Is a boom in retail shareholder activism imminent in India?

Source :Sify
Last Updated: Thu, Jun 3rd, 2021, 18:26:03hrs
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Hertz

On May 22, 2020, Hertz – the world's first car rental company begun during the Spanish Flu pandemic in 1918 – filed for Chapter 11 bankruptcy in the US.

Lockdowns caused the business to collapse and from a high of $20 in February, Hertz's share price plummeted to $0.56 on May 26. But it rose again exponentially to reach $5.53 on June 10. This was unprecedented for any bankrupt company.  

Turns out the ones driving up prices by buying stocks – against conventional wisdom – was not Wall Street but individual, retail investors. Their street logic was simple: US was gradually opening up and in the pandemic, people would want to drive cars rather than use public transport. This meant car rentals and second-hand car prices - if Hertz had to sell inventory - would go up.

Shares of Hertz were delisted off the New York Stock Exchange but still exchange ownership Over The Counter (OTC).



 

 
 
 

In January 2021 there was another Wall Street and retail investor confrontation. The big guys betted against brick-and-mortar videogame retailer GameStop but Reddit posts and YouTube videos by Keith Gill galvanized hundreds of thousands of small investors to band together and defeat Wall Street short-sellers.

Last week, activist investors – on the single day of May 26th and on opposite sides of the Atlantic – made two giant oil corporations; ExxonMobil and Chevron - accept Climate Change and bow to their wish to go greener.

Technology is turning the financial world upside down. Cryptocurrencies, NFTs, China's digital Yuan etc. threaten to destabilize the existing global financial order. Retail stock market investors have used tech to fight powerful Wall Street bullies.

India could be at the cusp of the same. Last year an unprecedented 10 million i.e. a crore new demat accounts were opened by individuals with cash to spare. If we assume each put in a lakh, it means a trillion rupees or about 0.5% of India's GDP, was injected into the stock market, ironically, at a time when India battles a pandemic and is thus seeing negative GDP growth.

Also Read: BSE Chief reveals landmark surge in accounts opened on BSE

In life, if knowledge is power, information is money in the stock market. The power of information on fingertips i.e. mobile is driving this retail boom.

Stockbroking is a data-churning job. Before the digital age, one had to buy a company's prospectus, audit, and financial reports and go through them with a toothcomb. But today let's say you're interested in an IPO. All you got to do to know all there is to know about the company, is type its name on a search engine. There are dedicated financial portals that not only scour every scrap of info on every company but masticate it into analysis.

Actual investing is easier still. Just click on a few links on your bank's portal, or on apps like Zerodha, Religare Dynami, ShareKhan etc. and voila, you become a shareholder within seconds.  

Entertainment is also fuelling the rush. In early October 2020, Hansal Mehta's brilliant series Scam 1992 released on SonyLIV and quickly attained cult status. As I wrote earlier, not only does it tell a fascinating story, it is also a crash course into the stock market. I know at least one person who waded into shares after watching the series. I'm sure there are thousands more like him.

Is it any surprise that almost every IPO since the pandemic, including those with dicey numbers and litigations like Macrotech or restaurant chain Barbeque Nation that has little scope to profit in a lockdown, have reaped a windfall for investors with soaring stock prices?  

Ask any seasoned investor and she'll tell you that people investing without enough knowledge of the market will create bubbles whose bursting would singe investors.

The problem is that most new investors don't understand the difference between 'trading' and 'investing'. They're lured by the same greed aka the ability to make a quick buck via trading, that landed Harshad Mehta in prison.  

500 years ago when the Dutch East India company was refused a loan by banks, they came up with the idea of going directly to individual investors and offer them a 'share' in the company. They unwittingly invented 'shares' and thus the stock market and became what is believed to be the largest company to ever have existed in recorded history.

*The United Dutch East India Company, established 1602, is the world's first stock exchange.

An image of a bond issued by the United Dutch East India company showcasing the first of its kind investment for general public.

Not much has changed in the last 500 years, at least not the basics. It is still about 'investing'-- you put your money where your mouth is to lend cash to promising companies, and by staying invested for months or years. By voicing your opinions during shareholder meetings, you help them grow. This behaviour has contributed not only to global growth, but also advanced science and technology.

Often these ideas are subverted by the big players of the financial markets who manipulate the differences between 'trading' and  'investing'. They've made the financial system unduly complex with unethical ideas like short selling i.e. investing in the failure of a company, which two hedge funds - Melvin Capital and Citadel – were doing to GameStop when retail investors took them on causing them a total loss of $12.5 billion in January. Where the Occupy Wall Street movement failed, retail investors are succeeding by banding together.  

Thus, the influx of loose change by millions of retail investors creates a balance against the bullying of the big boys. And since every investor is an owner, she can make her disagreement heard by flagging issues not in consonance with individual, national or global values, just like activist investors did to ExxonMobil and Chevron on May 26th.  

In India, the Companies Act 2013 and regulations like the Proxy Advisory Firms regulated by Securities and Exchange Board of India (Research Analysts) Regulations 2014, have contributed to shareholder activism. Greater emphasis on corporate governance has also helped the cause of investor activism.

Add to this mix 10 million new stock market investors and you know that like in the old animation film where a shoal of small fish band together to fight a big one, some major consolidation of retail investors could lead to major upheaval in the Indian financial sector.

Hertz saw hope in the action of retail investors and decided to fight to turn things around. They have recently initiated proceedings to exit Chapter 11 bankruptcy. This fairy tale had the perfect ending -- not only does Hertz continue to exist but many small-time investors have reaped huge windfall gains for their investment.

With tens of millions of retail investors, India's Hertz and GameStop moments might just be on the horizon.

Satyen K Bordoloi is a scriptwriter, journalist based in Mumbai. His written words have appeared in many Indian and foreign publications.

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