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An act for good - Views on News from Equitymaster
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  • Nov 19, 2003

    An act for good

    Everytime the markets go beyond the 5,000 mark on the BSE-Sensex, intense selling pressure brings the markets down to the range of about 4,800. A part of this behaviour by investors could be attributed to the fact that they are wary of investing at higher levels, which could be basically for two reasons. One is on doubts whether the markets deserve a valuation higher than what it is currently trading at. However, to take care of this issue, there are already reports floating in the markets, which provide views on the economy ranging from 1 year to 40 years!

    However, the other part is what we are going to discuss here. It must be noted here that we do not intend to say that there are no other reasons for investors not continuing to invest at higher levels. Anyways, the other reason what we are talking about is the word, which every investor, all over the world, would dread even to think of - scam! Oh no, we are not going to talk about how scams take place or who are the ones behind the multi-crore siphoning of investors' hard-earned money. We have enough sources that cover them actively, round the clock. However, we will look here at an interesting development that is visible these days with respect to market movements and which are aimed at restoring and/or maintaining investor faith in capital markets.

    What we are talking about here is the statements issued, time and again, by the market regulators and the finance ministry about the health of the current stock market rally. It is not uncommon to see (these days) a senior finance ministry official state that the current rally is justified by the underlying fundamentals of the corporate sector and the economy as a whole. Also, we continue to see timely measures taken by market regulators like the imposition of margins on highly volatile stocks, which is aimed at not only curbing the volatility of the stock but also to keep at bay the existing speculators and also the probable speculators, who could get lured into investing such stocks with the intention of making a quick buck.

    Further, there were other steps taken in the interest of investors, which included imposing additional margins on derivatives positions and shifting of certain possible mischief creating stocks into the Z category. While the former step was taken, once again, to ensure that there was no speculative build up of positions in the Futures & Options segment, the latter measure was in a way an indication that investors need to be wary of trading in stocks put in the Z category. In fact, the stocks transferred to the Z category refreshed the memories of the tech-bubble, as many stocks belonged to the K-10 group of those times.

    Apart from the measures taken by the regulator at keeping the investor faith alive towards the capital markets, contribution from the stock exchanges cannot be ignored. The formation of the Investor Grievances Cell (IGC) is one such act by the exchanges. The IGC attends to various problems faced by investors in dealing with the two integral parts of the Capital Markets, Trading Members and Companies whose securities are traded on the Exchange. It is specially trained to identify the problems faced by the investor, and to find and execute a solution at the earliest. Among other measures, the introduction of circuit filters in the new avatar also helps to curb volatility in certain illiquid and lower category stocks.

    Further, the exchanges are quick to identify defaulting companies (i.e. companies who do not fulfill listing requirements or other requirements as put forward by the exchanges from time-to-time) and suspend trading in the same as a penalty. In fact, very recently, the BSE took a very drastic step of delisting nearly 100 companies for non-compliance of several norms. Undoubtedly, such a move would leave thousands of investors, practically all retail, in the lurch as they would be left with shares of companies, which are no longer traded on the exchange. However, we feel that this is the penalty every investor might have to pay (some time in their life) for investing in speculative and non-fundamental driven stocks, which are traded for purposes/reasons other than creating wealth for shareholders/investors. The move by the exchange was definitely an act for good of the investors.

    To sum it up, the finance ministry, the market regulator and the stock exchanges have all kept a smart eye on any untoward and strange developments that might take place in the garb of a bull rally. After all, a majority of the bull rallies in the past have ultimately turned out to be major scams. In fact, in conclusion, it wouldn't be wrong to say that they (the finance ministry, the market regulators and the stock exchanges), by their stiff measures, have in a way, deterred the retail investor from becoming a speculator.



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