As more investors look towards equity market, SEBI wants to implement an early warning system

The Securities and Exchange Board of India (SEBI) is looking to implement a system that will caution investors about the risks of investing in shares of overvalued companies, firms that do not having a viable business model, and the ones that could go bankrupt, reports Livemint.

The report said that the proposed system would allow investors to identify risks associated with a stock based on its trading pattern or performance of the firm’s business based on a numeric scale or a colour-coded system. SEBI officials had gone to Hong Kong and Singapore went to study a similar system system that is followed in those countries.

The Monetary Authority of Singapore introduced ‘trade with caution’ alerts in 2015 that are generated automatically when a listed firm says that it is not aware of the reason that could possibly explain the unusual increase in its shares trading.

The Indian market is trading near all-time high tempting small investors to ride the bull market by taking higher risk in the stock market without knowing the risks associated with investing in equity.

The market regulator's proposal to introduce such a system in the stock market stems from the increase in the number of initial public offerings, number of companies facing insolvency proceedings and cropping up of shell companies.

A similar system is in place at Mutual Funds called ‘Riskometer’.

SEBI may also ask listed entities to report certain additional information every quarter that contains human resource data, cost-cutting detail, changes in top management remuneration, details of loans availed and their usage.