Better infrastructure, not more controls

Written by Hasit Pandya | Updated: Sep 30 2008, 04:08am hrs
The current happenings in the global market are a indeed unfortunate and will have a telling effect on all markets across the globe. And this will also have shaken the confidence of many investors and even regulators. So when regulators react with strict norms, it does not come as a surprise.

Many markets have indeed let speculators run loose by not checking their participation. However, in India, the regulators have done exceedingly well in keeping a watch over some of these elements. Little wonder then that the impact of the global meltdown is not as intense here as is seen in other markets.

Regulations in India are apt and in poise to tackle miscreants. Even the surveillance system that the exchanges have put up, especially at the National Stock

Exchange, are robust and world-class in many ways. At the moment, the focus should be in bettering the infrastructure further in order to get more world-class practices in place. One such area is clearly the settlement mechanism.

A third party cheque now takes around three days to clear, but the brokers have to settle in two days. So it happens that many transactions are met out of the brokers pocket. Real time settlement issues need to be addressed at a war footing to make T+1 settlement possible. Online payments are possible, but at the moment, there is a great deal of apprehension over the safety of such transactions. Already the Application Supported by Blocked Amount (Asba) concept has come into play and this will serve the investors, both retail and institutions, positively. These are the structural changes that will improve the market conditions and go a long way in enhancing the equity investment culture.

That gets us to another important issue; of investor education. A basic awareness is present amongst retail investors, still a majority is not aware of the risks associated with the market and in dealing with brokers. We need to spread investor education further to increase the awareness level of the investing community. Many a time investors complain of having gypped by brokers, but then they themselves have given brokers the liberty to act on their behalf. When the times are good, nobody notices such things, but it is usually during bad times that such actions come to the fore. Hence, a lot more effort on the investor education front is required to make the market a better place.

Usually, catastrophic events, such as the ones witnessed in the global financial circles, elicit a strong reaction from every quarter and new norms come into place. While many of them are required to bring in systemic discipline many a time this is done at the expense of increasing the cost of compliance. After the earlier accounting scandal that rocked corporate America, the Sarbanes-Oxley financial reporting standards were introduced. Many companies actually got delisted from the US stock exchanges because of this and went overseas to other stock exchanges. At the moment, there is a concern that new regulations could increase the cost of compliance and therefore the cost of operations. And somewhere down the line these costs will be passed on to the clients and investors. This is something that the policy makers should look at carefully while formulating norms.

Already the equity investing culture is spreading wide across India and it will keep expanding as people realise the effectiveness of equities as an asset class that gives strong returns. In this light, a stronger focus in building infrastructure is more pertinent than brining in regulations that raises the cost of compliance.

The author is director, HPMG Shares & Securities