The guest post below is written by Pratyush Mittal from Dalal-Street and developer of Screener-Raoji
SEBI holds our highest regards for they have been the backbone in the revolution of Indian equity markets. SEBI revolutionized the markets with various changes including NEST, quick settlements, demat etc., and by always maintaining a strong vigilance and discipline over the exchanges and investors.
To tap the growth in this decade, Indian markets will need a continuous investment and an encouragement to entrepreneurship. We must remember that today’s large caps come from once small cap space. These growing companies need to be nurtured and supported through free trade and participation of investors & market makers, rather than being alienated from the investing space. It is only through an active secondary markets, that the primary markets will grow. In relation to this, the recent call auction mechanism has raised various concerns for market participants:
Concerns:
- Running the call-auctions throughout the day at an hourly interval and cancelling the order book is a flawed concept. World-over, the call-auction mechanism is implemented only to provide stabilization to securities during the opening and/or closing sessions, to prevent freak trades due to panic and anxiety. Running it throughout the day at hourly intervals has killed the already low liquidity and thus the interest of investors in small stocks.
- The criteria for choosing stocks seems arbitrary as it ignores the value of transactions. The list covers almost 2100 stocks of ~3000 active companies. Many of these companies are high quality companies.
- We believe that low liquidity is NOT responsible for manipulations. Being investors for over 30 years, we have seen that one thing common in any stock manipulation is high liquidity. These cases, where lots of small investors lose money are usually of pump and dump. Wherein manipulators benefit only when volumes are high and material amounts are involved to trap small investors.
- The free markets don’t feel free and transparent any longer. It has become virtually impossible to place large orders. The moment an investor places a large buy order, the sellers disappear. Similarly, when an investor wants to exit his position from a stock, even the existing buyers go away.
- We are fearful, that if the mechanism in not corrected or improved timely, then it will curb a lot of investing sentiment in the country. Many SMEs might not be able to come up with IPOs and hurt the entrepreneurship in India for future.
Solutions:
- SEBI already has too many good tools and mechanisms to curb manipulations. For eg: moving the suspicious scrips to T group. There are various good magazines and blogs, which highlight such suspicious companies on a regular basis.
- Running call auction sessions only for opening and/or closing session (that is only for few hours followed by normal trading).
- Implementing the mechanism in a phased manner by trying it out initially for 50-100 stocks and seeing if there are any benefits or not.
Coverage:
The ill-affects of the mechanism have been shared by many other investors, and these are few of the coverage:
When Sebi’s outwitted at call auction – DNA
SEBI’s new baby – rules for illiquid stocks – Prof. Neeraj Marathe
Periodic Call Auctions For Illiquid Stocks – Concerns – Bosco Menezes
The need of the hour is to encourage the investors into investing rather than implementing a mass punishment. We hope that the concerns soon turns into an achievement to take the nation on a new path.
Happy Investing!!!