Tech for small investors' benefit: SEBI on right track

By C. R. L. Narasimhan

Certain recent proposals of the Securities and Exchange Board of India should benefit the small investors and hence have a healthy impact on the capital market development.

The more important of those announced recently by Mr. S. S. Tarapore who now heads the Secondary Market Advisory Committee of the SEBI are (a) abolition of the non-delivery period for dematerialised shares of companies specifically at the time of dividend payment and bonus shares; (b) Reduction in period between two book closures from the current requirement of 90 days to 30 days; (c) Companies should make public within 15 minutes material decisions after the conclusion of the board meetings.

These material decisions would be those pertaining to say dividends, bonus or rights; and (d) With a view to ensuring a minimum float in the listed shares detailed guidelines are to be issued.

The above decisions will take effect soon. On the face of it, they are no more than technical matters concerning company secretaries and the like. On a closer examination, however, they represent a big regulatory step forward in protecting small investors. As Mr. Tarapore has remarked, small investors are the bedrock of the capital market. However, despite substantial progress made in protecting them, the universal perception is that the small investors in today's capital market are a neglected lot. In other words, the substantial initiatives taken by the SEBI in the first phase of capital market reform, the ordinary investors have not benefited in a tangible way. Consequently, many of them have stayed away. Ample evidence exists to prove that ordinary investors' desertion has harmed the larger interests of the capital market, both in its primary and secondary sub-segments.

The primary market's moribund state is directly attributable to the ordinary investors' apathy which even concerted SEBI efforts have been unable to shake off. The point is that the inherent weaknesses of the secondary stock market apparatus as seen by the frequent price manipulation and a whole lot of negative features have made small investors wary of the stock market route for their savings. Official policy has acknowledged this phenomenon. Note for instance the advice given to ordinary investors to take the mutual fund route rather than invest directly. This, on top of the attractive tax concessions, which mutual funds enjoy, seems to suggest that ordinary investors should not deal in stocks directly. It would be a sad day, however, if individual investors are discouraged from participating directly.

It is in such a context that the latest - seemingly technical - SEBI initiatives are to be appreciated. They have to be clarified and in course of time further refined. Take the well thought out initiative on doing away with the no-delivery period for dividends and bonus issues. When demat has taken hold there is obviously a need to relook at concepts such as a no-delivery period which were useful when physical scrips alone were transacted. Tangible gains from the move are (a) investors will reap immediately the benefits of corporate action involving dividend and bonus announcements; (b) Speculation will be reined in to a large extent. SEBI, which is considering the inclusion of rights announcements as well, should move fast and include stock- splits decisions too within the ambit of this move.

Evidently technology absorption has made the above possible. Further evidence lies in the decision to drastically prune the gap between two book-closures from 90 to 30 days. In course of time it should be possible to reduce it further. The ideal situation would be to operate on a record date concept alone.

To the extent stock speculators are denied the opportunity to arbitrage on say ex-bonus, cum-bonus and so on, the small investors gain. Similarly, the moves to force the companies to disclose share price-sensitive information within 15 minutes after the board meetings are also welcome.

Except that it is good to remember that reforms of this genre will succeed only if they are capable of being monitored and for that more and more dependence on technology becomes inevitable.

In a different genre, but equally significant, is the other important recommendation to ensure a minimum float in a quoted share.

At present there are specific guidelines on these when the company makes the first public offer: media, technology and infrastructure companies should offer at least 10 per cent of the offer at the time of the public issue and the others 25 per cent. Post-issue, however, these are not applicable.

Consequently, there are many scrips especially in the technology sector which are held in a concentrated fashion by very few investors. Erratic price fluctuations to benefit those few become the norm. The SEBI proposes to give some of these companies a year's grace period to comply with the new regulation. This move is laudable. It is actually a throw back to the time when listing requirements of the stock exchanges ensured a widespread dispersal of share holding.

All in all these are steps in the right direction. At long last the small investors' interests are focussed upon, not just technology for its own sake.

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Section  : Business
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