Securities and Exchange Board of India (SEBI) chairman G N Bajpai is not someone who can be taken in easily by the frills of a booming stockmarket. When I met him just before the New Year, against the backdrop of a continuously rising market, the little big man who sits as the head of the country?s markets regulatory authority was clear that the bourses needed strict vigilance. ?As a regulator, I am not bothered about whether the market is moving up or moving down. Every day, I look out for unnatural movements and seek to take corrective action whenever I see such movements,? he told me. The 30-share BSE Sensex was within sniffing distance of the 6,000 mark at the time, and Mr Bajpai would surely have been glued to his stock ticker watching out for unnatural price movements.
For long now, this market has been hungry for good news. And now, good news has come in buckets of plenty. The GDP for the second quarter, an astounding 8.4 per cent; corporate results showing signs of continuing the good times. And then, the finance minister?s double dose of sops, as a top-up to the feel-good frenzy.
But amidst all this, there was a surprise element from SEBI itself. First, the regulator announced that it was allowing margin trading and lifted the ban on brokers providing margin finance to clients. Thus far, banks have been allowed this activity, but SEBI has now decided to throw open this facility to corporate brokers with a net worth of over Rs 3 crore. Of course, there would be checks and balances and the list of stocks has been clearly laid down.
After this announcement came another one from the regulator: It had decided to cut the contract value for the futures and options (F&O) segment to close to but not less than Rs two lakh by using appropriate lot size or multiplier, which could be half of 50 per cent.
These two steps, put together, were enough to set an already steaming market afire. The margin trading announcement itself led to a buying frenzy the next day at the markets, something which was aided in the dying minutes of trading by the government?s announcement of tax sops across sectors. The Sensex closed the day after SEBI?s margin trading announcement up by a whopping 152 points.
Yes, SEBI has taken note of some obvious impediments in the market and taken action to free them up. But the timing of SEBI?s move has left some sections confused. Why has the regulator unveiled these measures in an already volatile market situation? Why now, when the market is bulldozing through every single upward resistance? If indeed SEBI is keeping a close watch on the rise in the market, and its frenetic pace, why is it adding to its own workload by fuelling the rise further? More importantly, the pace of the rally had caught ordinary investors napping, and many had been left behind or were desperately seeking an opportunity to get an entry point into the market. With the latest SEBI moves, they will surely be lured to try and enter the market now.
Both these moves will allow the smaller investor to get access to a larger chunk of the market with relatively low means. Generally, small investors are among the last to enter the market when it rises. In this case, SEBI has provided them a platform to enter when the market has crossed its all-time highs! Could SEBI have taken these measures earlier? Could it, alternatively, have taken them after the market stabilised a bit and turned less volatile. Unfortunately, the answer to both the questions is yes.
And even as the smaller investors are entering at these dangerously high levels, the foreign institutional investors (FIIs) are regularly churning their portfolios as the market hits successive highs. This is clearly seen from the trading pattern of last Friday, when FIIs bought Rs 1,447 crore of stocks, but also sold Rs 999 crore, with total FII turnovers hitting Rs 2,446 crore. What signal are we then sending to the domestic investor who, as SEBI too admits, is still starved of full information about the markets? Maybe the regulator needs to do some soul-searching on this one.