It was a sunny afternoon in winters of 1991. I was enjoying coffee at a famous public café in Connaught Place (New Delhi) with couple of my friends. All of us were waiting for our CA Final result, which was to be announced in couple of weeks. My friends were senior to me and were already working, having completed their articleship two years ago. We were discussing the economic changes that were getting unleashed in the country by the new regime that had assumed office a few months ago.
The economic
changes had not impacted me in any positive manner by then. INR devaluation had
led to inflation spike disturbing our household budget. Some of my close
relatives who were running micro and small industries (then called SSI) were deeply
worried about sustainability of their business as they were now exposed to
competition from larger businesses and imports. My cousins had their own set of
worries. The implementation of Mandal Commission recommendation was reaffirmed.
The competition to get government jobs and admission into public educational
institutions had intensified for general category candidates. The aftershocks
of former Prime Minister Rajiv Gandhi’s brutal killing, gulf war, Punjab
terrorism, were still being felt in Delhi. Overall things were not looking
great from where I was standing that afternoon.
My friends who
had started investing in stocks were however in high spirits. They had earned very
good profits by trading. Their employers had promised them promotions if they
pass their final exams. They already had a new Idol in (now infamous) Harshad
Mehta to look up to. That afternoon, they could not see anything wrong.
Arguably, this was their best time in life.
Our discussion
was obviously not harmonious.
About an hour
later, a middle aged man with very ordinary personality entered the scene.
Tarun, my friend, excitedly jumped out of his seat to greet him. “Meet Mr.
Hemant Pandey, my stock broker. Hemant ji advices me and also helps in executing
my trades at Delhi Stock Exchange. He also knows brokers who can execute trade
at BSE”, he proudly introduced the man to us.
And here begins
the story.
On enquiry, I
found that Hemant, a college dropout, was an “authorized agent” of a
“sub-broker” of DSE broker. A friend of his friend was a remisier (a person
authorized to go on trading floor) of a broker at BSE. He was therefore able to
place orders of his “clients” to brokers at DSE and BSE. Though it could usually
take upto 4 days to execute a trade and get confirmation of trade. The
brokerage charged ranged between 2% to 5%; and only “market price” orders were
acceptable. Delivery of physical share certificates with a valid transfer deed
was not guaranteed. It was mostly on “best effort” basis.
That was the
situation of Indian financial markets when the liberalization started 30years
ago. Having direct access to a stock brokers’ office was sufficient to make
someone “important” in his/her social circle. Something similar to if you have
direct access to a Minister’s office today.
The people in
their 20’s and 30’s who are spammed daily by multiple brokerages to open a
trading account at zero brokerage, would never be able to fathom what it was
like to be a stock trader or a “retail investor” in pre 1994 days.
Democratization
of financial market is one of the most understated reforms of past three
decades. The impact of democratization of society in past three decades is
visible in almost every sphere. People belonging to the bottom of the pyramid
have done particularly well in politics, administration, sports, entertainment,
business & professions and science.
However, the easy
and free access to financial and banking services has been the most remarkable
achievement. Financial inclusion, as we call it popularly, is one of the core
pillars of the entire socio-economic development endeavor in past three decades.
Technology (especially digitalization) and Telecom Infrastructure are two other
strong pillars which have supported the financial inclusion as well.
The tendency to
overregulate is one of the undesirable aspects of modern democracy, as it
promotes chaos, rebellion and anarchy. Since, the global financial crisis we
have witnessed this tendency to overregulate dominating the financial markets
also. As a natural corollary, the chaos (heightened volatility), anarchy
(unassimilated assets trading at unfathomable valuations) and rebellion
(rejection of conventional wisdom in favor of untested experimental ideas) is
also prominently visible in markets. May be time is approaching fast when the
democratization of financial markets that started three decades ago would also
need an affirmative agenda for renewal.
Like Robinhood
Markets of US, which pioneered commission-free investing model which allowed
many people to start investing, including those who otherwise would never have
ventured into stock markets, many platforms have emerged in India also.
Zerodha, for example, is now the largest stock trading platform in India in
terms of number of clients.
There are
multiple platforms for trading of unconventional financial products like
cryptocurrencies (e.g., Bitcoin) and Non-fungible tokens (NFTs).
Advent of new
technologies, new products, new set of investors, new methods of valuations and
different risk profiles perhaps require a fresh approach to the financial
markets regulatory framework.
So far the
regulators and governments have adopted an incremental approach for regulating the
emerging developments in financial markets. This is apparently resulting in overregulation,
misregulation, rebellion and chaos.
Margining and
disclosure norms which are not in synch with the current market realities;
abundant trading in unregulated (grey) markets; mushrooming of unregulated
crypto & NFT exchanges and platforms; participation of large number of
individual investors with inadequate financial literacy and risk tolerance etc.
are some of the problems that are plaguing the markets.
Some of the
problems that may require a totally new approach to regulations could be
illustrated as follows:
·
Under
pressure from market forces, the market regulator SEBI has been forced to defer
the implementation of proposed tighter margining norms.
·
The
managements are disclosing so much irrelevant and redundant information to the
market, on the pretext of regulatory requirement. The relevant information many
a times is getting lost in this overwhelming deluge of redundant information.
·
There
are numerous cases of offer for sales (in guise of initial public offers) where
the existing investors have exited at apparently unjustifiable price. The
managers of these issues owe no accountability to the gullible investors who
may lose substantial money.
·
Trading
in new assets (Cryptos, NFT etc.) so far is unrestricted. There are numerous
traders who may not be adequately skilled to understand the risks. There is no
visible effort from regulators so far to improve the literacy and awareness
level of these traders. It is therefore desirable that for the time being the
trading is restricted to the discerning traders only.
President Biden stated on the International Day of Democracy,
“No democracy is perfect, and no democracy is ever final. Every gain made,
every barrier broken, is the result of determined, unceasing work.” He has made
it clear that renewing democracy in the United States and around the world is
essential to meeting the unprecedented challenges of our time. He brought the
global leaders from government, civil society, and the private sector together
to a global democracy summit, to “set forth an affirmative agenda for
democratic renewal and to tackle the greatest threats faced by democracies
today through collective action.”
It is
imperative that this principle is applied to the financial markets also. The
promised new code for the regulation of financial markets must take a fresh
approach to regulation rather than adhering to the usual incrementalism.
