A lot more needs to be done to safeguard the interest of retail investors
When it comes to investor protection, SEBI as well as the bourses behave like the police in Bollywood movies—coming in only for the last scene. But, unlike in the movies, there is no hero to protect Indian investors. The consequence is a dramatic decline in the investor population from 20 million (1992) to eight million (Swarup Committee 2009). CMIE puts the number even lower—at 920,000 households investing directly in equity and just two million households in mutual funds at the end of December 2009.
The good news is that the regulator appears to have been aroused from its sleep, now that the retail investor is heading toward extinction. Consider this. Moneylife has been pushing for some standardisation in the power of attorney (PoA) that investors sign with brokers since 2006. Former SEBI chief, M Damodaran, refused to standardise it; after several years of abuse, which probably saw several lakh investors exiting the market, SEBI accepted the need to work on a standard PoA.
For a decade, we have argued that demat charges levied on investors are too high. SEBI’s Primary Market Advisory Committee also agreed that companies could be asked to bear part of the demat charges, especially companies which had been suspended or seemed on the verge of folding up. Investors in these companies continued to pay demat charges without a clue on whether the investment should be written off, while converting the shares to physicals would involve additional costs. All suggestions to help investors were ignored, especially when CB Bhave, the present SEBI chairman, headed the National Securities Depository Ltd (NSDL) which was then a near monopoly. Those days, NSDL used the cushion provided by high depository charges to subsidise the Tax Information Network and other businesses into which it wanted to expand. A month ago, SEBI under Mr Bhave, advised the two depositories to offer ‘no frills’ demat accounts to investors with restrictions on value and volume of transactions! Well, it is a step forward.
Stock exchanges, especially the National Stock Exchange (NSE), which has a near monopoly, is no different. For a decade, we argued with its managing director, that its arbitration process was one-sided and anti-investor. Since there was no appellate mechanism, brokers who were more conversant with the rules and procedures were disinclined to settle. On 28th July, after prodding from SEBI, it is finally planning to put such a mechanism in place. This is a beginning, but a lot more needs to be done to ensure that investors can actually access the arbitration and appeal mechanism without incurring huge costs. Unless this is done, investors would prefer to write off their losses and exit the capital market. It required over 12 million investors to exit before we saw the first sign of realisation among regulators of what is hurting the investors.