By Dr. Alok Singh,
Recently, small and medium enterprises have received good support in the stock market. The primary market is where the issuer gets the money from first-time buyers through initial public offerings (IPO), private placements, rights issues, and preference allotment and once allotment is done then the buying and selling happens in the secondary market of the stock exchange. The Indigenous stock exchange has seen huge participation from domestic small retailers in the primary as well as the secondary stock market. This has risen an alarm bell to the regulators, government, and even the judiciary. The mechanism of regulating the stock market is unfortunately skewed against the opportunity for small retailers.
At face value, it reflects the concern of the government, the regulators, and the judiciary to comment, act, or create awareness about the risks involved in investment by small retailers in small and medium enterprises. But this also sometimes creates an additional tool for the investment channel to mislead the investors who, mostly rely on information provided by their brokers.
There are many channels to participate in the stock market, and small retail investors usually have a single channel to do business and it is through the brokerage firms, whether it be the brokerage house like “Zerodha” and “Groww” or bank-supported stock brokerage businesses like ICICI Securities or HDFC Securities. These channels appear to be providing correct information. The information provided although is true, but if it is shared late it is as good as denying the information. In a free market, the information is not free and hence true free market is just an illusion. The regulated market also has share of its own problems.
This creates a tradeoff between the concepts of free market and regulated market. The 2008 financial crisis happened because of the free market and the freedom was so huge that it led to many regulations post the crisis. It seems that each additional regulation is meant for some bigger failure. The financial sector whether it be bank or stock is full of such repercussions.
These processes of freedom and regulation are not truly democratic. The completely free market is risky to small investors and a completely regulated market denies opportunities to small investors. It seems that none of the existing formats is in favor of small investors and small businesses. There are few bad apples in almost all the systems and because of those few, penalizing all is also not fair. The regulators, the government, and the judiciary should think seriously about the ways to democratize the participation of small investors and the small business in the stock market.
The financial crisis of 2008 led to the concept of creating big banks labeled as “Too Big to Fail”. This concept of “Too Big to Fail” itself is skewed against small businesses. The contemporary world whether it be e-commerce, digital entertainment, or the financial market is undemocratic despite so many hues and cries that digitalization, cheap data, and affordable communication and computing devices have democratized the process. The risks with such democratization are high for small, whether it be small investors or small businesses. It appears that the perception of the ecosystem being democratic is created but its behavior is otherwise in practical execution.
The broadcasting of concern about SMEs in the stock market is like an opportunity to deny small investors the business and transfer these money-making opportunities to big investors, like high-net-worth individuals, or investment bankers, or such kind of variety of big players, including those who are playing from beyond the geographical boundaries of our nation.
In the name of safeguarding the interest of small investors, there are many brokerage firms that restrict retail investors from buying an SME stock but permit them to sell SME stocks. These algorithm-based recommendations are legally valid or may be a statutory necessity as per the guidelines of the Securities and Exchange Board of India (SEBI), but the big point is that the small investors are being victimized while the big investors are being given more control. This will obviously create a huge gap between small and big investors in terms of owing the share of wealth in the stock market, even in logarithmic terms. Obviously, big investors will earn more in magnitude, but the logarithmic return should be fair game to small investors.
The choice of the regulators and the government seems to be limited. If they don’t act or create awareness, then they will be blamed for inaction, and if they act, then it leads to many opportunities for brokerage firms of stock exchange to interpret it the way it suits them.
Knowledgeable investors are raising their voices for the disadvantage. Currently, any fair framework of regulation and education is not visible that favours small investors to support small businesses in raising financials through the primary or secondary market of the stock exchange. The lot size, number of investors, and market capitalization along with many other parameters need to be evaluated subjectively rather than using algorithm-based objective evaluation to put any script on surveillance so that the small investors of our country who are contributing to nation-building by investing their money in SMEs are not discouraged. Currently, we have more than sixteen crore demat accounts, and discounting the multiple counting of such accounts, the best forecast expressed that there are at least eight crore individual investors in the domestic stock exchange. The stakes are high as these small investors are a shield against the financial institutional investors (FII), as FII on their command destabilizes our stock market. The SMEs and startups are being denied the opportunity to raise local capital. The narrative war has entered the stock market and is visible. The subjective evaluation of ten thousand or more companies is the task that needs to be thought about.
(Alok Singh has a doctorate in management from the Indian Institute of Management Indore and is currently a Delhi-based academician.)
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