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
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@example.com.