Asia's richest banker and Kotak Mahindra Bank founder Uday Kotak on Friday said that India is transforming from a nation of savers to investors.

The tussle between the saver, borrower and issuer investor model is underway, the veteran banker who hung up his boots as the managing director and CEO of Kotak Mahindra Bank in September says in a post on X.

"In the early 80s, the Indian saver had low confidence in financial assets versus gold and land. Slowly the saver moved some parts to bank deposits, UTI and LIC (Life Insurance Corporation). Even in the 90s, investing in equities was considered 'speculative'. Hence companies looking for capital went to the foreign institutional investor (FII)," says Kotak.

As a result, FIIs saw potential and bought into companies while the Indian saver stayed away. Companies raised capital through the less-known Luxembourg Stock Exchange while India’s capital market was being exported, he says.

Kotak says this phenomenon was highlighted to market regulator SEBI (Securities and Exchange Board of India). "That began the private placement market (QIP) in the early 2000s. Hence FIIs could also buy on Indian markets," he says.

The Indian saver's interest in markets improved after the global financial crisis, according to Kotak. "That saver is now savouring the joys of investing. Mutual fund platforms, cash equities and derivatives markets, insurance funds, global private equity in India, other platforms like AIFs, lower tax regime for equity, have all converted a saver to an investor," he says.

Kotak, however, cautions that many investors who joined post Covid-19 have mainly seen upside in the market. "While the situation is not comparable at present, we need to keep Japan of the 80s at the back of our mind. Its Nikkei Index peak was 1989. 34 years later with near zero interest rates, the Nikkei is still below its 1989 peak. We must avoid bubbles through policy, regulation, education, and supply of quality paper," he says, adding that companies should raise equity at lower cost of capital for productive use.

"While we must avoid tax arbitrage in debt, unless debt markets grow it will be a one legged race. The current gap on highest marginal tax rate between debt and equity of 39% and 10% is perhaps too wide," he suggests.

Kotak argues that double taxation on dividends needs a relook. "A shareholder is like a partner. There is no additional tax when money is moved from the partnership to the partners capital account. Same principle applies to shareholders," he says.

The veteran banker warns that low-cost leverage through derivatives can distort financial markets and it needs attention.

Kotak urges the large corporate sector to meaningfully move to capital markets—debt and equity—and away from banks. "Banks will become distributors of corporate debt rather than storage houses. They will need to penetrate mid-sized corporates, MSMEs and consumers," he says.

Two areas that need urgent focus for India's aspiration are acquisition financing and streamlining of the Insolvency and Bankruptcy Code (IBC) and the National Company Law Tribunal (NCLT) process, says Kotak.

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India transforming from a nation of savers to investors: Uday Kotak