Protection of investor’s interest is
very high on agenda of the Securities and Exchange Board of India (SEBI) these
days. The primary reason could be that the capital markets are increasingly
susceptible to fraudulent transactions ensuing in heavy losses to the innocent
investors.

At the moment, Indian capital market
is witnessing all-time high valuations. As a consequence, investors are going
crazy like never before to invest in the equity stocks. Investors are willing
to taking mammoth risks even with a zero knowledge of menaces associated with
investment in equity stocks.

SEBI is planning to introduce
‘Riskometer’ system in equity stocks which will warn investors about the
overvalued stocks or a loss-making company with a bad business model. The said
system is already prevalent in mutual funds system.

Upsurge in insolvency cases and
initial public offerings and quick emerging trend of instances of shell
companies are the dynamics that subsidized to ink the proposal of establishment
of Riskometer system in the equity stocks.

The proposal of establishment of
Riskometer system in the equity stock was enthused from the Singapore system of
automatic generation of “Trade with caution” alerts during the trading activity
of a stock that otherwise cannot be enlightened based on publicly available
information.

The implementation of the proposed
system will certainly facilitate the investors to ascertain risks concomitant
with a stock based on its trading pattern or performance of the firm’s business
based on a numeric scale or a color-coded system.

SEBI is further planning to expand the
horizon of information to be disclosed by the companies by issuing a directive
to listed companies to disclose non-financial information (along with financial
information) related to certain categories as specified by SEBI on quarterly
basis.

Under the Riskometer system, investors
will be educated about company’s business-related risks by comparing its data
with the industry benchmark and market related risks.

The implementation of Riskometer
system may become a reality in second half of 2019 and such a mechanism may
take the existing financial reporting system to the next level, i.e.,
evaluative reporting regime.

It is hoped that with the serious
implementation of proposed Riskometer system will educate the investors of risk
associated with the equity stocks and safeguard them from getting exposed to
scam and fraudulent trading activities – further it will certainly make
companies more accountable and responsible for the trading of their equity
stocks– ultimately bring stability to and protect integrity of the capital
markets.

Research and inputs by Paruchuri
Baswanth Mohan

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About the author :

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at [email protected].