Sebi pushes for reforms to quell information asymmetry for small investors

Measures like e-KYC brought in investors even in Covid times

A record number of retail investors are entering the Indian stock markets, possibly convinced that the regulator, the Securities and Exchange Board of India (Sebi), is on top of the game.

The entry has happened as the markets have soared by 130 per cent by the end of September 2021 in a span of 18 months since the lockdown of March 2020. 

Some of those retail investors would have noticed that Sebi has gone aggressive in the rules it has brought in for the exchanges and the investors. One of those is the expansion of the scope of rewards for information on insider trading, the other is the mandating of mutual fund employees to have skin in the game. It has set up an expert group to suggest changes to public issues so that the sway of institutional investors in setting the price is kept in check and retail investors are offered a larger band to choose from.

There are others but all of them are meant to assure the retail investors about steps to curb a peculiar bane of stock markets, information asymmetry. As chairman Ajay Tyagi and most of his board members demit office by the end of this calendar year or early next year, the response from the small investors should please them. Retail investors, essentially those with shareholding of up to Rs 2 lakh in a listed company, increased their exposure to NSE-listed companies to 7.18 per cent in June from 6.74 per cent a year earlier, as per Prime Database. That means a staggering lifetime high of Rs 16.18 trillion holding in companies, up from Rs 13.94 trillion sequentially.

Yet, this can have a flip side, of scaring away the larger investors about too intrusive a regulator. It has not happened so far, but the rumblings have begun, especially about the skin in the game order. The other concern is the persistently large number of Sebi orders which are stayed or rejected by the Securities Appellate Tribunal. 

Sebi officials say they have strong reasons for the flurry of new rules. The government is keen to draw in foreign retail investors to the Indian markets. Predictability of rules is most important in this context and so is the ability of the regulator to impose penalties.  

One of the standing aim of the market regulator is to make it attractive enough for the so called common man to invest in. For retail investors this means acknowledging their most common grouse about the markets, that of the risk of insider trading.

In 2015, Sebi had defined insiders as those “who are essentially persons in possession of  unpublished price sensitive information”. The Sebi (Prohibition Of Insider Trading) Regulations made these insiders responsible for handling such information “with care and to deal with the information with  them when transacting their business strictly on a need-to-know basis”. Since then Sebi has had to revise the regulations eight times including the latest one. 2021 has already seen two amendments. It is the most amended regulation in the Sebi arsenal.

Every day the two stock market exchanges NSE and BSE publish data on insider trading. But their numbers are too massive for anyone without an additional clue to make sense. For instance in just four days this week from 26th to 29th September, there were 201 insider trades reported to the two exchanges.  

Despite the wealth of data in the disclosures it is impossible to connect them with any trend unless an outsider is aware of market developments. 

In the US, there are services which use algorithms to “sort through the torrent of SEC filings, filter out what it calls “uninformed” transactions—that is, those that don’t seem to have predictive value” to extract a list of top insiders, as per Bloomberg.

This sort of service about Indian markets is not available to the investors in India. One of the alternatives the retail investors explore is therefore listening to stock market gurus.

Despite the crib, the authorities believe Sebi has done well. Anand Mohan Bajaj, additional secretary (financial markets) in the department of economic affairs said, ”the financial markets in India have performed well beyond the expectations of market participants. Continuous functioning of financial markets even during Covid is a testimony of technology and resilience”. He made the remarks at the 12th CII Financial Markets Summit this month. 

A little help: 

Retail entry and the consequent broad basing of investor classes away from FPIs has got helped by two more changes. Sebi last year allowed the exchanges to e-know your customers. The move allowed a large number of investors to complete their paperwork to join markets without having to step out from homes. Simultaneously as companies went in for online shareholder meetings, investor services were able to gather eyeballs to pose stiff questions for management. Each such event the latest being IDFC voting has built more layers of confidence. 

Another reason for the friendly buzz is the amount of money raised in public issues by start ups in this calendar year. In August it crossed $9 billion already surpassing the totals of the past three years. This has sharply expanded the universe of good scrips in the market. This has allowed almost everyone to ignore scraps like the one between Sebi and the SAT on the capital raising plan by the housing business subsidiary of Punjab National Bank. In May this year while the company wanted to raise Rs 4000 crore by allotting preference shares and warrants to investors led by US-based private equity player Carlyle Group, Sebi asked the company based on complaints by a minority group of shareholders not to go ahead with the plan until a valuation of its shares is done by an independent registered valuer.

SAT overruled Sebi and the latter has appealed the order in the Supreme Court.  

For the government, however, the test of how well Sebi has performed is going to come later this financial year. India’s largest IPO, that of LIC will happen and so will the sale of BPCL from the government. Both these are mega deals and will bring the Indian market to the attention of investors across the globe. For the Sebi board this shall be the crucial test to pass and reckon 2021 as the year when Indian stock markets have shown their mettle as sound investment platforms.