The SME market is almost like a casino now. It does not feel like a stock market.
Sunil Subramaniam: I fully agree with you. The reason for this is also related to the rampant futures and options situation. Demat accounts are going up. Post-COVID, youth with a lot of time on their hands, armed with internet and technology hands, are treating the stock market like a gambling den. There are no two ways about it. We do not have other options for gambling. We can see similar kinds of success when it comes to Dream11 and those kinds of sports-related apps. Despite all Sebi restrictions, financial influencers (fin fluencers) play a big part. It is like a get-rich-quick scheme. Booking gains from these IPOs show their intent. They are not investors. They are speculators.
The regulator will give approvals as long as the process is clean. The regulator will never put a full stop to an IPO on valuations; that is the function of merchant bankers. The regulator is talking about disclosures. So, somewhere, the merchant bankers and the brokers, need to be careful and need to do the fiduciary duty of not selling bronze at the price of diamonds because they are taking the company public.
Sunil Subramaniam: Partly I would agree with you because these merchant bankers are not saddled with the task of right selling. Their job is to get a maximum price for the issuer. Second, since the stock market is like a commodity market, who is to say what is the right price? Are average PEs 25 right, and average PEs of 32 the right? The market is the best to determine.
So, can you blame merchant bankers, for trying to maximise the rewards for their existing shareholders, whether they are promoters or PE people? I think it is part of the capital market. That is how capitalism works. Now, who is going to regulate this? Now, the point is very simple. I do not think even the SEC regulates this. Unless there is some price fixing, rigging, there is some false news put across which makes the share price go up. Unless you can find clear evidence of fraud.
Second, let me take a slightly larger perspective: I think this is all part of a healthy capital market. It is only when you have these speculative entities like these people come in, that there is liquidity in the market. But if you regulate them and take them out, overall as a market, the liquidity is going to shrink. So, there is a moral issue that maybe the youth who do not know anything about the markets are coming in. They are making money today.
Tomorrow, they will burn their fingers. They are going to go away from the markets, that is a social and moral issue. But in a healthy capital market, there is always the need for speculators. An element of speculation is necessary for the market to breathe. So, it is a healthy capital market from my perspective. But yes, some people are unaware that they are being used by financial influencers to invest without any basis, and are looking to book gains. The Sebi study says that when people book losses, they just fill it and put it in their cupboard. They forget about it. They are very public about their profits, but they hide their losses away in the cupboard, but that is natural. I am saying we are a developing capital market and these things will happen. Should the regulators step in on the valuations? I do not think that is right because there is no golden rule on what should be the right valuation. The market is the best determinant.
Do you think somewhere SEBI needs to come in and put on extra vigilance? For example, to control the market risk, the regulator and exchanges can change the margins. If we have to prick the bubble in the SME market, the regulator can tighten it and Merchant bankers need to be careful and not just say the risk lies with the investors.
Sunil Subramaniam: The danger is that there is no orderly move from chaos into stability. The moment the regulator announces something like this, there will be a collapse and lots of people will face massive losses and you are going to give them a big thappad (slap) and a big shock.
So, one option is to talk it down, like SEBI did in the smallcap case or the futures and options case. They can talk it down. Financial influencers tried a little bit of talking it down, but putting any regulations gives the signal that SEBI considers this irrational exuberance and that could trigger a collapse.
In a regulated move from this chaos, I would suggest we start by first talking, advising, and guiding, before we introduce any harsh actions that could give a wrong signal to the market and lead to a domino effect. That must be even Sebi’s view. As far as data and analytics are concerned, Sebi has a fantastic AI team of high-quality engineers who are churning out these data. So, if they are sensing that there is some wrong process involved, some kind of insider trading involved, some information was leaked, then they should take harsh action. So, wherever there is something illegal going on, then you take step action.
I would step away from trying to regulate a free capital market through regulations, but talking is always welcome.