Regulation and capital market

Monday, 21 May 2012 00:00 - - {{hitsCtrl.values.hits}}

In retrospect, I recall the expression Indrani Sugathadasa, the then Chairman of the SEC, used to sum up the circumstance that led to tightening of regulations – ‘ don’t kill the rooster that lays the golden eggs, intending to take all eggs at once’. In a matter of four short months, all doubts as to the correctness of what the regime did to the stock market in terms of regulation has been cleared, with many applauding the hindsight of the decisions thus taken.

Following the triumphant end to the war, the Market, as expected reacted with a positive sentiment, resulting in an upward trend. Consequently, the index ascended to 7800, from1500, in a short span of time. Was this rise fundamentally realistic? There are those analysts who believed that it should have stabilised at 5500, as opposed to rising upto 7800.

The difference between the actual rise versus the predicted rise is an indication of the manipulation that might have prevailed in the market, which led investors to drive small cap stocks to unrealistic levels.

The stocks that rose to unrealistic levels have now crashed to levels it should be and as a result the market is settling down at a more realistic level with fundamentally strong stocks driving the market.

Had the market climbed upto 10,000, which some Brokers were anxious to achieve, the fall would have been even greater, with adverse financial implications to many, if not all market participants.

The post mortem of this situation has left a bad taste in the markets with many retail investors suffering huge losses as a result of punting in low cap stocks that were driven by manipulators.

We now realise that the price band was in fact, the need of the hour. It helped curb the rise of stocks to an unrealistic value and was used as a guide for investors. In the absence of a price band, the market would undeniably have leaped to 10,000, an unrealistic reflection of the authentic market activities. Had the market soared to such heights and settled at what it is now, the damage it would have caused predominantly in terms of investor confidence is beyond comprehension.

Credit was a debatable issue. If these investors who suffered huge losses were not availed of by credit, their fall would perhaps have being been less steeper.

The fuelling a capital market with credit leads to a bubble formation. Fuelling a market with equity strengthens the market and is less speculative. This very reason was the thinking behind imposing a credit ban.

So the SEC was mindful of this and imposed a credit ban.

It is of paramount importance to keep in mind that “no amount of credit can fuel a capital market, it can be fuelled only with capital.”

A concerned investor