The title of this blog is inspired by a book written by the late British economist John Maynard Keynes in 1940. Taking note from the time period during which the book is set, it was a plan designed by Keynes for the British Government to finance the war needs in order to fight against Germany. It is best defined as: a method or a process to mobilise financial resources from the independent households towards productive investments to achieve a desired objective. In the case of India, at present, it is not about any external threat but to act towards solving the problem of declining household savings -- as with the rise in share of physical assets, it becomes difficult for the corporate / private sector to raise money for the capital expenditure and its burden shifts towards the government (Dr. Janak Raj, [Profile]). But, have corporate investments fallen during the same period? Based on the articles from April and May 2023, it would appear that the situation remains the same i.e. there is a huge deviation in investments (as it has not been sufficient enough to lead productive growth of economy) by the private sector and other macroeconomic variables such as domestic credit and household consumption (among other factors) in proportion to the gross domestic product.
Another worry for the banking sector as even acknowledged by the Reserve Bank of India is the fall in the value held in savings deposits with banks as a proportion of entire demand deposits causing concerns for the banks to manage the essential credit growth. As the governor along with the union minister and markets regulator acknowledge or share that people at large have moved towards financial instruments like equities through mutual funds, the banks and economy at large need to brace for situations arising out of increasing passive investments. This is because, as general behaviour among the retail investors is or has been towards equity investments, we need to go a long way in realising duties as a responsible shareholder. In theory, being a responsible shareholder of a company means following through with many effortful activities that may not always be possible. For instance, most theoretical models in finance assume a rational investor in a company would have visited the company’s facilities, attended Annual General Meetings, asked questions about executive remunerations in relation to the value addition for shareholders and voted on management issues. But, to what extent does the assumption of rationality often discussed in the books hold true for us? If we look at the data from the National Stock Exchange on retail ownership of NSE listed companies based on total market capitalization, the trends are represented as follows:
Source: India Ownership Tracker, Volume 6 (Issue 1) - Q1 FY25
Although the above line graph depicts the decline in retail shareholding within the NIFTY 50 universe, don’t let the visual divert your attention from the ongoing frenzy among the retailers as asset management companies who sponsor mutual funds have been successful in shifting the flow of monetary resources. To verify the shift, one may consider looking at the rise in value of assets managed by any asset management company or the flow of SIPs discussed in the business media.
Turning the attention of readers towards investor participation from rational investor theory, the voting participation of the public in the decision to approve the audited financial statements taken during an AGM for a certain company in the month of September 2022 speaks a lot of things in terms of so called financial awareness and literacy of the public besides the entrepreneurial attitude often discussed today where the decision to accept the audited financial statements was passed with a majority despite there being a difference of INR 38,95,000 in the revenues reported in the audited financial results for the year 2021 given in the reports for FY 2021 (INR 799,37,35,000) and FY 2022 (INR 799,76,30,000).
Upon looking for the required transcript for the AGM meeting from FY 2022, the said document along with the scrutinizer's report was not available anywhere (including the disclosures at the company’s page and the stock exchanges). Hence, it is difficult to convict the ignorance on the part of public shareholders (especially retail investors).
Upon policy specific measures, the leaders shall focus on how the excess funds inflating the asset prices can be channelled into productive areas of the economy that are lagging in contributions in value additions and in order to fuel productivity in the strategic areas, significant tax incentives should be carved out in a manner that the three balance sheets - households, governments and firms - reflect smooth flow of funds with minimum leakages.
Karan Agarwal
