A fine line

Regulator should not comment on market prospects

The Securities and Exchange Board of India (Sebi) is said to be contemplating releasing regular “risk-factor disclosures” on market trends. The regulator hopes that by periodically sharing more information, and divulging its own observations, it will aid investors in decision-making and, thus, help them break out of the “herd mentality” that often drives the markets.  Reportedly, it has been mooted that these disclosures can focus on investor behaviour over a time period, profits or losses, the market segments that have been profitable or loss-making, areas of interest, etc. This may be a response to the recent losses sustained in a large number of initial public offerings, as well as in the derivatives segment. There are pros and cons to this idea. On the good side, the market regulator has access to much more data, which is not available in the public domain. It can also analyse that data to greater depth and with greater accuracy and thus offer deeper perspectives. By transparently sharing more data, it could certainly aid discerning investors.

However, the market regulator’s brief is essentially to create a level-playing field for investors by ensuring high standards of corporate governance, transparency, equal access to price-sensitive information, and ensuring the smooth functioning of financial exchanges. All publicly-traded firms, financial institutions operating in the markets and market infrastructure such as stock and commodity exchanges, must provide disclosures regarding their actions, policies, and future strategies. The regulator has worked to strengthen the corporate governance norms and disclosure requirements for listed companies. But it has no obligation to guide investors in decision-making, as opposed to enabling the flow of more information from corporate entities. Indeed, it should not do so. It is easy to imagine a situation where Sebi’s risk updates are cited widely, and misinterpreted, or selectively interpreted, to imply “Sebi recommends” some course of action.

Apart from becoming a possible scapegoat in such cases, by offering its own observations on market risk factors, Sebi may end up actually reinforcing and amplifying the herd mentality, which is always endemic to markets. If the bulk of investors believe that Sebi is flagging a specific risk, or highlighting a potential opportunity, there will be even more “herding”. There is another deeper issue to be considered here as well. While the regulator may be seeking to offer an unbiased perspective, and deeper insights, interested parties would certainly seek to influence the direction of any such periodic updates.  Attempts to capture independent regulatory institutions are not unheard of, and there would be intense lobbying to influence such a periodic update. It is even conceivable that there would be pressure from government sources in the event of a large public sector undertaking disinvestment being on the cards, for example. This is a primary reason why market regulators are independent statutory bodies, and it is also why they generally evince little opinion about market trends.

It would be good if Sebi chooses to release more datasets into the public domain and thereby offer investors a wider-angle view of the financial landscape. But the analysis of such data, and its possible interpretations in terms of trends must always be left to the investor. This would require drawing a very fine line, and it is better not to try such micromanagement.