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Majority of states have very few stock market investors

LiveMint logoLiveMint 22-02-2017 Sachin P. Mampatta

Stock market movements make headlines every day. How many people invest in stock markets in India? Which state has most stock market investors in India? Mint has analyzed statistics from the Bombay Stock Exchange (BSE) to answer some of these questions.

The BSE data used unique client codes to identify the number of stock market investors in each state and union territory. It identified 3.23 crore registered stock market investors in total. All investor accounts are linked to a demat account, though there maybe duplication, for example with one demat account connected to investor accounts with more than one brokerage. A total of 98.7% of these had clear state/union-territory wise data. It was not defined for 4.29 lakh investors. This works out to less than 7% of India’s 48.18 crore-strong workforce. The exchange updates the data daily. The analysis used numbers from 20 February 2017.

Maharashtra alone accounts for more than one-fifth of India’s stock market investors. Gujarat, Tamil Nadu, West Bengal and Uttar Pradesh are the other top five states in terms of percentage share in total stock market investors. These five states account for a little less than 60% of India’s stock market investors. Most of India’s states and union territories have a smaller share in total number of stock market investors than their share in population.

Urbanization and per capita Gross State Domestic Product (GSDP) seem to be bigger drivers for interest in stock markets than literacy.

What explains this skewed distribution in number of investors across states? Urbanization and per capita Gross State Domestic Product (GSDP) seem to be bigger drivers for interest in stock markets than literacy. The first two have a correlation of 0.69 with state’s stock market penetration rate, or registered investors as a percentage of total state population. Literacy only has a correlation of 0.30.

States like Maharashtra and Gujarat also benefit from a traditional equity culture.

Another factor may be geography. The lowest penetration seems to be in areas far away from the main stock exchanges in Mumbai. This is an interesting takeaway in an era of electronic trading. Nobody has to be present in the trading ring to buy or sell shares anymore. Investors can get information through television and the internet. Yet, geographical distance still seems to play a role.

It is important to note that these numbers are likely to be overestimates. Industry experts point to duplication in the number of demat (or investor) accounts, as one person often has more than one such account. Many of the demat accounts are hardly used.

Another pointer to the investor numbers being overstated lies in the tax data. There were only 4.72 lakh people who recorded any short term capital gains or losses, according to income tax statistics for the assessment year 2014-15, which is a very small fraction of the aggregate figure of 3.23 crore which emerges from BSE data. Short term capital gains tax is paid for securities held for less than a year. It can also apply to other transactions such as land and gold. This means that not everyone who has filed gains or losses is talking about the stock market.

An earlier Plainfacts column had compared stock market data with income tax data when it was first released. Some of this seems to be on account of under-reporting. However, subsequent releases of tax data shows that while the absolute number of such individuals has gone up for the next two years, there is a decline in terms of share in total number of filings. This would suggest stagnation in equity penetration.


What explains this supposedly low interest in stock markets in India? A 2011 National Council of Applied Economic Research Survey, which was sponsored by the Securities and Exchange Board of India, noted information asymmetry and poor quality as two key deterrents to widespread participation in stock markets in India.

Mutual funds could be another factor. Satish Menon, executive director of the brokerage house Geojit, said that new investors who do not have the time or expertise to track markets on a regular basis opt for the mutual fund route. Data from the Association of Mutual Funds in India puts the number of mutual fund investor accounts in India at 5.28 crore in December 2016, much higher than the 3.23 crore figure for stock market investors.

To be sure, industry executives caution against assuming that there is no overlap between mutual fund and stock market investors or one mutual fund investor operating multiple accounts.

Incidentally, the 3.23 crore registered investors are more than the depositories’ count of 2.73 crore demat accounts. This would point to a lot of duplication. Also only a quarter of demat accounts are said to be active, as was pointed out in story cited above. Thus, the total number of actual investors for each state could be significantly lower than even the low figures given above.

Stock markets have been around for a long time in India. The first recorded stock market boom was in 1865 when capital from a cotton export boom fueled a rise in share prices. The mania while it lasted, enveloped ‘ordinary clerks, officers, pleaders, adventurists, editors, and even sweepers’.

There doesn’t seem as much of an equity culture today, even as one stock exchange has already listed and another one is on its way to do so.

What can be done to improve the situation?

It is obvious that factors like per capita income and urbanisation are not in the control of India’s stock market authorities. However, it can definitely do more to address concerns vis-à-vis asymmetric or poor information. The regulator has had some success in pushing mutual funds in smaller cities through the use of higher incentives. Whether this success can be replicated in direct equities may be worth a debate.

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