Regulatory Focus Side-Stepping Retail Investor: Study

Price Waterhouse has prepared a report for the Securities and Exchange Board of India (Sebi), calling on the market regulator to decide on whether the presence of the retail investor and the market intermediary is required at the Indian capital markets.

The report has been prepared under the financial institutions reforms and expansion (FIRE) project under USAID.

The report states that the Indian markets is in a process of change which is similar to the US markets during 1970-76.

While the focus has clearly been on retail investors, there is still no clarity on who is the actual investor and which needs to be catered to.

 

The report labeled Indias choice: Should the securities market service retail investors? - categorically states that in recent years, one group of stakeholders, the retail part of the securities market has not been adequately represented.

The report has been prepared by Tom Keyes, capital markets consultant and Paritosh Sharma, securities markets specialist at Price Waterhouse.

Price Waterhouse officials have had a detailed round of talks with senior Sebi representatives from all key departments on the issues raised in the report.

On the one hand the regulator has offered the entry option to the retail investor through the primary market. However, there is no efficient mechanism in place to offer an exit route.

If you want the retail investor in the equity market then it must be understood that the intermediary who brings him to the market is a sub-broker and not the main broker. If the whole quest is to protect this retail investor, then it is a must to bring the entire sub-broking business under the regulatory ambit, Keyes said.

The report gains significance in view of the several systemic problems existing in the Indian markets linked to the recent CRB scam, sub-brokers registration problem, bad paper floating in the markets and the continuing lacklustre trading in B1 and B2 stocks, despite the current upswing at the markets.

The existing rules, regulations and market systems have accepted or created an irregular market for retail investors.

Further investors without legal access to the markets will now be serviced by the irregular market, the share shops and spot dealers, the report states.

The current focus is entirely institution-oriented which is not servicing the retail investor, the report adds.

The report provides examples of markets in Germany, Switzerland and Italy, which have adopted different regulatory system to suit their market systems.

The current focus on existing institutions is not servicing retail investors. At this moment, it does not appear to be assisting stock exchanges either. India does not have a delivery market. Other than a few institutional trades that are backed by delivery, the entire market volume belongs to speculators and arbitrageurs, the report says.

According to the firm,the Securities and Exchange Board of India on several occasions has said that mutual funds are the appropriate investment vehicle for the small investors.

If India chooses to limit access to individual securities, and to promote funds as the government choice, some distribution pattern must be developed.

The current application system does not provide AMCs with a reliable distribution system, nor does it protect investors from fraudulent distribution practices, the report added.

If a capital market structure for the institutional and high net worth individual is truly the choice, then the choice must be explicit and congruent. In recent times, the words and actions have not been congruent.

Existing rules, regulations and market systems have accepted or created an irregular market for retail investors

Define clearly which investor Sebi intends to protect

The current distribution practice has failed to protect investors from fraudulent distribution practices

If Sebi wants the retail investor to access the market through mutual funds then a code needs to be framed for their selling practice

If Sebi intends to protect the retail investor, then sub-broker registration is a must