What Kind of ‘Market Risk Factor’ Disclosures Can the Market Regulator Make?
This week, an intriguing report by the news agency PTI said that, in view of the ‘recent losses sustained by investors’ in initial public offerings (IPOs) and derivatives transactions, the market watchdog was planning a ‘worldwide first’ to assist investors by releasing monthly 'risk factor disclosures' on market trends, including surges and crashes. Read the news here: SEBI Considers Making 'Market Risk Factor Disclosures' To Aid Investors: Report.
An unnamed senior official is quoted as saying that the Securities & Exchange Board of India (SEBI) will harness the ‘huge capabilities’ it has created over the decades, including cutting-edge technology and data, to ‘analyse things that have gone good or bad for the investors’ and pass it on in the form of ‘risk-factor disclosures’ which will benefit investors in their investment decisions. The report was quick to clarify that this ‘move, which is still in the early stages of discussion’ could help investors ‘avoid the herd mentality that has been particularly visible in recent years’, beginning with the pandemic. 
This anonymous kite-flying illustrates how some knowledge of market history is important for a regulator. On seeking the views of seasoned market watchers and former regulators about the news report, most thought SEBI was wading into dangerous territory, except, perhaps, the Commodity Participant Association of India, which wholeheartedly ‘welcomed the move’ and wanted the regulator to go beyond ‘standard statements’ and ‘talk about the economy, its macro, tailwinds and headwinds’, etc.
The news report itself suggests that SEBI is feeling the pressure to ‘do something’, now that the ferocious bull run has ended; markets around the world have declined; over-priced IPO by tech start-ups have caused huge losses; and the frenzy drummed up in unregulated segments like crypto-currency is fading rapidly. 
The pressure on SEBI to ‘do something’ is understandable. India’s investor population as well as popular market indices nearly doubled since the pandemic forced a lock-down in March 2020. These 15mn (million)-odd new investors have only seen a ferocious bull market which had no truck with the disruption or misery caused by COVID-19 in the form of job losses, deaths and the long march home of migrant labour. 
And, yet, India is not doing badly enough to warrant panic. It is true that the market peaked sometime in October 2021, when the BSE Sensex was around 61,765 (18th October), has zigzagged downwards and, after new lows in March and June 2022, is around 54,000 today. Most new investors riding high on bull market profits immediately begin to vent against regulators when they suffer losses and, by their sheer number, have perhaps managed to turn the heat on regulators.
This too is not new. Prolonged bear markets put a break on corporate fund-raising plans and usually pressure the finance ministry to ‘do something’. In the 1980s, the government usually reacted by setting up ‘high-power’ committees. A bear market in the early-1980s saw four important committees being set up in the decade. 
In 1986, the GS Patel committee was tasked with recommending ways to instil discipline, ethics and professionalism in the capital market. In 1987, a committee under Dr SA Dave was asked to find ways to revive the market, after efforts to prop up stock prices by forcing public sector institutions and insurance companies to buy had failed. A third committee headed by Dr Abid Hussain, then a member of the Planning Commission, was asked to suggest ways to ‘motivate growth of the capital market’. In 1990, the MJ Pherwani committee was set up to look at issue of capital, trading and debentures. 
Some suggestions of each committee were accepted and many discarded; but the capital market really changed direction and put in place efficient systems on par with the best in the world when three things happened: a) SEBI got its statutory teeth and some independence; b) the National Stock Exchange (NSE) was set up as a modern, nationwide exchange; and c) economic liberalisation dismantled red-tape and allowed corporate India to grow even as the entry of foreign institutional investors (FIIs) brought huge new investment into the market.
But these developments did not prevent a series of scams and bubbles hitting the market over the next two decades. Starting with the Securities Scam of 1992, which exposed large-scale lawlessness among brokers, banks and institutions, to the dotcom bubble fomented by Ketan Parekh’s reckless ramping up of stock prices, leading to an inevitable collapse in 2000-2001. Although India escaped the global accounting scandals that took down Enron, WorldCom, etc, the global financial scandal of 2008 definitely rocked the Indian stock markets significantly. 
This short history of four decades holds a simple lesson: artificial engineering to revive markets, even if it is attempted by the government, does not work; just as warnings issued in a frenzied bull market are usually ignored. People lose money due to bad decisions, wrong investments or hasty actions. These cannot be fixed by data and warnings. 
Regulators can, at best, ensure that investors have all the information needed to make the right decisions. SEBI has, indeed, been tightening disclosure norms over the years and can fine-tune them a bit more. Others, like the Reserve Bank of India (RBI), have repeatedly warned against investment in unregulated crypto-currencies, many of which have flamed out in recent months; but nobody listened. 
Regulators have issued regular warnings about cyber fraud, online scams, investing in dubious Ponzi and quick-money schemes; but how many investors listen? In fact, this is perhaps the first time in history, when social media and ease of communications has given discerning investors very affordable or even free access to high-quality research and analysis on the economy, specific industry sectors and even individual stocks. But only a small number of serious investors values it.
Similarly, there were plenty of warnings to stay away from high-priced IPOs of technology start-ups which saw retail investors as a source of yet another round of burn-money. But millions of newbies, high on confidence and low on historical data or respect for analysis, were in no mood to listen—they saw an opportunity to flip, without realising they would be left holding the baby.
Coming back to the beginning, what ‘market risk factors’ can SEBI put out, with all the ‘cutting-edge data’ available with it? Despite what the anonymous ‘top official’ has said, SEBI cannot comment on specific stocks or their prices – not even for over-priced IPOs. It ought not to comment on specific industry sectors and cannot make unilateral ‘fact-based disclosures’ about companies because the flip-side is to be accountable for misses and scams. SEBI can certainly put out its ‘insights’ analysis on economic fundamentals and risk factors, but that would be general information and is really the domain of RBI, the finance ministry and even NITI Aayog or of the respective ministries.
The only way that the regulator can ‘assist investors in making better decisions’ is by mandating better disclosures from listed companies and market infrastructure institutions. It can start by directing all exchanges to submit themselves to the Right to Information (RTI) Act. This itself will act like a huge disinfectant and save the regulator a lot of embarrassment. The scandalous goings-on at NSE, a powerful, near-monopoly institution, remained buried because it was permitted to operate like a private fief, rather than a public institution. 
Secondly, SEBI can set its own house in order and eliminate wasteful work that is clogging up its enforcement system (read: Needed a Powerful SEBI Chief, To Stop Markets from Regressing to the 1990s); the credibility of SEBI’s orders and settlement processes can be improved by following strict precedent, equivalence and avoidance of  contradictory orders (read: SEBI’s Insider Trading Orders: Is There Any Method in the Madness? and Rot inside SEBI: Strange warning letters to let off serious offenders). 
Finally, a market watchdog will be far more credible when it speaks directly to the market or media, instead of the vague bombast from an anonymous ‘top official’. Perhaps, for the first time, SEBI has a chairperson with real market experience and the courage to go off the beaten path. We would like to see real action that takes the regulator back to the potential it promised in 1992 under the late GV Ramakrishna.
3 months ago
Well said. This is not an area where SEBI needs to wade in, no matter the pressure to be seen as doing something. Let SEBI focus on the many issues only it can do and leave this for others.
3 months ago
If SEBI wants to do something about equity markets, it must act on the non compliance by many companies that leaves them suspended for their own benefit, making a mockery of the shareholders. Let SEBI push for criminal action against such managements and boards, so that more companies trade. It's silly to tell investors how risky stock markets are, they must burn their fingers once in a while. We see investors go crazy about cryptos, will they really lead 'risk factors' ? In fact only people who have experience of winning and losing in stock markets should be allowed into SEBI, only then will this nonsense stop.
3 months ago
I'm afraid I don't think anything positive will come out of SEBI. Their culture is too entrenched, in babudom and red tape, for one person to make any difference. Nothing will happen. That's par for the course.

First, culture has to change. This means cleaning up the house -- which includes employees and bureaucrats. From scratch. Yes. Old people out. New people in.

Then we can talk about market disclosures, rules, "insights", bla bla bla. Otherwise, all this is redundant and useless empty discussion, echo chamber talk.
3 months ago
Very good advice. Top officials anonymity indicates the level of HR in SEBI. Officials should have the freedom to air their views as long as they do not infringe on the policies of the organisation adversely. Healthy internal communication is an essential virtue of a regulatory agency.
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