Particularly of significance has been the losses suffered by investors in a large number of IPOs in the recent past and in the highly complicated futures and options segment of the capital market
In a global first, the Securities and Exchange Board of India (Sebi) is planning to issue regular 'risk factor disclosures' on market trends, including surges and collapses, to help investors make right decisions by learning from the regulator's insights, sources said.
The move, which is still in a preliminary stage of discussion, can help investors avoid a herd mentality that has been particularly witnessed during the last couple of years -- starting with large-scale selloffs when the pandemic hit the world in early 2020, followed soon by a sharp surge in buying of stocks without understanding the fundamentals and largely on account of get-rich-quick stories and then subsequent losses.
Particularly of significance has been the losses suffered by investors in a large number of IPOs in the recent past and in the highly complicated futures and options segment of the capital market.
"Though the investors have seen a fixed pattern play out in every single cycle -- that is, everyone rushes to buy shares when the going is good and then they indulge in panic-selling when a crisis strikes. The basics of capital market investments are always thrown out of the window and one key reason for that is the lack of truly independent insights," a top official said.
The official further said most of the research material available in the market has been prepared by the market participants who have their own business interests in mind and therefore it could be a great idea if the regulator itself makes public its insights from upswings or downtrends in the market.
Explaining the idea that Sebi is working on, a high-level source said, "It's time for Sebi to lead by example by making disclosures on matters that can have implications for investors at large and disclosures of important market-wide datapoints."
"A simple sentence mandated under the present regulations that certain 'investments are subject to market risks' has become too cliched and it is like a motherhood statement that does not work anymore. What is required at this moment is that investors get some detailed datasets, that too from the regulator and not only from their wealth managers, whose main aim remains maximising their businesses," said the source involved in the proposed move.
"We are not a nanny state where a regulator can dictate terms to market participants, including investors, on what to do and what not to do, but it is certainly the responsibility of the regulator to ensure that all necessary disclosures are made and to tell the market participants how those disclosures should be made.
"But when we tell others to make all necessary disclosures, it becomes the regulator's duty also to disclose to the investors and all market players what has been its learnings and understandings," the source added.
Sebi has got huge amount of facts and figures and enormous datasets, thanks to the use of big data, artificial intelligence and other facets of latest technologies, all of which can be of immense help to the investors and other market participants if Sebi itself starts making regular disclosures about its learnings.
"It is said that understanding the future can be really easy if we analyse the past and the present well. Sebi has created huge capabilities over the years where it is in position to analyse things that have gone good or bad for the investors and if that information is passed on to the investors in form of risk-factor disclosures, the investors can benefit hugely for their investment decisions," a senior government official said.
Right now, the regulations require that all listed companies, as also some market participants and market infrastructure institutions, make the disclosures about their decisions, policies and future strategies to help investors make right investment decisions.
However, there is no such requirement for the regulator itself and it is high time that Sebi itself leads by example as it is the only entity that has got a complete holistic view of the entire marketplace, the official added.
"It goes beyond saying that the regulator is the best placed when it comes to datasets and disclosures that can be trusted the most and are market-wide in nature. At a later stage, Sebi can also ask brokers, exchanges and other entities dealing with investors to make market-wide risk factor disclosures that can be relied upon by the investors," said a source privy to ongoing the discussions.
The source further said the idea is to make fact-based disclosures on a regular basis -- which could be annually, half-yearly or quarterly.
"While the finer details are still being worked out, these disclosures can also focus on investor behaviour over a period of time, profits being made by them or the losses suffered by them, the market segments that have been profitable or loss-making, the areas of interest etc.
"We have the advantage of big data that helps us understand what has worked for the market and what has gone awry. There is no point keeping all that totally invisible to the investors. Obviously, certain things cannot be made public, but the investors have a right to know what has been the regulator's understandings from a good or a bad market, from a scam or from its handling of scamsters," the source added.
The Indian stock market has seen huge volatility in the recent months, largely on account of sudden outflow of foreign funds and delayed economic recovery in most key sectors, though the last two fiscals saw relatively stronger trends despite the COVID-19 pandemic.
The overall resource mobilisation from the capital market during 2020-21 remained strong at over Rs 10 lakh crore, surpassing the previous year's figure of Rs 9.96 lakh crore, though businesses in general were affected due to the pandemic.
A unique highlight has been the unprecedented growth in individual investor participation in the securities market, including through mutual funds.
The last two years have also seen the corporate governance norms and disclosure requirements for listed companies being further strengthened, including enhancing the role and applicability of the risk management committee, extending the requirements for mandatorily framing a dividend distribution policy and many others.