Are Indian retail investments in equity much higher?

6 Sep 2024 , 01:24 PM

REPORTING OF HOUSEHOLD SAVINGS IN CAPITAL MARKETS

In India, the household savings and household flows into capital markets are reported on a periodic basis by the MOSPI in the National Accounts Statistics, as well as by the RBI in the RBI bulletin on a periodic basis. In the last few years, there have been concerns that despite the rapid growth in the number of demat accounts, number of trading accounts and the number of systematic investment plans (SIPs), the total household savings in the capital markets is not really increasing at the same pace. Obviously, something is not fitting into the entire story. Let us look at the numbers and compare with other signals.

Let us look at the resource mobilization as reported by the RBI. For example, the total resource mobilization by capital markets from households in FY21 was ₹1.25 Trillion. This increased to ₹2.14 Trillion in FY23. While there has been growth, it is not matching with the growth we have seen in demat accounts, trading accounts, and SIPs in the post-COVID phase. Similarly, if you look at the household stock invested in capital markets, it has grown from ₹17.3 Trillion to ₹23.68 Trillion between FY21 and FY23. In a recent white paper put out by SEBI, they have noted that the current methodology is not fully representative and many of the finer aspects of the capital markets are not captured in the current methodology. Which is why, this SBI White Paper becomes a lot more interesting.

HOW IS THE CALCULATION METHODOLOGY CURRENTLY?

Currently, the RBI and the National Account Statistics collect the household savings in capital markets in a traditional structured manner. For instance, the data on resource mobilized through Equity and Debt is sourced from the SEBI Monthly Bulletin. The RBI directly imputes the retail quota of 35% in case of equity mobilizations in the primary market and 40% in case of debt mobilizations in the primary market. The focus is primarily on the resources mobilized by individuals and HUFs through the capital markets route. In addition, the realm of Dawood’s policy also includes offer for sale (OFS), follow-on public offer (FPO) and rights & Rights and 40 per cent of public issuance of debt, respectively as being mobilized from Individuals and HUFs.

There are also shortcomings in the way the household savings are stored in capital market assets. Currently, for arriving at the asset value of the households in India, only the Assets Under Management (AUM) in mutual funds by High Networth Individuals and Retails are considered. The source for the data is category-wise AUM data as reported by AMFI.

WHAT ARE THE CHANGES TO THE METHODOLOGY THAT SEBI IS PROPOSING?

The SEBI White paper has proposed some key changes to the methodology of computing and reporting the household savings in capital markets. Broadly, these changes pertain to the categorization of investors, the instruments to be included, and new categories of assets to be added to the list. The idea is to make it more comprehensive and ensure that the numbers are reflective of the retail influence on overall capital markets. Here are some of the key changes proposed by SEBI in its white paper.

1. Currently, in the definition of households, only individual stock holders, high net worth investors (HNIs) and HUF stock holders find a place. Under the proposed methodology, SEBI has suggested to include all domestic individuals irrespective of income levels in this list. Also, non-individuals like non-profit individuals serving households (NPISH) is proposed to be included in this list. The NPISH includes NGOs, charities, and trusts.
   

2. Let us now turn to the proposed changes to the instruments to be included in the reading of householders savings in capital markets. Currently, as part of fresh flows, only 35% of primary equity issues and 40% of primary debt issued are include. In the proposed methodology, SEBI has suggested that the actual amounts raised via debt and equity by the categories mentioned above, via primary markets and secondary markets must be included in the flow calculation.
   

3. In the present calculation, only the net flows into mutual funds as reported by AMFI are calculated. In the methodology proposed by SEBI, apart from the net flows into mutual funds, the flow data into mutual funds and ETF funds should also be considered. In addition, SEBI has also suggested that many of the recent additions to capital market instruments like REITs, INVITs etc are not included. In the proposed SEBI model, it has also suggested that such products also be included to get an asset allocation picture.
   

4. There are also some gaps in the methodology to value the stock of assets held by the individuals. In the current methodology, the AUM data for HNIs and Retail is only considered while the value of individual and HNI holdings in equity and bonds in the secondary markets are not included. According to the proposed methodology, apart from the individual data and HNI data, the NPISH data (pertaining to charitable trusts) must also be in this AUM. Currently, values of direct equity and debt are not reported at market value. SEBI has suggested to include that too in the stock value computation of Indian households. Of course, the valuation of REITs and INVITs will also be added.
   

5. SEBI has also proposed changes to the instruments to be included under the definition of household assets. In the equity segment, it is suggested that preferential issuances in the primary market and OFS executed through the stock exchange platform also be included in the list. In addition, the debt segment can include private placed debt, municipal debt, and securitized data of obligations. On the holding data, the new methodology will also cover all the instruments above.

Having seen the proposed changes, the big question is how will it impact the data on resource mobilization and capital market stock.

SEBI PROPOSED CHANGES COULD MAKE NUMBERS MORE ATTRACTIVE

The impact on the flows and the impact on total capital market stock is likely to be substantial if these changes are implemented. For instance, We have presented the SEBI simulation of flows and stock and the difference it makes. The table is a quick gist.

Particulars	Existing Methodology	Proposed Methodology	Change due to new methodology
Household Resources Mobilized in the fiscal year FY23	₹2,14,293 Crore	₹3,30,598 Crore	54.3% Higher
Household Resources Mobilized in the fiscal year FY24	Not Available	₹3,52,906 Crore	Not comparable
Household Asset stock value in the fiscal year FY23	₹23,69,793 Crore	₹83,83,011 Crore	253.7% Higher
Household Asset stock value in the fiscal year FY24	Not Available	₹1,27,82,637 Crore	Not comparable

Data Source: SEBI / RBI / National Accounts Statistics.

As can be seen from the above data, the old methodology does not use actual numbers, ignores the direct equity markets, and also does not consider the new instruments like REITs and INVITs. It is expected that the new methodology will give a better picture of the quantum of household savings in the capital markets (both direct and indirect) ownership of capital market asset classes.