Ta(l)king stock: Volatility part of parcel

The Indian market’s most important characteristic is that although it is volatile, it has adequate safeguards to protect interests of investors, D.R. Mehta, Chairman of Securities Exchange Board of India said. He was speaking at a two-day seminar on Capital Markets, organised by the Indian Revenue Service Association on Friday.

He added that markets all over the world are volatile. "We have proved to the world that Indian markets are much more stable than the Nasdaq or the South East Asian markets," he said. He added that this volatility will now be a standard feature of markets the world over. Explaining this notion he said in absence of a common regulator and advent of technology in trading has fueled volatility in markets worldwide.

Giving more examples, he said the primary market underwent a major change after the companies were allowed free pricing of their issues. "This changed the primary market from merit to a disclosure-based market as the free market has a fundamental principle where the investor decides and not the government or Sebi. Our job is to ensure that, the investor is well-informed," Mr. Mehta said.

This is the reason why the disclosure norms are getting tighter and more stringent every day. But with the investor getting several choices, he has the power to decide what is right or wrong. However, he is also responsible for his decisions, he added.

Another question doing rounds, Mr. Mehta said is whether the disclosure norms had killed the secondary market. He said, "Our disclosure norms are comparable with the best in the world, and barring the US, one will not find tighter or more comprehensive norms anywhere. In fact, an investor is well-protected due to these norms."

According to Mr. Mehta, book-building was an innovation that looked into realties of the market and a need to balance the mechanism. So, a system was put into place in which qualified institutional buyers assessed the demand and the market price and on this basis determined the issue price. He said, like all new ideas, this idea met resistance in the initial stages.

However, it is now established as a cheaper and more effective way and also helps the company assess its worth, he added. Similar innovations are the ESOPs or the equity stock options and the concept of corporate governance, he said. Moreover, the cost of capital in market is the second lowest in the world, pointed out Mr. Mehta. This means that the transaction cost for financial institution buyers is second best in the world.

Speaking of the need for changes, he said, "We need countervailing forces to reduce the dominance of the FIIs in the market. More investment by mutual and pension funds can be the solution." He added that while there is a need to reduce the dominance of FIIs in the capital markets, "We welcome their role. The need is that the Indian prompters should also perform."

Speaking of the nature of capital markets, Ms. Uma Shashikant, Director of UTI Institute of Capital Market, said, "In modern economic sense, capital markets represent risk management. It helps price the risk, transfer the risk and gives the players the opportunity to quit." She said the capital markets are based on the assumption that future cannot be predicted and risk wished away. She said, "Capital markets constantly price the projects and give the opportunity to the investor to move out of a project at a given time at a given price." She said capital market is not just for return but also a means to reallocate resources.

Republished from Asian Age