The Securities and Exchange Board of India (Sebi) plans to release monthly 'risk factor disclosures' on market trends, including surges and crashes, in a worldwide first to assist investors make the correct decisions by learning from the regulator's observations, according to the sources, news agency PTI reported.
The move, which is still in the early stages of discussion, could help investors avoid the herd mentality that has been particularly visible in recent years, beginning with large-scale selloffs when the pandemic hit the world in early 2020, followed by a sharp surge in buying of stocks without understanding the fundamentals and largely on the basis of get-rich-quick stories, and then subsequent losses.
The recent losses sustained by investors in a large number of IPOs, as well as the extremely intricate futures and options section of the capital market, have been particularly significant.
"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 was quoted by PTI in its report.
According to the official, much of the research material accessible in the market has been generated by market players with their own commercial interests in mind, and therefore it may be a fantastic idea if the regulator itself makes public its insights from market upswings or downtrends.
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, PTI reported.
"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," the source said.
"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 amassed a massive amount of facts and figures, as well as massive datasets, as a result of its use of big data, artificial intelligence, and other facets of cutting-edge technology, all of which can be of enormous assistance to investors and other market participants if Sebi begins 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 was quoted by PTI in its report.
Currently, rules demand that all publicly traded firms, as well as some market players and market infrastructure organisations, provide disclosures regarding their actions, policies, and future strategies in order to assist investors in making sound investment decisions.
However, there is no such obligation for the regulator, and it is past time for Sebi to lead by example as the sole body with a comprehensive holistic perspective of the whole marketplace, according to the official.
"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.
According to the source, the plan is to make fact-based disclosures on a regular basis, which may be annually, biannually, 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," the source said.
"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 faced significant volatility in recent months, owing to a rapid exodus of foreign capital and a delayed economic recovery in most important industries, albeit the previous two fiscals have shown more stronger trends despite the COVID-19 epidemic.
Overall capital market resource mobilisation in 2020-21 remained high at over Rs 10 lakh crore, above the previous year's total of Rs 9.96 lakh crore, despite the pandemic's impact on enterprises in general.
The remarkable expansion in individual investor engagement in the securities market, notably through mutual funds, has been a standout feature.
In the last two years, corporate governance norms and disclosure requirements for publicly traded companies have been strengthened further, including expanding the role and applicability of the risk management committee and mandating the creation of a dividend distribution policy, among other things.
(With Inputs From PTI)