Boost to investors

The proposal made by the Securities and Exchange Board of India (SEBI) to double the investment limit for retail investors is welcome from the points of view of the small investor, companies that go in for large public offerings and the stock market as such.  The new proposal means a fresh definition of the retail investor on the basis of the increased capacity of the investor to respond to share offerings. Applications up to Rs 2 lakh will be considered eligible for the retail quota and they will also enjoy the usual price discount that has been a feature of the offerings. This will help to increase retail participation in the share market which, in spite of many incentives, is not very high.It has been found that they get crowded out by other categories of investors who have stronger financial muscle.

A SEBI study has found that most retail applications at present are in the upper range of the eligibility bracket and that means that they are capable of bidding for more shares if the limit is raised. The raising of the limit offers an opportunity for them to apply for more shares successfully.  Greater allotment for small investors is good for companies because in many large issues the volume of retail applications is not high because of the low limit. They would also be happy to avoid the situation in which a large number of their shares are owned by a few investors. With the market booming now and with many  initial public offerings and follow-up offers in the pipeline, expansion of the retail participation is necessary. The government itself will be a gainer because it has a major disinvestment programme to implement in the coming months and years.

A higher level of retail participation is necessary for the health of the stock markets also. Investment in stock markets receives only low priority in India. Even when the size and financial clout of the middle class has increased only about 5 per cent of the Indian public have some investment in the stock market. A wider shareholding among the public is good for the market because it will ensure better stability and less volatility. SEBI can also think of progressively increasing the investment limit for retail investors as part of a mechanism linked to the consumer price index.