NEVER mind the colossal loss of fortunes that investors suffered when the technology bubble burst, one in three Americans are still investing in stocks.

Twelve million people put their money in shares in the UK and even in India, retail or small investors in stocks aggregate to more than four million. There are no authentic figures of total number of investors in Pakistani stocks.

Mudassar Malik, an investment banker and director equities at BMA Capial Management forwards a pathetic figure of 70,000 retail investors, but says that the actual realistic estimate would put them at fewer than 40,000.

Stock brokers brush that aside as a too low assumption and place the investor numbers between 1 and 1.5 million, deriving the figure by adding together total number of shareholders listed in the annual reports of all 719 quoted companies taken together.

Since many shareholders would have stakes in more than one companies, that calculation is doubtless faulty. But for all that, conservative estimates by knowledgeable equity analysts indicate that retail investor base in Pakistani stocks couldn’t be more than 200,000.

That in a population of 140 million people comes to 0.1 per cent or one in a thousand.The current year has witnessed the stock market boom that has seen shares soar past their eight-year high and outperform the best of the world’s markets.

President Musharraf, in his national address this week, did not forget to mention the rise of the KSE index from 1100 in October 1999 to the current level of 2300 points (the President inadvertently referring to ‘points’ as ‘units’).

But because of low retail-investor base, the benefit of the stock market boom is not known to have unleashed a wave of prosperity among ordinary urban class that such increase in corporate earnings and their share values bring as a rule, in more developed world.

Institutional investors, stock brokers and those who have continued to hold unflinching faith in stocks are reaping the fruits and getting wealthier.

Most small savers have their household savings parked away, in the banks’ vaults. The banking system supports as many as 28.3 million accounts with aggregate deposits amounting to a whopping Rs 1,426 billion.

In addition, the total investor funds in various National Savings Schemes amount to Rs 844 billion. Even at its height of the bull run, the aggregate market capitalisation at the Karachi Stock Exchange is Rs 530 billion, which means that fixed income investment attract at least four times more funds than the equities. But the good news is that all of that may now be changing. The retail investors are flocking back to the market.

Even those who burnt their fingers in the great crash of 1994, are casting at least one eye on the stocks anew. For spare cash, there is nowhere to go. Post 9/11, dollar is an unpopular, low-yield avenue (and the proposed decision by US government to change its colour isn’t likely to make it more attractive).

Perhaps the greatest attraction of the stocks is the huge yield gap between fixed income securities and equity investments. With an average Return on Equity (ROE) as high as 25 per cent and trading at price-to-earnings (p/e) ratio of 6.37 and price/book value ratio of 1.35, Pakistani stocks offer the most attractive option. By contrast, bank interest rates are at their lowest with most banks offering as little as 4-4.5 per cent on deposits. With last week’s rate cut by the Central Bank, interest rates on deposits are set to come again under the knife. And in the last four years, the return on National Saving Schemes (NSS) have been slashed by as much as 50 per cent.

In the 18 months between January 1, 2001 to July 31, 2002, the rates of return on NSS have been reduced three times, by a collective 6 per cent (2; 1.5 and 2.5 per cent on six monthly basis). Now the profit rates are to be further cut in January 2003. On 10-year Defence Savings Certificates, the rate of return has come down to 11.7 per cent currently. On 3-year Special Saving Certificates, it has dropped to 9.95 per cent.

Retail investors in equity markets, have doubtless, suffered losses in the past. But for that, in most part, they have themselves to blame. Instead of research-based investing, small investors relied solely on rumours and followed the footsteps of big brokers, who seldom hesitated to waylaid the unwary, where even the smallest amount of profit could be made. The recent implementation of universally approved “undisclosed trading system” which the incumbent KSE managing director Moin M. Fudda did within a week of assuming office, has helped greatly to curb the herd mentality and save small investors from losses.

Stock brokers too have begun to realise that as their reputation for fairness and integrity climbs, so would the number of retail investors in stocks and therefore their commission. But, for all that, the KSE and the regulators really need to do more. They ought to enforce strict corporate governance— not only for the fewer big, blue chip companies that already have maintained various levels of corporate governance, either to protect group reputations or to comply with the directives of foreign parent companies— but for the majority of companies, mainly in the textile sector, where rules have continued to be flouted.

Naming and shaming by placing companies on ‘defaulters’ counter’ by the KSE has done little to force delinquent managements to fall in line. Persuading chronic loss-making companies to buy-back shares has resulted in yielding well-brokered repurchase prices of dead stock for small shareholders and that, instead of suspension and de-listing of companies without paying a paisa to the small shareholders, should be the future policy for company de-listings. NIT last week announced that it had earned fabulous income from striking bargain block deals with sponsors of some lame duck companies. Where such ‘premium priced’ block deals are entered into between institutions and sponsors, it should be made mandatory for sponsors to offer the same price to small shareholders in those companies.

Mutual and pension fund industry, considered to be the normal channel for investment by retail investors, is still in its infancy; albeit some of the new funds launched in recent times, hold promise of high returns and safety of small investors’ funds. Availability of Online trading and branch network throughout the country, should be vigorously pursued for it would attract more retail investors from smaller towns and cities and maybe, even the countryside. Protection of minority shareholders should be at the head of the Regulators’ agenda. The SECP’s demand for revamping of the recently enacted ‘Takeover Law’ so as to favour the small shareholders is a bold and laudable attempt to confront the bureaucracy.

Corporates should be persuaded to pay dividends and the payout warrants should be in the hands of investors in fewer than 45 days. Individual investor stake in most companies remains less than 10 per cent; companies ought to be barred from letting small investors’ shareholding drop below 20 per cent. Small shareholders’ Associations— perhaps led by institutional players and mutual funds— should be formed and encouraged.

The effective presence of such groupings at annual general meetings could strike terror in the hearts of managements that routinely trespass shareholders’ rights. And finally, the only section in the ‘Code of corporate governance’ that has been kept ‘voluntary’ is clause (i) regarding “representation of independent non-executive directors, including those representing minority interests, on the Board of Directors of listed companies”. Like the rest of the 45 clauses, the enforcement of this clause should also be made ‘mandatory’ on company managements, so as to add voice of small shareholders on the company boards.