The market can stay irrational longer than you can stay solvent - John Maynard Keynes

Stock market fluctuations are wild. But they are not always sentiment driven. Few informed investors who have vested interest in stock price movement, manipulate prices. Based on positives or the negatives about the company mentioned in the research report; cartels operating in the market either jack up or beat down stock prices. Market participants such as brokerage houses, investment banks and mutual fund houses are already being overseen by the market regulator, Securities and Exchange Board of India, (SEBI) extensively. But given the increased number of cases of stock price manipulations, SEBI now feels the need of bringing all research analysts under its regulation.

Why greater regulation?
Gullible investors invest in stocks based on recommendations of self-proclaimed experts; but often lose money due to price manipulations. SEBI has a mechanism to discourage such malpractices but few in the market find loopholes in regulations and restrictions to control stock prices. Although, circuit limits are prescribed on every stock that is not in the derivative segment; there is nothing that can prevent the stock from staying in circuit for consecutive days unless manipulation is proved. There have been also some instances in the past where even the bluechip stocks were manipulated. Hence, tighter regulations on research analysts giving views on companies under their coverage; would be beneficial to genuine investors.

What will change for research analyst?
International Advisory Board (IAB) of SEBI made a suggestion to introducing separate guidelines for analysts last year. Introduction of new guidelines would make research analysts more accountable. They would have to give disclosures pertaining to:

• Incentive structure
• Shareholding pattern
• Market dealings
• Various direct and indirect business interests
  
  

The above mentioned disclosures would make it difficult for research analysts to write reports out of their personal bias. For example, unless a researcher is made subject to regulations, he may comment on petty issues in a grave manner to take advantage of price fluctuations for his personal investments. New regulations would discourage independent research analyst.

PersonalFN is of the view that, making all research analysts accountable for their advice would help improve quality of research reports released. This may also help curb stock price rigging as nailing manipulators would become a little easy for the regulator. However, PersonalFN believes, stock price manipulations may happen even in future as there are about 5,000 stocks listed on Indian stock markets. PersonalFN believes while you take advice from any research house you must be sure about its authenticity. Independent and unbiased research houses may work best in your interest. However, those who don't have time or a skill set to select stocks for their portfolio may invest in mutual funds.

In some cases, individual investors or even stock analysts may not be well equipped to gauge speculation happening in stock prices. Mutual Funds, on the other hand, are tightly regulated and have internal risk management systems to minimise risk. Moreover, funds are managed by professionals who usually have to comply with internal investment processes and systems while buying and selling stocks which include size of the company, volume of trades and past performance of the company among others. This automatically discourages a fund manager to bet on stocks which are controlled by cartels. It is important to be a wise investor to be a successful investor.

Add Comments