The recent happenings in the stock market make this a good time to rethink the basic tenets of investing and to ponder the lessons of the latest developments. There are certain issues regarding the governance of the Indian stock market and the underlying investment scenario. Here, the dual perspective (of governance as well as investors’ profile) is imperative in the larger interest of the investing community, especially the small and retail investors who are always at the receiving end.
The first such issue relates to the way our government reacts when the market crashes like this. We have innumerable examples from the developed world, when various governments have announced immediate measures, such as rate cuts, infusing liquidity and so on to bolster the market’s confidence and to maintain a healthy investment scenario. In our case, the measures are usually limited to making generic statements about the economy.
In the developed world, governments announce measures such as rate cuts, infusing liquidity and so on…. In our case, measures are limited to generic statements about the economy
Another issue relates to the role of the regulator who, without creating a congenial atmosphere, permits use of deadly speculative weapons by a novice small investor. I am hinting at the gross misuse of F&Os by retail investors. F&Os is essentially a device to be used by organized players as a hedging mechanism. Retail investors have overused it for pure speculative purposes with the simple logic of playing beyond what the depth of their pockets permits. This is because the F&Os segment permits taking position three-to-five times more in a stock or an index than what can otherwise be done in the cash segment.
As the RBI and SEBI are fighting with the excessive flow of liquidity in the markets in the name of regulating these flows by putting curbs on PNs, a sort of contradiction has been created in the market. Doesn’t all this make it imperative for the regulator to rethink on permitting small investors to play in the F&Os segment?
Another interesting development deserving national debate is the judgment of the Supreme Court regarding the recently concluded IPO of Reliance Power Limited. The sweeping judgment may have very dangerous implications in future as even right thinking individuals/legal experts/NGOs may not be able to highlight the weaknesses/flaws concerning such issues. From the view of sound investment principles, the company has been prima facie engaged in certain questionable practices, which have been grossly overlooked. The regulator’s role in the entire exercise, clearing the issue despite a number of complaints pending with it, has also raised a big question mark.
Also, the practice of manipulating and publicizing grey market premium on forthcoming IPOs is a major issue that needs to be urgently addressed. An average investor hardly has any access to the detailed document such as DRHP filed by the company with the regulator. He has no option but to assess an IPO by the prevailing grey market premium – which is often, if not always, manipulated by certain operators. No justification whatsoever could be offered for such an astronomical premium assigned to the Reliance Power IPO that sucked huge liquidity from the markets. If the same fails to quote at such a price, the retail investors will be further betrayed and investors’ confidence in the market will get severe blows. This may have a cascading effect on the entire process of capital formation in the country, thereby affecting our proudly claimed growth rates of 9 to 10 per cent. The recent regulations relating to the mandatory rating of IPOs by SEBI also need to be debated in this context.
