Downsizing our Capital Markets- A solution

SEBI is apparently going to set up a mechanism to ‘risk’ profile listed companies and financial intermediaries. (http://www.deccanchronicle.com/140414/business-companies/article/sebi-set-risk-profiling-listed-firms). Today, I see SEBI behaving like the anointed godfather of a child (the investing community). The only difference is that unlike a biological father, it will not do anything to regulate the playing field.

SEBI has to understand that the fault is not with the players but with itself. The primary fault lies with SEBI, for not checking who gets in to the playing eleven. The entry barriers to becoming a financial intermediary or to become a listed company are minimal. Instead of addressing this, SEBI is looking at the disease after it has become an epidemic.

For instance, does the Indian market size demand so many intermediaries who can meet all the compliance costs? Probably fifty to hundred brokers are more than enough given the market size. To keep it minimal, what SEBI has to do is to raise the bar. Say, insist on a minimum net worth of Rs.100 crore. Most of the small timers need to get out. All they do is indulge in proprietary trading and some dealings of a few cronies. There are even some who let out their terminal on hire to professional intraday punters.

The second thing is to reduce dramatically the number of listed companies. Today, barring a handful of companies, most are illiquid stocks, if we exclude the block deals and the institutional trades. In fact, like in the debt market, the institutional trades should go to a direct platform where buyers and sellers can bypass the broking system. And for listing, make it mandatory to have at least, say, around 50,000 shareholders, who each hold at least a few hundred shares. Put all the rest of the stocks in to the OTC category and for hand delivery. Our stock markets neither have the depth nor the breadth. I would say that more than ninetynine percent of the stocks in our market are illiquid and one cannot buy even a few crore worth without moving the price.

So, instead of confusing the investors further, SEBI should try and trim the playing field, however much it hurts the ego of the players and vested interests.