Critical evaluation of small investors by Abhishek Pande


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Small Investors in Indian Stock Market

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Critical evaluation of small investors by Abhishek Pande

  1. 1. ROLE OF SEBI (THE REGULATOR) AND CRITICAL EVALUATION FOR SMALL INVESTORS IN INDIAN STOCK MARKET Authors1 * Mr Abhishek Pande (Mentor) Orange School of Business, Nagpur.ABSTRACTThis paper argues that rather than applying the traditional solutions,the regulatorneeds to adopt strong measures to protect the interest of small investors,it would befair to say that progress that we have made in this period is due largely to effects ofstringent measures adopted by SEBI. The dynamics of economics also plays a pivotalrole in the growth story of industry and commerce.The stock market is importantfrom both the industry’s point of view as well as the investor’s point of view.KEYWORDS – acquisitions,derivatives,margins,rating agencies,stocks,volatility index.LITERATURE OVERVIEWIn 1988 the Securities and Exchange Board of India (SEBI) was established by theGovernment of India through an executive resolution, and was subsequently upgraded as afully autonomous body (a statutory Board) in the year 1992 with the passing of the Securitiesand Exchange Board of India Act (SEBI Act)2 on 30th January 1992. In place of GovernmentControl, a statutory and autonomous regulatory board with defined responsibilities, to coverboth development & regulation of the market.1 Authors : Mr Abhishek Pande2 The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBIAct, 1992. 1
  2. 2. STATEMENT OF THE RESEARCH PROBLEMThis study helps to protect the interests of small investors in security market with the help ofregulators role and creating awareness about economic indicators.OBJECTIVES OF THE STUDY  To highlight the working of regulator with respect to stock markets.  To promote investors awareness about stock markets.  To educate small investors and students about the economic downturns of stock markets.  To promote overall economic development for sustainable growth.Since its inception SEBI has been working targeting the securities and is attending to thefulfillment of its objectives with commendable zeal and dexterity. The improvements in thesecurities markets like capitalization requirements, margining, establishment of clearingcorporations etc reduced the risk of credit.SCOPE OF THE STUDYThis study includes the role of SEBI as a watchdog to manage stocks and securities in indianmarket.The study is conducted to analyze the investors preference and protect his interestbefore the interest of the companies trading in indian stock market.To analyze the dataresearcher used simple analytical techniques and tools such as pie charts.RESEARCH DESIGNResearch Design of the study deals with understanding the investors sentiments and his abilityto protect himself against the recessionary trends that often takes place in stock markets withspecial reference to important economic indicators. 2
  3. 3. Data required for the studyTo carry out the research,conceptual knowledge about investors risk takingability,information about their preferences, choices, investment awareness,with respect todifferent companies listed on stock exchange has been taken into consideration.Data SourcesA. Primary SourceTo study the SEBI guidelines for small investors pattern of purchasing shares of listedcompanies in stock market,data collected through Primary Source. i.e. Interviews,discussions & Questionnaires.B. Secondary SourceThe Secondary data have been collected through the books, magazines, broachers, Journals& annual general report, socio-economic profile and web sites.To collect the primary data questionnaire is prepared. This questionnaire consists close-ended questions. The questionnaire is a siphon off information viz. company preferences,choices, determinants etc.Data AnalysisData collected from Primary and Secondary Sources is analyzed. The analyzed data isformulated into the tabular and graphical form.ROLE OF SEBI THE REGULATORThe contribution of the market regulator has been to create a regulatory environment thatpermitted competition to flourish at a time when many companies are not performing up tothe investors expectation.To provide license to dealers and brokers :SEBI has power to provide license to dealers and brokers of stock market. If SEBI sees thatany financial product is of capital nature, then SEBI can also control that product and itsdealers.One of the main example is of ULIPs 3.3 Unit Linked Insurance Plan 3
  4. 4. To stop fraud in stock market :SEBI has many powers for stopping fraud in capital market.It can ban on the trading of thosebrokers who are involved in fraudulent and unfair trade practices relating to stock market.Itcan impose the penalties on capital market intermediaries if they are involved in insidertrading.To Control the mergers,acquisitions and takeover of the companies :Many big companies in India want to create monopoly in stock market. So, these companiesbuy all other companies or deal of merging. SEBI sees whether this merge or acquisition isfor development of business or to harm stock market.To audit the performance of stock market :SEBI uses their powers to audit the performance of different Indian stock exchanges forbringing transparency in there working.To make new rules on carry - forward transactions :Share trading transactions carry forward can not exceed 25% of brokers total transactions.90 day limit for carry forward transactions is set by SEBI.To create relationship with ICAI4 :ICAI is the authority for making new auditors of companies. SEBI creates good relationshipwith ICAI for bringing more transparency in the auditing work of company accounts becauseaudited financial statements are mirror to see the real face of company and after this investorscan decide to invest.Moreover,in many cases investors trust still rely on audited financialreports.Introduction of derivative contracts on volatility index :For reducing the risk of investors,SEBI has now decided to permit derivative contracts onvolatility index, subject to the conditions :a. The underlying volatility index has a track record of at least one year.4 Regulates the profession of Chartered Accountants in India. 4
  5. 5. b. The exchange has in place the appropriate risk management framework for such derivativecontracts.c. Before introduction of such contracts, the stock exchange shall submit the following :-i. Contract specifications.ii. Position and exercise limits.iii. Margins5.iv. The economic purpose it is intended to serve.v. Likely contribution to market The safeguards and the risk protection mechanism adopted by the exchange to ensuremarket integrity, protection of investors and orderly trading.vii. The infrastructure of the exchange and the surveillance system to effectively monitortrading in such contracts.viii. Details of settlement procedures & systems.ix. Details of back testing of margin calculation for a period of one year considering a calland a put option on the underlying with a delta of 0.25 & - 0.25 respectively and actual valueof the underlying.To get reports on portfolio management activities :SEBI has power to call reports on portfolio management to check the stock marketperformance.Recently,SEBI sent the letter to all registered portfolio managers of India fordemanding report.5 A type of financial collateral used to cover credit risk. 5
  6. 6. To educate the investors :Time to time, SEBI arranges scheduled workshops to educate the investors.The regulatormust also ruthlessly discard those elements of regulatory regime that are not in favour ofsmall investors.FINDINGS FROM SEBISome of the findings from SEBI with respect to small investors grievances are :  Financial analysts at major banks promote stocks they know to be worthless, misleading small investors who rely on their advice.  Ratings agencies give AAA ratings on debt they know to be in order to gain goodwill of the issuers—who happen to pay fees of agencies, violating rating agencys duty to provide the marketplace with honest evaluations.  Some executives receive outsized and high compensation packages—the result of false misleading recommendations of stocks to gain the goodwill of CEOs and independent directors, thus violating duty to the shareholders of companies for whom they are working.  Reputed fund managers charge exorbitant fees that investors have to absorb—fees that dramatically reduce any possibility of outperforming market and that are set by captive boards of captive management companies.  "High-frequency trading6" produces not only reality of a two-tiered market but also probability of front-running—that is, illegally trading of information not yet widely known—that eats possible profits of small investors being served by these market players, violating the norms set by SEBI for best available price discovery.  Airlines stocks are bailed out, costing taxpayers tens of billions of rupees, even though (as we later learned) the big broking firms knew that airlines stocks were6 A program trading platform that uses powerful computers to transact a large number of orders at very fast speeds.High-frequency trading uses complex algorithms to analyze multiple markets and execute orders based on market conditions. 6
  7. 7. going down and were able to hedge and cover their positions.Smaller investors are left holding the stock, and left for picking up the trash.  The underlying assumption is apparent since information and advice, the very life- blood of a level playing field, is not where it needs.  The small investors still doesnt have a fair shot. While there have been case-specific remedies, the aggregate effect of all the scandals still holds the market forces responsible. ECONOMIC POINTS TO PONDER There are many economic points that requires due consideration for a small investor before he invests his hard earn money in stocks.These economic points act as a preliminary study for any investor to understand before entering stock market.  Liquidity situation in a system- Less liquidity situations means shortage of funds in market,it leads to increase in interest rates consequentally companies cost of funding increase,it hammers profits of company and share prices of that company goes down and therefore loss to small investors.  Climate or monsoon situation- In an agriculture base economy monsoon plays a vital role,situation of bad monsoon curtails the demand & consumption levels,it adversally affects profits of companies and therefore loss to small investors & vice versa.  Inflation rate in the economy- Inflation conditions puts pressure on margins of companies,(e.g.. of petrol & diesel cost),hence the small investors should monitor pulse of market with knowing the headline inflation7.  Technological development- Innovations in companies can increases productivity,this drives investment and increases profits, pushing growth,hence small investors should monitor this trend.7 A measurement of price inflation that takes into account all types of inflation that an economy can experience. 7
  8. 8.  Growth rates- Industry growth rates taking place in sectors like construction,mining,manufacturing,power,auto,banking,metal etc, can provide vital statistics for small investors if they are updated with proper information.  National income growth rate for the current year.  GDP estimates for the upcoming year.  Increase or decrease in foreign investments.  Increase or decrease in exports.  Trade liberalisation,capital mobility & exchange rate policy.CONCLUSIONFinally we conclude that SEBI the regulator has three functions rolled into one body: quasi-legislative8, quasi-judicial and quasi-executive. It drafts regulations in its legislative capacity,it conducts investigation and enforcement action in its executive function and it passesrulings and orders in its judicial capacity to create accountability for small investors,alsoreturns in stock market depends on conditions of economy.And a good economy would helpin improving living standards of individuals,who could encash higher returns from stockmarket,business as a whole sees increased sales and profit which ultimately drives shareprices for small investors.8 A quasi-legislative capacity is that in which a public administrative agency or body acts when it makes rules andregulations. 8
  9. 9. REFERENCESBooks[1] SEBI Guidelines and Listing of Companies – Dr A V Avadhani[2] Manual Taxmanns SEBI Manual[3] Financial Management – M Y Khan,P K Jain[4] A Legal Commentary on Securities Exchange Board of India Act - Sumit Agrawal,RobinJoseph Baby,edited by Amit Agrawal[5] Indian Economy – T R Jain, Mukesh Trehan, Ranju Trehan, Dr Rajinder Uppal[6] Indian Economy - Mishra & Puri[7] Principles of business economics 2nd edition – Joseph Nellis, David ParkerWebsites[1] NCAER website[2][3][4] ANNEXURE Questionnaire for small InvestorsName of the participant: ________________Contact number: _____________________Date: ____/____/____ 9
  10. 10. Q1. Tell us something about your overall stock market experience?______________Q2. Do you think stock market research is essential for investing your money to earn high returns? Yes NoQ3. How long have you been indulged into the stock market research and this business? More than a year More than three year More than five years More than seven years More than thisQ4. Which of the following mentioned factors play an important role while you finalize a stock company? Overall reputation Offered stock market term & conditions Condition of economy Current stock quotes Other, please write: ________________Q5. You purchase the shares to: Invest your money wisely For long term money investment For high end returns To invest money regularlyQ6. Which of the following risk factors disturb the stock market continuously? Corporate drawn Market value fluctuations Economic breakdown 10
  11. 11. Q7. Which of the methods do you use to conduct a stock market research before investing money into shares? Internet Friend’s advice News paper Television Other, please mention: __________________Q8. Would you like to mention a little more about you stock market expertise?__________________________ Survey Results 70.00 60.00 out of 100 50.00 40.00 30.00 20.00 10.00 0.00 Different answers 11
  12. 12. 60.50 22.88 10.03 3.45 2.82 0.31Tip from friendOpinion of analysts in print media 24.68 57.79 5.19 7.79 3.90 0.65Opinion of experts on TV 13.64 30.30 18.18 34.85 0.00 3.03Research reports in newspapers/magazines 28.57 16.67 14.29 21.43 9.52 9.52Research reports on stock market websites 8.33 50.00 0.00 25.00 16.67 0.00Advice of broker 11.11 55.56 0.00 11.11 22.22 0.00Total 42.19 33.22 9.63 9.80 3.82 1.33 Regional Disparity 80.00 70.00 60.00 InvestorSaver 50.00 40.00 Households 30.00 20.00 Households 10.00 0.00 Other Households Total Households InvestorSaver Households Other Total Households Households Households Central Region 0.14 2.70 1.14 3.98 Eastern Region 2.62 5.28 1.63 9.53 Northern Region 1.42 10.20 5.80 17.42 North-Eastern Region 0.32 0.66 0.16 1.15 Southern Region 4.84 5.75 11.20 21.79 Western Region 5.88 8.93 4.71 19.51 Total 15.23 33.52 24.63 73.38 12
  13. 13. Investment Pattern Derivative 4% Bond Debenture 15% 7% Mutual IPO Fund 10% 43% Secondary Market 21% Bond Debenture IPO Secondary Mutual Derivative Market FundAll India 14.89 6.94 10.05 21.59 42.89 3.64Urban 15.07 8.57 8.47 21.25 40.80 5.85Rural 14.60 4.26 12.66 22.04 46.44 0.00 13