Sucheta Dalal :Every bump in market shrinks investor population
Sucheta Dalal

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Every bump in market shrinks investor population  

Dec 11, 2006

On friday, as the BSE Sensex crashed 180 points, my neighbour Sinha (name changed) worried about people who probably lost big chunks of their savings that day.

I questioned him about his reaction and he said how a careless investment landed him with Rs 10 lakh loss on an investment of Rs 5 lakhs plus his long-term investments. His story is typical of thousands of investors whose investment has vanished overnight.

They are excited at reports about a 1,000 point rise in the Sensex, apparently every few weeks, and want a piece of the action. However, they have neither the time nor the inclination to understand the investment process; so they hand over a chunk of money to a broker, sign the account opening and demat forms without reading them and wait to collect the profit.

Sinha tells me how he used to receive regular calls from his brokerage firm telling him he had made a profit of Rs 20,000 at one time and Rs 80,000 at another. After a particularly vicious correction, the calls stopped; but by then, he was confident that the company really knew all the ways to wealth and didn’t bother to check with them until it was time to file his tax returns. The firm then told him that it had not only lost his Rs 5 lakh investment in speculative trades but had also sold off his original blue chip holdings that were worth another Rs 5 lakh.

To add insult to injury, the Sensex has soared another 2,000 points since he lost his entire investment. The lesson: it doesn’t matter if the Sensex continues to power upwards, one big correction like the recent 180 point drop is enough to cause a specific retail investor to lose a big chunk of money.

I asked Sinha if he had filed a complaint with the regulator. He said, no; he had decided to write off the loss and stay away from the capital market forever.

Last week, a journalist friend had called to say how four of her relatives have lost Rs 17 lakh by similarly entrusting their money to a commodity brokerage firm. It had failed to anticipate the fall in crude oil prices and sank their savings.

Market intermediaries, investment experts and fund managers are usually contemptuous about such hard luck stories. Buyers beware, is what investors are always told after the loss. Even more depressingly, regulatory recommendations and the wisdom of Parliamentary committees are invariably based on hindsight and useless to those who have already lost their money. Take for example the parliamentary committee’s report on the IPO (Initial Public Offering) scam that was released last week. It pulled up Securities and Exchange Board of India (Sebi) and asked it to “remain alert and increase vigil” every time there is a bull run.

Well, recently the Sensex moved past 14,000 and we are also in the middle of a realty-stock led bubble. Wouldn’t it have been nice if the Parliamentary committee had strengthened Sebi’s hands with some direction regarding the current IPO situation? Instead it wants Sebi to investigate all IPOs floated since 1999 and report its findings.

The standing committee is particularly harsh on the depositories. For instance, it has taken serious note of the fact that the National Securities Depository Ltd. (NSDL) was “aware of the irregularities in connection with opening of accounts from the year 2003”. It also considered it a “very serious matter that inspection reports have been reduced to a mere formality” and that its Disciplinary Action Committee had not met since inception. Interestingly, the Parliamentary committee may have backed Sebi’s “suggestion” regarding revamping of management of depositories, but NSDL continues to challenge all Sebi orders, including the scrapping of restrictive exit fees which has now reached the apex court.

Investor groups have long demanded better scrutiny and grading of IPOs, because ordinary investors find it difficult to comprehend complex disclosures and risk factors listed in the prospectus. However, the independent grading process has been stalledfor nearly two years due to pressure from companies wanting to raise public money and their investment bankers. At the same time, reputed mortgage financiers say that companies who would not be lent a crore of rupees based on a realistic valuation have raised several hundred crore from the capital market by exaggerating their land bank and inflating valuations.

Since Parliamentary committee members represent ordinary people, who lose money at every major bump and correction in the market, wouldn’t it be more useful to the public if they recommended preventive action by empowering regulators, instead of analyzing past scams?

-- Sucheta Dalal