It was evident, even before the coronavirus pandemic, that stocks were hugely over-valued, and that the benchmark indices were being driven up by just a dozen stocks.
Those asking that the stock markets be shut down need to rethink their demand. It is true investors have been bruised, and promoters’ wealth has been eroded—and, possibly, their collateral against loans is eroding—but, discontinuing trading means taking away an opportunity from those who want to buy or sell. That is patently unfair, and will add to the pressure when the markets finally open. The regulator’s measures aimed at reining in excessive speculation should do the trick. Short positions in the derivatives segment can no longer exceed the underlying value of cash holdings, or the collateral provided. That is a fair rule as it keeps the market safe. Also, market-wide position limits for the extremely volatile stocks—those that see an average daily variation of 15% during the week—have been halved.
So, just about 10% of the market cap of a company would be traded, compared with 20% before this. In addition, the margins for trading in these stocks have been raised, which would make it costlier for traders. And, for good measure, the penalties for any breach are now five times higher. In fact, the regulator has hiked penalties—by up to ten times—for various breaches. Sebi has also upped the margins to 40%—in a phased manner—for volatile stocks in the cash segment, a fairly high level.
One could always argue that Sebi needed to have stepped in earlier and contained the damage, but a demand to ban short-sales totally, as has been done in other markets, is not justified. With naked shorts now banned, there is no reason not to allow intra-day short-selling. As is well-accepted, day trading adds to the volumes, and large volumes are particularly critical at times like these. For all the volatility and the big crash, it must be said that no defaults have been reported so far.
Those who have lost money have only themselves to blame. It was evident, even before the coronavirus pandemic, that stocks were hugely over-valued, and that the benchmark indices were being driven up by just a dozen stocks. More than 80% of the stocks have lost value since early 2018, and the trend worsening over the past two years is not surprising since corporate earnings have been very poor. An FE Index that tracks how firms with a market capitalisation of Rs 1,000 crore plus have fared has done badly. The truth is, investors get carried away by fund managers, who are always talking up the market. Analysts, for their part, are often compelled to paint a picture that is rosier than it actually is, and brokerages need to get their clients to trade as much as possible so that they survive. But, the blame, for any loss, must ultimately lie with the investor who simply doesn’t believe in caveat emptor. A more cautious approach to investing would spare savers much grief.