DC Edit | Fix regulatory regime to gain back investor trust

Update: 2023-02-14 18:40 GMT
The US market's positive close on Friday and foreign portfolio investors turning net buyers in the last two trading sessions along with some good second quarter results like Maruti Suzuki's augur well for the stock market. (DC file image)

It appears that the Hindenburg report on the Adani Group and the impact that it has had on the Indian stock markets will lead to the constitution of a committee that will explore ways and means to protect Indian investors. The Union government and the market regulator, Securities and Exchange Board of India (SEBI), have told the Supreme Court that they are on the same page with it on the issue. 

While the Union government would agree to such a suggestion, it would want to insist that the SEBI and the Reserve Bank of India, two State agencies that regulate the flow of funds, are fully equipped to handle this. It also indicated that it wanted a say in the constitution and remit of such a committee as it should not be seen as a result of the Supreme Court’s wish to monitor the functioning of the market and financial sector regulators. It would submit the remit and the possible names to be included in the committee in sealed covers over the next couple of days. 

The government’s reply came in response to a query by the apex court to explain to it the “robust mechanisms” the government has introduced in order to ensure that investor interests are protected. The court was made to intervene after market volatility shook investor confidence at least for a brief time, erasing wealth.  

It is a fact that despite governmental claims of robust mechanisms, and even after factoring the inherent reflection of economic conditions in the market, the Indian stock markets have been visited upon by several scams in the last three decades, a period during which it exploded, offering even small investors an option to be part of the economic activity and to benefit from it. There are disclosure norms but also ways to skirt them. Smart operators have identified gaps in the mechanisms, made use of them and duped investors, financial institutions and even governments. Not just gullible investors, even seasoned ones became their victims. The Hindenburg report revealed nothing knew that was unknown to people; it only sought to list the doings of one company.   

Investor protection is a risky term with respect to market operation in that risk is an inherent factor associated with it. In fact, success there depends on one’s ability to navigate through the tough alleys out there. All that the government can do is to ensure that there are updated laws to address the developments and mechanisms to implement them. It must also be able to use technological tools to pre-empt the tricks of the fraudsters. Working nonstop on creating awareness on prudent investment practices is another important area where regulators and the governments can work together. 

The government’s anxiety about a committee evaluating the functioning of the market and banking regulators and its potential impact on funds flow is palpable but it must realise that more damage will be done to it when foreign investors discover that there are enough slips in the regulatory mechanism which allow dishonest people to play in the market for long periods without being noticed. Hence, judicial oversight over the investor protection measures is the best option until such time when the government is able to put in place robust, self-run processes and until public and the investors/ prospective investors get the confidence that these are effective and adequate.

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