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Ensuring integrity of capital market

A better informed investor raises SEBI's stature

THE ANNUAL Report of the Securities and Exchange Board of India for 2005-06, released recently, is at one level a recapitulation of major initiatives undertaken by the capital market regulator last year. It covers the whole gamut of the capital market — the primary market, secondary market, mutual funds, FII investment, corporate restructuring and stock market surveillance.

But a mere catalogue of regulatory initiatives, however comprehensive, will have only limited utility unless they are seen against the backdrop of major market developments of the period.

Major developments

The period under review — April1, 2005-March 31, 2006 — was, by all accounts, part of an exceptional one in recent history of the Indian capital market. At the close of the year the bull market had peaked. Although no one predicted then, a long-overdue correction was round the corner. By the third week of May 2006 the indices had plunged drastically.

But during the period covered by the SEBI report it was mostly good news. As the report records, the benchmark indices — the Sensex and the Nifty — zoomed.

Between March 31, 2005, and March 31, 2006, the appreciation was as high as 73.7 per cent in Sensex and 67.1 per cent in Nifty. It is not at all surprising that such appreciation in stock prices should be reflected in all other measures of stock market performance.

The turnover in the cash segment for the year rose by 43.4 per cent to touch Rs. 23,90,103 crore. Clearly, plenty of churning had taken place. Plenty of fresh investments had also come in both directly and through mutual funds.

In fact, equity mutual funds have had an extraordinary run, with many of them beating the benchmark indices handsomely. Under the rules, the funds have to warn investors that past performance is no sure guide to the future.

Whether all the funds registered with the SEBI follow this regulatory guideline in letter and spirit is not known. In fact a few have been clearly misleading investors when they or their distributors seemed to suggest that returns of such a magnitude would be the norm in the future.

Many supportive factors

Few will argue over the fact that the heady bull run during the period under review was due to a variety of factors. Robust and sustained economic growth, consistently impressive corporate results and a benign economic and political environment, have all played a role.

There is no doubt too that proactive capital market regulation has ensured the integrity of Indian markets and this has certainly been a major factor underpinning investor confidence.

It is just as well that the regulator stayed away from identifying itself too closely with the Sensex levels. To correlate stupendously high market levels with the outcomes of successful economic policies (including regulation) is the height of naiveté. Past experience suggests that it could be a dangerous folly.

In what should be seen as a sign of maturity, there was caution — not self-serving accolades — emanating from the policy establishment urging investors to be careful in picking stocks. It is true that such warnings were routinely issued in the past too whenever the markets rose. But this time, during the first week of May when Sensex seemed heading towards 13000 and beyond, no exaggerated claims were made. The credibility of the regulator remained in tact.

Growing global links

Another important recent development is the recognition of the growing linkages between stock markets here and those outside. Movement of share prices in India has consequently become more predictable and hence much less hyped than before. A combination of factors — better understanding by the investor community of the factors that drive share prices and a detached stance about extreme market movements — have helped in enhancing the status of SEBI.

The list of regulatory measures that the Annual Report covers is fairly long but none path-breaking. Most of them did not make headlines. That again is good news as far as the standing of the regulator is concerned.

C. R. L. Narasimhan

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