Sucheta Dalal has been the perennial activist (and perhaps a lone one as well) for transparency in stock markets and increase participation of retail investor.
In this piece she laments that despite surge in middle class population, the small investor base has remained unchanged since 20 years.
At Moneylife, we are of the firm view that investment in good stocks for the long term (7-10 years) is the only way that people can hope to beat inflation and grow their savings to last them through a couple of decades of life after retirement. Except ‘government servants’, who are on an inflation-adjusted salary and pensions, all of us have to worry about how much to save, to take care of galloping healthcare costs, cost of services, food and education.
But investors dread the capital market and with good reason too. Moneylifehas repeatedly pointed out, over the past 10 years, that India’s investor population has shrunk in the 25 years since we embarked on economic liberalisation. People are scared about investing in the market after being scammed by market manipulation, inadequate disclosures, dubious management practices and initial public offerings (IPOs) at inflated prices that seldom leave room for returns.
She blames this on SEBI, the capital market regualtor. She says that the focus has been on getting fines from the culprits whereas investors are interested in getting their money back:
Worse, complaints to the regulator are a waste of time and resources, since policy-makers have yet to grasp the fact that investors are more concerned about getting their money back than seeing the culprits punished.
Yes, 25 years after the Securities & Exchange Board of India (SEBI) was set up as an independent regulator and its powers expanded comprehensively to make it one of India’s most powerful regulators, investor confidence in the capital market remains dishearteningly low. SEBI has never publicly acknowledged this issue, let alone address it. Hence, it was refreshing to read that Ashish Chauhan, CEO of the Bombay Stock Exchange (BSE), said recently that India’s investor population “has reduced in the last 20 years, despite many technological advances and there is a need to introspect as to what led to the fall.” Mr Chauhan estimates that India has 270 million investors; while the Indian middle-class has grown 10 times in the past two decades, the investor population has remained the same. Our estimate of the investor population is considerably lower. But acknowledging a problem is the first step towards addressing it. It is now important that the regulator also admits that there is a serious issue and works on fixing it.
Unfortunately, SEBI is more focused on expanding its regulatory remit and increasing its punitive powers, rather than on redress of investor grievances. Although it is already one of the most powerful securities regulators in the world, SEBI is lobbying for powers to conduct search and seizure operations without getting a court warrant (as required under the regulations notified in September 2015). A court warrant is a basic judicial oversight prevalent in most developed nations to prevent flagrant misuse of powers by regulators; however, SEBI argues that local courts do not understand markets and are quick to grant stay orders to companies or individuals against SEBI action.
She points to several cases where SEBI has not acted and sums it up as a case of negligence:
A common thread that runs through the examples cited above is that none of them benefits or relates to the ordinary investor who may have lost his shirt due to stock price manipulation, cheating by intermediaries, insider trading, poor accounting or dodgy disclosures. Whether SEBI collects a fat payment under consent proceedings or levies a hefty fine on a wrongdoer, who has been cheated by an intermediary or wrong corporate accounts and disclosures, there is no specific relief for the investor.
SEBI’s policies must be framed to ensure grievance resolution rather than imposing penalties that only support its vast and expanding bureaucracy. Take the case of IPOs whose prices head south on listing. The intermediaries are directly responsible for disclosures and omissions in the prospectus. Investment bankers or auditors have almost never faced the music, so why will they mend their ways and ensure fair pricing? Until regulatory action is recast with investor interests in mind, only a few investors, with access to serious financial analysis or knowledge of trading, will invest in equities. All others will stay away.
I am not too sure whether the regulator alone can be blamed here. Infact by asking the regulator to get into things like IPO pricing etc. we are again pushing for old times when regulator looked at pricing of IPO issues. This was something we escaped from and is one of the hallmarks of economic liberalisation since 1991.
The bigger deal is why after all these years, the financial market industry is still interested in short term gains over long term gains. We have continuous ads from firms and experts that plan long term and so on. But they themselves continue to look at short-term gains themseleves by getting into all kinds of manipulations.
Anyone who has been part of IPO exercise knows much of it is farce. It is selling to the institutional investors by promising them first day/first week returns. Seeing the big guys come in, the retail investors start buying in as well. Eventually IPO is subscribed. With some initial hype the first day returns are booked and all is forgotten.
Financial market investing is largely about information asymmetry. Even those who have most of information make mistakes and lose money. A much bigger deal is for people to figure that this market is risky and we should invest with caution. There are umpteen cases of financial advisers encouraging people to invest without telling them of caution word.
By asking the regulator to get into a lot of things, we will only make it messier. The financial industry should play a larger role. The idea should be to build yachts for others and not for oneself alone. Sadly this has been the case ever since equity markets started not just in India but globally too..