Wednesday, August 15, 2012

Punish Share Market Scamsters

How do the idea of having a 'safety net' and 'guaranteed returns in 6 months' sound for your investments? No doubt they are very comforting. Well most readers would assume that the instrument being referred to would be a fixed deposit or a debt paper. But what if even your equity investments were ring fenced against market volatility? Well, as investors most of us would prefer safe returns in shortest possible time. But that the capital market regulator should go to any extent promising goodies to boost sentiments seems ridiculous!

The Securities and Exchange Board of India (SEBI) is worried about the lacuna in primary markets. Understandably so. The last 24 months have hardly seen any major capital market issuances by India Inc. Plenty of them have been cancelled at the last minute. Most others have seen investor money getting eroded over time. As a result investors have completely lost interest and confidence in IPOs.

Therefore, in order to reverse the fortunes of the IPO market, the SEBI has proposed some radical reforms. Key amongst them is the proposal to introduce a 'safety net' guarantee for the investors in IPOs. This safety net mechanism is being considered only for retail investors. It would be mandatory for promoters and other entities offloading shares through IPOs to compensate investors in the event of a loss. That is if the company's shares plunge below a certain threshold limit within six months of listing, the promoters will be liable to pay.

We believe that if implemented, such ridiculous reforms could be the perfect recipe for heightened speculation in stock markets. First of all the very idea of making returns from stocks in six months is uncalled for. Moreover, market speculators will hardly miss an opportunity to speculate on such IPOs. If promoters fail to compensate investors in the event of heightened volatility, confidence of retail investors in capital markets will be quashed for good.

Instead of making such absurd promises, we believe that the SEBI could do with some initiatives to ensure better corporate governance amongst companies. That coupled with promoting the idea of long term investing in stocks will solve the purpose. Fiscal incentives and adequate transparency on companies could go a long way in boosting stock investing. To top that we would also suggest that the regulator takes some solid steps in educating retail investors about stock investing.

The above is from the mail I receive from Equitymaster. The basic defect in our system is that we have no system of punishing the guilty according to the severity of his crime. Our politicians and bureaucrats amass wealth by hook or crack, mainly by crook. Politicians are never punished. The people may punish them by not reelecting them but what about the wealth that was amassed. Have we ever been confiscated their wealth? Same with bureaucrats, Their ill-gotten wealth has never been confiscated. What Nitish Kumar has done is a good beginning but I fear it is just for publicity. Do you seriously expect me to believe there have been just two bureaucrats who have amassed wealth by corrupt means? People who come to the share market for money and then cheat the people who subscribe to their issues should be a punished differently. Their names, addresses and family history should be widely published in all relevant media. A finger print, iris scan record should be maintained so that they can never come again to collect funds from the public, banks and financial institutions.

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