The Spread of People's Capitalism

DHIRUBHAI AMBANI galvanized the Indian stock market by showing small investors that putting money in the market wasn't a mugs game. An investor who bought shares of Mr. Ambani's Reliance Industries Ltd., now India's largest private sector corporation, at its initial public offering (IPO) in 1977 and in subsequent offerings could have made a 528 percent return on that investment by today.

The government encouraged such equity investment. Until recently a government body ensured that public offerings were underpriced. Now companies can issue IPOs at any price. Yet small investors still take as much as 60 percent of the offerings.

Used to quick profits on IPOs, some investors have little patience with the long-term returns mutual funds promise. "The small investors don't yet see that the opportunities they had earlier are not gone," says U. R. Bhatt, managing director of Ind Fund Management Ltd. It manages 11 funds holding 8 billion rupees (US$254.8 million).

India has about 16 million direct shareholders. About 59 million investors have bought mutual funds. That's a small fraction of the 900-plus million population.

"Indians are still risk averse and see bank deposits as the most secure form of investment," says Basudeb Sen, general manager of Unit Trust of India, the nation's largest mutual-fund operator. The government hasn't allowed the Indian equivalent of the pension fund to invest in the stock market because it sees that as too risky.

However, a growing number of the middle class invests in tradable securities. Investments in shares, debentures, and mutual funds jumped from 3.9 percent of household savings in 1971 to 15.8 percent in 1994. Today, India has 23 stock exchanges and 7,000-plus firms listed on them. For the fiscal year ending in March, stock markets raised 200 billion rupees ($6.37 billion) against 39.54 billion rupees in fiscal 1991.

At present, Indian stock markets are bearish. They peaked in September 1994 when the Bombay Stock Exchange Sensitive Exchange reached 4,630 points. The index has since lost 1,300 because of political uncertainty - general elections are planned next year - a tight monetary policy, and a drop in foreign investment in the market.

India has about 7,000 brokers and 100,000 "subbrokers," but few can finance research for counseling clients, explains M.G. Damani, chairman of the stock exchange's Broker's Forum.

The government has been slow to pass legislation to modernize settlement procedures and buying and selling shares can be difficult and time consuming. A regulatory body has been set up to improve disclosure. But occasionally crises involving companies force the market to close.