETFs are mutual funds that mimic an index and list on the stock exchange) and the use of ETFs earlier for equity disinvestment of public sector firms has rung alarm bells in the plush offices of the life insurance industry. To see how they are connected, we will have to use a wide-angle lens and watch from 30,000 feet. The story is about who gets to be the pipe that connects savings to investments, and shaves off a few basis points to a few percentage points of costs, as it does so. Households and firms generate savings, which becomes the raw material for firms for their investments, that they use to start a new business or expand an existing one. Firms will either borrow or sell their equity to get the funds. Banks, insurance firms, mutual funds and pension funds are the pipes that connect savers to users (both borrowers and equity sellers).
A granddad buys a bond for his grandchild. Nothing unusual except that there is no grandchild. His recently married offspring has zero plans for having a child in the near future. But the appeal of turning ₹2,700 into ₹1 lakh over 25 years was a compelling story in 1992. As it was in 1996 when ICICI Bank came to the market with its tranche of deep discount bonds (that do not pay periodic interest but accumulate it in the bond and return the principal plus accumulated and reinvested interest in the future) and another set of households rushed to buy and lock in their long-term returns. That was the buzz around the deep discount bonds in the 1990s when IDBI Ltd, ICICI Bank and others used this bond type to tap directly into the household savings. A deep discount bond from a “safe” issuer ticks all the boxes for the middle Indian investor—it is safe, the period of investment is known, the return is better than a fixed deposit (FD) and the amount at the end of the period is a known number. You have to only see the success of the traditional insurance products (such as money-back and endowment) that give an effective return that is poorer than that of a bank deposit, to understand how deeply middle India craves safety, predictability of return and the promise of money-back when it is due.
What’s happened to the Indian economy? From an aspiring 10% growth, we are struggling to do half of that. The mood is down. Consumers are not buying. Household savings are at a low. Corporates are not investing. Gold prices have fallen. Real estate is still comatose. Just the stock market has the steam to keep rising higher. Clearly, there is something deeper to this story—what’s going on with the Indian consumers, savers, investors and entrepreneurs? And why is the market up, when data on consumption, spending, confidence, jobs and growth shows only gloom. On one side, the reasons for this skid off the growth path are said to do with demonetization, a botched GST, the persistent bank NPA problems, the shadow banking mess and hardening of rules. The other argument looks at this being a result of an attempt to switch the Indian business model towards formalization. Whatever may be the reason for the skid, the result right now is a slump in the mood of the economic participants.
Policymakers have long bemoaned the “non-optimal” Indian household that holds “unproductive” gold and land rather than financial assets. The same policymakers have sat on defined-benefit pension plans, medical treatment for life, other perks and have had very little idea about markets, how they work and how ordinary people deal with on-ground issues. They also forget to look at supply-side market failure before blaming the household. That household whose rupee finally makes the whole story hold together through taxes, consumption and savings. But very little work goes into working through why a household behaves the way it does when it makes its investing choices and even when there is work, it is ignored and not implemented.
You, the Indian investor, have been pick-pocketed, stolen from, mis-sold, cheated and defrauded in all kinds of scams perpetrated not by knife-wielding muggers but white-collar criminals who bend, twist and totally escape from regulatory norms that are meant to protect you. A mapping of the big money vanishing tricks of the past two decades points a finger at systemic regulatory failure to protect household savings.
As the Indian economy opened up, the regulators were set up to develop the market and protect the investors. However, the development role, along with turf wars, has taken precedence over its protection role and India has found its regulators repeatedly asleep at the wheel, costing the household its savings again and again (see graph). The latest season of the loot story has Karvy Stock Broking Ltd dipping its fingers into your money and using your shares to borrow money for its own use. Why have the regulators failed investors in India? The answer to this question is a mix of politics, power, capture, hubris and incompetence.