Retail investors in India have lost Rs 15 lakh crore in one go in the last three weeks. The main reasons for this loss are rising commodity prices, sluggish economy and Ukraine crisis. Many of these investors enthusiastically put their savings into the market for the first time but were disappointed. It also showed a lack of understanding of market volatility in the country, especially among retail investors. The issue of lack of social security is fine. In such a scenario, we need to look at how our young investors invest. Many of them invest their savings in mutual funds and equities, while others turn to lucrative savings schemes that fall victim to fraud.
In terms of equity, even the top listed corporates have lost their luster during this time. New firms typically offer large returns to retail investors through IPOs. But such firms are now notorious for paying too much attention to public issues. Among them, Paytm (One97 Communications Limited) was the talk of the town. Its share price has been falling steadily, well below the IPO price.
Meanwhile, market volatility has largely obscured the challenges of corporate governance. The irregularities in the NSE (emails from former NSE chiefs seeking input from non-stakeholders on important issues like business planning, board meeting agenda) have exposed a deep institutional decay. Meanwhile, Sebi has withdrawn its earlier stand to separate the roles of Chairman and MD in the top 500 listed firms. Out of the top 500 firms in the country, 300 are run by promoters. As such, these firms will continue to play both roles at the same time, with a natural conflict of interest between board responsibilities and day-to-day responsibilities in general. The recent sinking of Rs 22,842 crore debt of 28 banks in the ABJ Shipyard scam shows that the crisis of banking NPAs is deepening. The growing number of independent directors resigning from listed firms indicates that many firms are involved in fraud.
Meanwhile, cryptocurrency poses a new challenge. Bitconnect founder Satish Kumbhani fled India after hosting a 4 2.4 billion global ponzi scheme and being convicted by a US jury in New York. A bike boat scam worth Rs 15,000 crore has taken place in Noida since August 2017. In it, Sanjay Bhati from Uttar Pradesh has defrauded 200,000 investors worth over Rs 15,000 crore through a simple scheme. Under this, an investment of Rs. 62,100 was encouraged for ordinary bikes. In return, he was promised an annual profit of Rs 1.17 lakh.
The country has a regulatory framework to protect ordinary Indian investors from fraud, but it is ineffective. Currently, an institutional mechanism needs to be developed to improve investor awareness and review chit fund schemes. Such a system would ideally confirm the plan in advance and act as an intermediary platform for the collection of payments. We also need a mechanism for ordinary Indians to verify whether a scheme is right for them or not. Integration between Aadhaar, UPI and GST can help strengthen such a system.
The situation is not very good even for those investors who prefer to keep their money in bank accounts. There has also been an increase in cases of fraud. According to RBI data, between April 2021 and September 2021, there were 4,071 cases of banking fraud worth Rs 36,342 crore in the country. Of these, 34.6 per cent were related to internet and card transactions. Take the latest case of Dhani app, where hundreds of Indians have taken innumerable loans in their name. The scammers used PAN and Aadhaar card details to secure the loan. To address this problem, PSU banks need to be given significant autonomy and strict KYC rules must be enforced by the RBI. Also, we should impose strict restrictions on people with commercial interests joining the boards of banks (including cooperatives).
Interestingly, those who have relied on the government for retirement are also feeling insecure. Cases of illegal withdrawals from Employees Provident Fund Organization (EPFO) accounts have risen sharply in the last one year. Reports on how EPFO employees allegedly withdrew money from companies closed through forged documents and mobile numbers. The CBI has arrested 18 EPFO officials in connection with the Rs 18.97 crore scam. It is clear that the EPFO needs to be institutionally strengthened to bring transparency in its operations and to protect the interests of the employees.
In the face of all such cases of embezzlement and fraud, concrete initiatives are needed to protect retail investors. The scope and method of institutional measures for investor awareness and protection is currently very weak. We need a fundamentally modern banking infrastructure that is effective in preventing such frauds. Retail investors need protection and the state should provide it on a priority basis.
Disclaimer: The views expressed above are those of the author.