Market regulation. Time for caution

The Indian stock market may have been a little subdued this week, but it has been in a raging rally this year, attracting retail investors to the bourses by droves. SEBI Chairman Ajay Tyagi’s recent warning about possible headwinds to the rally is timely and needs to be heeded. The regulator should take steps to ensure that there are no trading malpractices in this period and that retail investors are apprised of the risks they are taking by investing in an overheated market. The ongoing bull market has made the Indian benchmarks among the best performing this year, with gains of over 22 per cent. The enthusiasm being shown by investors in Indian equities is at odds with the ground realities. Corporate earnings which benefited from the commodity rally and base effect last fiscal year, will now face the uncertainty around the future course of the pandemic, sustainability of demand revival and ability of the government to spend enough to pull the economy out of the woods. Stock valuations are at record highs due to investor expectations far outpacing business growth. What’s more, investors appear oblivious about the risks to the rally posed by the impending monetary tightening by global central banks including the US Federal Reserve.

The problem has been compounded this time due to the dominance of retail investors in the market. With the pandemic leading to many people working from home, the number of investors trading online has been growing by leaps and bounds since March 2020. An average of 26 lakh demat accounts were opened every month in 2020-21, up from monthly average of 4 lakh accounts in 2019-20. Average share of individual investors in daily cash market turnover has increased from 39 per cent in FY20 to 45 per cent now. Holding of retail investors in total market cap had also increased to 9.3 per cent by June 2021. While higher retail participation is good as it imparts depth to the market and helps counter the volatility caused by sudden FPI outflows, this trend is worrisome on two counts. One, most of them are first-time investors in equity and have seen only the one-sided bull market since last March. They are unaware of the risk of capital loss that exists while investing in over-stretched markets. Two, many of them seem to be speculating in stock markets instead of investing for the long-term. This is evident from the rally in small-cap stocks with poor fundamentals and increasing retail volume in derivatives.

The regulator needs to monitor the situation closely to increase trading margins, especially in the more speculative counters, if volatility increases. Surveillance also needs to be increased to spot and check price manipulation, especially in small-cap stocks, where more retail investors are active. It’s probably time to run a campaign, in print, digital and electronic media, warning investors about the market risks and the need to disregard unsolicited market advice. The investor awareness programmes run by SEBI, exchanges and other organisations can also be increased to reach more investors.

COMMENT NOW