Poor feeding PAPA with silver spoon; Dalal Street Situation

This article is based on Shankar Sharma is Founder, GQuant Investech explains how India’s stock market system and retail investors have been misused, with foreign institutional investors (FIIs) taking advantage of the situation. In simple terms, FIIs are big international investors who bring dollars into the Indian stock market. But instead of strengthening the market in the long run, they are using it as a way to make easy profits and exit without any difficulty. Here’s how it works, broken down step by step:

1990s and the Fear of FII Exit

In the late 1990s, people were scared of what would happen if FIIs decided to sell all their investments and leave India. At that time, many believed that if FIIs pulled out, India would face a financial crisis like the one in 1991. Dollars flowing out of India felt like a doomsday scenario.

But Shankar Sharma, the author of this analysis, had a very different view. He compared the idea of dollars leaving India to pigs flying over Marine Drive — meaning it was so unrealistic and absurd that it was almost impossible. According to him, FIIs could not sell their shares and leave easily because of two main reasons:

1. Market Crash Without Buyers: If FIIs tried to sell large amounts of shares, they would struggle to find buyers in India, as the country lacked the purchasing power at that time.
2. Price Collapse: When FIIs sell shares in bulk, the prices of those shares drop significantly, leading to massive losses for them before they can even sell a small portion of their holdings. This creates a situation where FIIs are stuck — they can’t exit without suffering heavy losses.

He used an example: If an FII has $1 billion worth of shares in a company and tries to sell, the price would collapse by 20% after selling just $1 million worth. Selling more would make things worse, causing even bigger losses. This is why FIIs couldn’t leave the Indian stock market easily.

The Indian Stock Market as “Hotel California”

Shankar Sharma called the Indian stock market the “Perfect Financial Hotel California,” where FIIs could check in anytime, but they could never leave. Whenever FIIs tried to exit, they would face significant losses, so they had no choice but to stay.

The Rise of Indian Retail Investors

Fast forward to the present, and the situation has changed completely. In recent years, a new generation of Indian retail investors has emerged. These investors are ordinary people who invest in stocks, often influenced by financial media, mutual funds, and social media platforms. But there’s a big problem: most of these investors are not well-educated about how the stock market works. They are being brainwashed with overly optimistic narratives, like:

• “Stock prices always go up in India.”
• “Investing in Indian equities is always a good idea.”

This has created a culture where Indian retail investors are making irrational investment decisions:

• They are blindly buying stocks when FIIs are selling.
• They are relying on poor financial advice from YouTube videos or TV channels.
• They are overconfident and ignoring the risks of the market.

How FIIs Are Benefiting

This new behavior of retail investors has given FIIs an easy way out of the Indian stock market. Now, whenever FIIs want to sell their shares, Indian retail investors step in and buy them, even if the stocks are overpriced or risky. Earlier, FIIs couldn’t sell without causing a market crash, but now, Indian investors absorb all the selling pressure.

This creates a situation where FIIs are selling their investments at high prices, making huge profits, while Indian retail investors are left holding overpriced and potentially worthless stocks.

The result? A massive transfer of wealth from poor Indian investors to rich foreign investors.

Shankar Sharma sarcastically calls this process, “Dharavi ne Manhattan ko ameer banaya,” meaning that the poor people of India (like those in Dharavi) are essentially making rich people in Manhattan (New York) even richer. This is the opposite of how things should work.

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Lack of Financial Education

One of the biggest issues highlighted in this article is the lack of proper financial education in India. Retail investors are not taught to analyze risks or think critically about their investments. Instead, they are fed simplified and biased narratives, like:

• “Indian equities have given 15% returns over the last 30-40 years,” without factoring in market volatility.
• “Keep investing through SIPs (Systematic Investment Plans), and you will always make money.”

The truth, however, is very different:

• During the 10 years before 2019, dollar returns from Indian equities were zero.
• Between 2014 and 2020, India’s GDP growth was weak, and stock market returns barely beat fixed deposit (FD) returns.

But these facts are hidden from the public. The financial media and mutual fund industry only highlight success stories and outlier events, like how someone who invested in Titan or Asian Paints years ago made huge profits. This creates a false sense of security and encourages reckless investing.

Current Indian Market Scenario

In 2023-24, the Indian stock market is seeing a significant rise in retail participation, with over 11 crore active Demat accounts registered. This surge in retail investors has coincided with FIIs once again offloading their holdings. For example:

• Midcap and Smallcap Stocks: These segments have seen a massive rally, with retail investors pouring money in, but FIIs are quietly exiting.
• Mutual Fund Inflows: Monthly SIP contributions reached an all-time high of ₹15,000 crore in December 2023, showing the growing confidence of retail investors despite concerns about overvaluation.
• High Valuations: The Nifty 50 and Sensex are trading at Price-to-Earnings (P/E) ratios significantly higher than global benchmarks like the S&P 500. This makes Indian equities among the most expensive in the world, increasing the risk of a correction.

However, this optimism is not backed by economic fundamentals:

• Slowdown in GDP Growth: India’s GDP growth rate has moderated to around 6%, and export growth has been weak due to global economic uncertainty.
• Corporate Earnings Lag: Many companies, particularly in the IT and export sectors, have shown stagnant or declining earnings, creating a disconnect between stock prices and fundamentals.
• FII Selling: In 2023, FIIs sold over $15 billion worth of Indian equities, even as retail investors continued to buy aggressively.

This trend shows that Indian retail investors are acting as shock absorbers, taking on risks that FIIs are offloading. This could lead to significant losses for small investors if the market corrects sharply.

The Risk of a Macroeconomic Disaster

This culture of blind investing has serious consequences for India’s economy:

1. Easy FII Exits: FIIs are now able to exit the Indian market effortlessly, taking billions of dollars with them, while Indian investors absorb the losses.
2. Overvalued Markets: Retail investors keep buying, pushing stock prices to unsustainable levels, which could lead to a market crash.
3. Wealth Inequality: A huge amount of money is flowing from ordinary Indians to rich foreign investors and funds.

The Core Problem

Investing is not about bravery or blindly buying stocks; it’s about smart risk management and protecting your capital. But in India, this basic principle is being ignored. The financial industry has created millions of naive investors who:

• Don’t understand the difference between acceptable and unacceptable risks.
• Continue to buy overpriced stocks, thinking the market will always go up.
• Don’t realize that they are being exploited by FIIs and the financial system.

Shankar Sharma warns that this culture of irrational investing could lead to a major economic disaster. The system is flawed, and unless retail investors are properly educated about risks and market realities, they will continue to suffer while FIIs and big funds benefit.

Edited and Designed by Minhaj (minhaj@thg-thenextgen.com)