Lack of central KYC hinders market participation

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I recently spent an idyllic week trekking with friends in the Dordogne region of southwest France. The area has a raw appeal with the Dordogne River cutting through imposing limestone cliffs. There are prehistoric caves with ancient art. Tiny villages dot the river bank.

Most nights we stayed in local hotels overlooking the river. We trekked around 15 kilometres daily from one hotel to another through the French countryside. The Tour Organiser’s (TO) mobile app (MacsAdventure) kept us on track, guiding us through barely visible turns, and notifying us when we were off course by even 50 metres. The elevation map, updated minute by minute, showed us the difficulty we could expect. Local taxis transferred our luggage from one hotel to another, allowing us to enjoy the trek with just a small day pack.

The TO provided a comprehensive service. Their app listed several treks in Europe and the UK, many of which were custom-made. The app allowed us to choose the Dordogne trek based on our parameters: a slow-paced, comfortable walking tour lasting six to seven days in April or May within a reasonable budget.

Reflecting on the trip, I realised how much the basic ecosystem had contributed to our enjoyment. We faced no problems with the hotels or the taxi operators, who were all licensed. Even in the smallest village, there were hotels with basic facilities. The taxis arrived on time to pick up our luggage. We could trust them to transport it unaccompanied to the next hotel.  The whole countryside was geo-marked. Even the smallest establishments were on the app.

The roads were never more than a kilometre away. Once, tired midway through the trek, we called a taxi to take us to the hotel. This infrastructure allows the TO to provide a comprehensive package while ensuring trekkers’ comfort.

I describe my trekking holiday here in such detail for a reason. Let’s compare it with the investment journey of the Indian retail investor. The ecosystem has evolved substantially. Mutual funds are now well-regulated, offering investments in asset classes like stocks, bonds, and gold. The same ecosystem also makes the risky Futures and Options (F&O) market accessible to retail investors.

Many retail investors have flocked to the suitable mutual fund option (akin to the slow-paced, comfortable walking tour). But many more are opting for the risky F&O option (akin to risky grade-five adventures in our trekking analogy). Data from the Securities and Exchange Board of India (Sebi) demonstrate that over 90 per cent of F&O investors lose money. Yet, the gold rush continues, an issue that needs to be resolved at the ecosystem level.

The biggest issue is the lack of a central Know Your Customer (KYC) system (akin to geo-marking the countryside) that will enable investors to transition smoothly to investments once they have opened bank accounts. Without this, the number of investors in the securities market will always be limited. Twenty crore individuals play on online gaming platforms with real money, but only half as many have demat accounts, and less than a quarter invest in mutual funds.

Another issue is the limited popularity of comprehensive financial planning services provided by Sebi-registered investment advisers. In the trekking example, the TO app, riding on top of an excellent ecosystem, allowed us to trek comfortably in a country where the locals didn’t speak English. Similarly, an enabling ecosystem where financial planning is popular will allow investors to feel comfortable while making suitable investments based on their goals, risk-taking abilities, and resources.

Truth be told, Indian retail investors have already proved their mettle by playing a significant role in the country’s capital formation. Monthly investment in mutual funds through Systematic Investment Plans (SIPs) exceeds Rs 20,000 crore. Imagine the possibilities if the ecosystem resolves the vexatious central KYC issue.

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X (formerly Twitter): @harshroongta

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of or the Business Standard newspaper

Mandatory disclosure by SEBI

(A slightly different version of this column first appeared in the Business Standard on June 03, 2024)

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