Until the 1990s, we were a closed-door economy where rules of the game were largely determined by licences and capacity constraints. Our industries were sheltered from foreign competition through a regime of tariffs and entry barriers. It is then that we decided to give our consumers a fairer deal by making our industries more quality-driven and cost-effective. The strategy adopted was unshackling capacity growth, freedom of entry and opening up of various sectors to foreign investment and participation. The watchword was deregulation.

The government decreed two kinds of investment in our corporate sector. One was foreign direct investment (FDI) and the other was foreign portfolio investment (FPI). It was the second pattern of foreign investment which has had a telling impact on the Indian stock markets.

The FPI route allowed foreigners to acquire shareholding in Indian companies. In all our economic policies the intent was to allow market forces to determine the rules of the game. The policy of the government was also reflected in the capital market with the abolition of CCI (Controller of Capital Issues) and creation of Sebi (Securities and Exchange Board of India). While CCI rationed corporate access to stock markets by a set of pricing norms for securities, Sebi was created with the avowed objective of investor protection.

CCI, therefore, acted as an investment adviser to the public by allowing only worthy companies to float issues. Sebi undertook the task of regulation under deregulation. Investor protection, it was felt, should not mean pricing issues but forcing companies to make full and meaningful disclosures in offer documents to enable investors to make informed decisions. "Full disclosure", "qualitative information", "investor perception" are undoubtedly the ultimate objects of a free market. For the investors to be able to grasp and evaluate corporate information, we needed to have a financial analyst regime to decode corporate information to understandable bits.

In the Indian context this facility was missing. The result was company managements gave full vent to their creativity in presenting financial data in a way as to lure investors to subscribe to its share issues which were allegedly being floated for smart projects which, if the predictions were to be believed, would start laying golden eggs as soon as public subscriptions were collected. In the zeal for free market pricing, what was ignored was that it was first necessary to create an environment in which free market pricing could lead to the ultimate objective of investor freedom.

To add to all these woes, we had a securities scam in which public money was illegally funnelled to the share market to prop up prices, thereby creating an illusion of rising share markets.

When the bubble burst, the investors had lost heavily. The scam had cost heavily in terms of reputation of our banks and financial institutions, which had colluded with the scamsters.

In India, whenever there is an institutional failure causing harm to public, the public cannot look anywhere for help and justice because our legal system is so tardy that it is not easy to book culprits and retrieve losses. Our submissive public meekly accept it as a price for having reposed trust in these institutions.

Let us now move to the post-scam era, which saw the rise of equity culture, which was in large part a run for equities, tantamount to a hungry person devouring food. The simile is very apt because the CCI era had selectively allowed companies to float issues, therefore these issues could always be sold at a hefty premium which fetched attractive returns to investors.

Having been inured to a regime of selective issues and restrictive pricing, the investing public could not immediately make an informed choice from various public issues that now started hitting the market under free-pricing regime.

In all this, regulatory failure lay in failing to discern that free pricing could not succeed without adequate legal and protective mechanisms to prevent abuse of freedom to access market for funds. As a result, many fly-by-night operators brought out issues and milked unwary investors of their hard-earned savings.

These hard-earned savings were in turn utilised by these fraudulent promoters for buying goodies for themselves. The merry making went on at the cost of hapless investors who had nowhere to turn for protection and redressal. This ultimately impinged upon the investment climate, the reverberations of which we are now painfully feeling.

Retail investors enthusiastically responded to liberalisation and free pricing. However, on account of institutional failures and regulatory inadequacies they had no choice but to desert the market. This is the backdrop of the current scenario and therefore any attempt at bringing back retail investors has to adequately redress the past wrongs. Retail investors are badly needed in the market because they are a potent source of risk capital. We have also seen that cosmetic changes and a few incentives in the form of tax breaks here and there have failed to coax the investor back into the market. We immediately need to take the following steps to woo retail investors back into the market:

Provide exit routes to investors of untraded companies

: Sebi/government should undertake an exercise to identify the companies that are not being traded and the reasons for which these are not being traded. In most such cases, managements have abandoned the companies after milking them dry for all that they were worth. In some cases even shares sent for transfer come back undelivered. Some other companies are badly managed and are on the verge of closure. If need be a, special legislation should be passed for vesting the properties of all such companies in special liquidators.

Also, these liquidators must be empowered to attach properties of directors of these companies, if need be, to pay off shareholders and the other contractual obligations. This would go a long way to convince investors that government means business as far as it is the question of investor interest.

Make dematerialised trading compulsory

: Dematerialisation has been a good step in the direction of removing systemic deficiencies associated with scrip-based trading. However, dematerialisation as it exists today needs a few changes before it is made compulsory across the board. The main depository has taken resort to depository participants (DPs) to dematerialise investor holdings. However, the system is silent about the risk arising to investors as a result of participants' failure. In other words, the 'agency' risk has been cast upon retail investors. Towards this the following steps are advised:

All scheduled commercial banks should be mandated to provide agency service of the depository. The idea is that depositors can transfer both funds and shareholding through the medium of the same agency.

Insurance companies should underwrite investor risks inherent in a DP other than commercial banks. Risk transfer should be such that in case of failure of depository participants the insurance company should step in to make good the loss arising to investors as a result of loss of shareholding. Such cost of insurance should be cast upon depository participant and not on the investor.

All stock exchanges must necessarily settle the trades through NSCCL (National Securities Clearing Corporation Ltd). Although Sebi has mandated a trade guarantee mechanism for all stock exchanges, many of them are yet to put in place the necessary mechanism.

Instead of duplicating the guarantee mechanism at every stock exchange, Sebi must instead decree that all trades taking place on all stock exchanges must be settled through NSCCL. In this regard, it is necessary to keep in mind that not all members may be in a position to meet the adequacy norms prescribed by NSCCL. Thus, we may have two kinds of members (a) Clearing members (b) Non-clearing members.

Clearing members are those members who having met the adequacy norms can directly settle the trades through NSCCL. Non-clearing members are those members who have not met the adequacy norms and therefore can settle it through clearing members.

We will in effect be preventing weak members from participating directly in clearing and settlement. Their risk will thus have been effectively transferred to clearing members who in turn will monitor the exposure and margins in their own interest.

Also, by so making the entire market safe, we will encourage more and more investors to participate in the market thereby enlarging market depth and liquidity. We will have therefore laid a foundation for a strong and vibrant stock market.

Make market-making compulsory for all listed scrips

: A phenomenon we witnessed in the post liberalisation era was companies vanishing from the market after making public issues. This happened because there was no responsibility on management to ensure liquidity for shares issued. If a company is coming out with a public issue for the first time, the company management should be obligated to provide market-making in its shares at least till such time they are regularly traded and quoted on the regional stock exchange. Also, in case of regularly traded scrips if trading does not take place for two settlements at a stretch on the regional bourse, the company management must be required to arrange market-making. Thus, investors will have continuous liquidity and would always have an exit option.

In the absence of liquidity and market-making, our investors are stuck with paper. An essential ingredient of this market is continuous liquidity so that investors who have invested in a particular scrip are able to exit from it and put their money in another company. This is the axis around which the entire market moves. If this axis becomes rusted the market is bound to come to a standstill. The present investor apathy can in large part be attributed to the fact that our investors have been bogged down under illiquid scrips and as a result they are not in a position to rotate their saving among various issues.

Make investor protection a shared responsibility of corporates and intermediaries

: The prevailing regulatory perception is that investor protection is solely the responsibility of broking intermediaries. However, the intermediary is only playing a value-addition role between corporates and investors. The ultimate beneficiary in the game is the corporate entity, which gets a potent source of risk capital for funding its ventures. Hence, the responsibility of investor protection must be shared by intermediaries and corporates.

The investor loss arising as a result of wrongful transfer of title to shares must be made good by the company instead of unwinding the transfers and throwing the shares in the secondary market. For this purpose every company which has made a public offer of its shares/debentures must be mandated to credit a part of issue proceeds to an insurance fund which would take care of such investor losses.

It is retail investors who support the market's vitality. Although foreign institutional investors have been allowed to operate in Indian stock markets, they can never be a stable source of funds. Foreign investors' perceptions are influenced by the risk of depreciation of Indian rupee arising from a higher inflation rate in the India than in US, Europe and Japan. On the other hand, domestic investors are not concerned with the exchange rate depreciation of the Indian rupee. Sometimes a higher inflation rate makes equity investments more attractive for domestic investors because stocks provide some degree of hedge against inflation. We must therefore take serious and concerted steps to bring retail investors back to the market.