Opinion | SEBI's proposal to link stock investments to income is apartheid

The Securities Exchange Board of India (SEBI) is planning to cap investor exposure in the equity market based on their income or net worth. The move, which is aimed at preventing individuals from going overboard on equity investments,  is wrong on many fronts. It is nothing short of apartheid, a system of institutionalized segregation. It is not only bad for the retail investor but also for the market and the economy as a whole.

According to media reports, investors will have to get a net-worth certificate from their chartered accountant to prove they are solvent enough to enter the exchange or trade in equities. It seems that the markets regulator does not want the retail investor to be anywhere close to the big boys club.

The very act of placing a cap and asking the chartered accountant’s net worth certificate defies logic. Without commenting on the sanctity of such certificates, why should a person with a small capital not be allowed to trade to his maximum potential if there is an opportunity to make money? Why should he be judged on his economic status?

Equity trading is as good as any other business and carries its own set of risks. The good part of trading is that it can be started with a small capital and done on a part-time basis, unlike many other businesses which require sizeable capital and time. Many high profile investors of today have a rags-to-riches story behind them.

To SEBI’s credit, its aim might be to keep the retail investor from hurting themselves. But every retail participant who enters the market does so knowing the risk behind it. Investing in equity is a risky venture with or without leverage. The more conservative investors have traditionally been advised to invest in equity mutual funds as they are safer. But apart from a handful of mutual funds, others have not managed to beat the performance of the broad indices.

Sure, leveraged products are riskier, but if a participant is willing to take the risk and is good for the loss that he will incur, why should the regulator have a problem? There are already enough safeguards for leveraged products where an investor is allowed to trade only after he submits his bank statements for the past six months and gets the approval from the broker’s risk management team.

This is not the first time that regulators have tried to keep retail investors from capitalizing on market opportunities. The markets regulator banned the popular mini-Nifty derivative contract which was aimed at small investors. It then increased the lot size of futures from Rs 2 lakh to Rs 5 lakh. Yet, after initial reluctance, retail traders moved to the bigger lot sizes in stock futures.

Banning retail investors from investing as they please could have other, less desirable, consequences. There is a ready market, perhaps more liquid and involving lower hurdles, that is awaiting such investors. These investors, who might not like to trust their money with any fund manager, would move to the bucket shops, popularly known as ‘dabba’ markets in India. Dabba trading risks would be far greater.

Second, such a cap on the small investor could very well mean a loss of liquidity from the markets. NSE data shows that nearly 50 percent of trading volumes in equity and 40 percent in derivatives comes from non-institutional investors, the segment that SEBI wants to target. Moreover, lower trading volumes could lead to a loss in revenue for the government.

In conclusion, SEBI would do well not to pursue this line of thought. There are other ways to protect small investors and make the marketplace a level playing field. For starters, it can focus on resolving the NSE colocation case.