Back in 1850, a group of five stockbrokers used to conduct brokerage meetings under a banyan tree in front of Mumbai’s town hall. This small group moved to Dalal Street in 1874 (Dalal means broker in many regional languages), giving birth to the iconic Bombay Stock Exchange. 

While the concept of investing has been around since the 1800s, the stock market remained unfamiliar territory to most people in India, until some liberalization reforms, digitization, and stock market frauds were thrown into the mix. 

As people marvel over the unexpected market rally in the midst of a pandemic, we thought it’s worth taking a look at how the retail investor has traversed the turbulent path of risk and reward. This story is almost as intriguing as the one in Gangs of Wasseypur (and just like the movie, it has two parts).

Sowing the seeds of a socialist doctrine

Reeling from the hangover of the colonial era, trade, and commerce in the 1950s and 60s was mostly controlled by state-owned institutions. This setup was a way for the government to mobilize funds through banks. However, it also aimed at reducing monopoly and providing fair credit access to people.

This bid to control citizens’ economic lives meant that for most people ‘saving’ was synonymous with instruments such as bank FDs. Bank facilities were thinly spread and other avenues of wealth-creation such as the stock market was mostly a closed-door one that involved steep fees and waiting for weeks until the paperwork arrived. 

It wasn’t until 1963 that the idea of ‘Mutual funds’ was introduced to the public. The RBI set up the Unit Trust of India (UTI), an incentive to get people interested in retail investment. But most people still stuck to their first love- Fixed Deposits (This wouldn’t change for a few decades, but we’ll get to that in a bit). 

The age of the equity emperor

Before we hit the late 70s, India had started to grapple with a new challenge: the unforeseen effects of the License Raj. The bureaucratic nature of this system stifled fundraising, hampering private businesses, and restricting innovation. This led to the country evidencing a ‘Hindu rate of growth’, the low growth rate which was in sharp contrast to our Asian counterparts with similar incomes. 

Now during the license raj, there was one man who was still establishing huge industries- Dhirubhai Ambani aka the ‘Equity emperor’. And here’s what he wanted to do: he wanted to convince the common man to invest in his dreams. To lure him away from just saving to investing he turned to convertible debentures issues. A convertible debenture (CD) is a kind of long-term loan which can be transformed into a company’s stock after a specific period of time. 

CDs were a win-win from the word go. They allowed industrialists to raise capital for their ambitions directly from retail investors, bypassing banks that insisted on securing loans through project assets and promoter guarantees. At the same time, they provided retail investors a higher rate of interest than bank fixed deposits, while also giving holders potential kicker in the form of additional returns through appreciation on the conversion of debentures into equity. 

Those who invested in the Reliance Industries Ltd CDs became millionaires as they stayed invested, fuelling the appetite and aspirations of others. A small portion of the population finally started getting a taste of what wealth creation beyond bank FDs looked like. 

Rising from the ashes

By the summer of 1991, India was a high-cost economy at the brink of collapse. Millions watched in anticipation as a seemingly timid man was to make a televised announcement to the people; Manmohan Singh began this address with a fitting Urdu composition that read ‘the desire for revolution is in our hearts’. This was the introduction of liberalization reforms. 

The intent of these reforms was clear: the government was keen to dismantle socialistic doctrines in the pursuit of a free-market economy. It encouraged the industry to raise capital from the open market and the government would go from being a controller to a regulator. The markets reacted well, and the reforms evoked a decade of renewed growth and expansion.

However, the birth of this new economic charter began with a rather dubious transition- the Harshad Mehta securities scam. You must have heard of this story as some sort of lore when people talk about the history of stock markets in India. For the uninitiated, Harshad Mehta became a subject of infamy after he led a diversion of bank funds worth Rs 3,500 crore to the stock market by exploiting the paperwork-heavy processes to his advantage.

It was the fraudulent and analog nature of this scam that served as a wake-up call to restructure the entire stock market system. The National Stock Exchange of India (NSE) (1992), which provided a fully automated screen-based electronic trading system was one of the outcomes of the government’s initiatives to curtail bureaucracy. This accelerated digitization at the BSE in 1995 and laid the foundation for wider participation of people in the markets. The government also issued licenses for private sector Mutual Funds which gave investors more options.

The golden era of growth

Meanwhile, somewhere in a remote corner of Bengaluru, a freshly minted graduate was fielding phone calls for twelve hours a day, while his superiors made him practice his American accent while watching the TV show ‘Friends’. Thus began the birth of a new industry- Business Process Outsourcing. BPOs were the holy grail for the young workforce, an avenue for 18-year-olds to make and manage their own money. 

In the 2000s,  investing was starting to become alluring to the common man for a few reasons:

  • Creation of more jobs in service sectors like ITeS and BPOs.
  • Drop in inflation and interest rates, coupled with more availability of loans.
  • Lower barriers to investment because of improved accessibility to the stock markets.
  • Akshay Kumar’s character in Hera Pheri claiming he became ‘25 din mein crorepati’

Alright jokes apart, the 2000s was heralded as the golden era of growth- with India averaging a remarkable ~7% annual growth in GDP between 2000-2007. Internationally, this was the period when consumerism reached its peak with consumers getting easy access to money via NINJA (No income no job no asset) loans. These excesses eventually led to the global financial crisis and a total meltdown in 2008.

India withstood the 2008 recession better than most countries. Despite the ripple effect of the event that was felt in every part of the world, our regulated market and RBI’s conservative approach ensured that we stayed relatively insulated. It was also the thrifty and risk-averse nature of most Indians that shielded them from a dire financial crisis. 

Gen X- A force to be reckoned with 

In 2015, the penetration of smartphones into tier 2 and tier 3 cities, coupled with Jio’s affordable data plans allowed people from small towns developed a new world-view. The introduction of Digital India and JanDhan-Aadhar-Mobile (J-A-M) accelerated the opening of bank accounts with KYC, and banking started to become ‘digital’ in the true sense of the word. 

Also get this: The average age of the population was 25 years old. This meant that there was an immense number of young people in the workforce who were seeking new ways to grow their money. With inflation under control, the bank interest rates started their southward journey. So the people started looking for investments other than bank FDs. 

Enter ‘SIP’s. The Systematic Investment Plan (SIP) was the shiny new toy for the middle-class Indian. With monthly payments as low as 500 rupees, SIPs not only allowed people the opportunity to ‘invest’, but also assuaged their biggest fears about the jargon-heavy risk-laden world of ‘stocks’. One no longer needed to learn the difference between scalping and swing trading, if they wanted to be a retail investor. 

Towards the end of the decade, the average Indian investor had overcome his shyness about investing beyond FDs, and I’d have to conjecture that all was kosher. But hold your horses. As history has taught us ‘What’s past is prologue’. This story only gets super riveting as we realize that this new-age investor had a lot more than just his returns to worry about. More on this in part 2 of this series. 

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