Technical Analysis

Call auction for illiquid stocks has hurt investors

Lokeshwarri S. K. | Updated on November 23, 2017 Published on October 12, 2013

Siddharth Shah, Chairman, BSE Brokers' Forum

The biggest challenge before the broking industry is that retail investors are losing faith in the market. — Siddharth Shah, Chairman,  BSE Brokers' Forum

We run a quick check on the mood in the market with Siddharth Shah, Chairman, BSE Brokers' Forum. Excerpts from the interview:

What are the main challenges before the Indian broking industry now?

The biggest challenge before the broking industry is that the retail investors are losing faith in the market Of the total population of 120 crore, the number of registered investors is only 1.50 crore. Issues like the NSEL scam has dented the sentiment badly. Indians have investment allocation of 44 per cent in fixed deposit, 29 per cent in life insurance, 22 per cent in postal schemes. Investments in the equity markets is only 3 per cent while the global average is around 35 per cent. The other problem is that broking industry is highly fragmented with more than 1,400 brokers registered and 7,7000 sub-brokers.

Competitive brokerages charged by brokers has killed the industry. The cost factor in the broking industry is very high due to high manpower and compliance cost. Margins are, however, coming down since brokerages declined more than 90 per cent due to cut-throat competition.

What are retail investors doing these days - buying, selling or sitting on fence?

The retail investor has simply run out of the market. Whenever there is sudden rise in stock prices, there has been selling.

Retail investors are waiting to exit from the markets.

They are badly trapped in sectors such as real estate or infrastructure, where stocks have been badly battered.

Even though the index is showing 20,000 levels, this is not reflected in the stock prices

What in your opinion should the Government do to increase retail investor interest in the equity market?

The Government launched the Rajiv Gandhi Equity Savings Schemes (RGESS) which did not pick up.

The scheme is good but has to be modified with certain changes like all existing and new investors should be covered under the scheme, the entire amount of Rs 50,000 invested should be allowed as income-tax deduction and the lock-in period should be reduced from three years to one.

These changes would give retail investors the motivation to be part of the market and they would invest for long- term.

Concepts like the safety net should be made mandatory for all IPOs. Merchant Bankers who allow fancy valuations should be made answerable.

Was moving over 2000 stocks to call auction a good idea? How is the trading in these stocks?

The call auction method has killed the entire market and it is the retail investors who have suffered the most. These 2000 stocks were in the portfolios of large number of retail investors.

In the call auction method, the clients are required to put the trade six times in a day if the trade is not executed. This is really frustrating for the brokers as well as the clients.

Also illiquidity is not a function of the fundamental of the company so why should the company be punished? The illiquidity of the stock is the function of the demand and supply from market participants.

The management of the company should not be penalised.

But once the company is in call auction, the valuation of the company suffers and it also makes the company unattractive from the institutional investor’s perspective.

How has the NSEL issue affected the stock broking industry?

Investors along with brokers had taken exposure to the product since the product had been launched from the platform of the exchange.

The failure of the NSEL exchange has created a negative impression in the minds of the foreign investors.

The Settlement Guarantee Fund, which is the backbone of any exchange, failed in its obligation.

The investors are now apprehensive to deal with the other exchanges also. The Government needs to ensure that the investors’ money is quickly paid back and that the guilty are punished. The failure of the Spot Exchange has created lot of questions about the sanctity of the settlement process.

Published on October 12, 2013
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