SEBI-RBI's Coordinated Attack Against Lending To Buy Shares May Have Just Begun
The approach is simple—pick the big boys of the segment and make an example out of them for the industry to stop uncontrolled borrowing.
India's regulators are taking coordinated action to reduce leverage in the financial system. The Securities and Exchange Board of India and the Reserve Bank of India have stepped in through exchange of information and action.
The approach is simple—pick the big boys of the segment and make an example out of them for the industry to stop uncontrolled borrowing. The concerted effort by SEBI to reduce debt-fuelled share purchases comes in the backdrop of unsecured lending malpractices prevalent in the banking and financial sector.
See how JM Financial has responded: "We have been in this business for five decades", and we know what we are doing.
But 'nobody can touch me' is no longer the case. The regulators will touch you and size you up if you show the legal card. The spirit of the regulation matters, not the letter. That's the clear message.
Since October, the market regulator has been concerned about the leverage it has seen in the stock market—be it via flows to small- and mid-caps stocks directly or through mutual funds; IPO financing; IPO over-subscription on the SME listing platform or in the offers by small and medium-sized companies on the main board. Not to mention, an overheated derivatives market with options volumes and turnover on the rise.
While the regulators haven’t disclosed publicly how this leverage is being created, they are aware that pools of liquidity from the banking and financial system are getting diverted into the capital market, creating potential systemic risks.
A wider policy approach for the sector will disrupt the normal functioning of the financial markets, bringing the industry up in arms against the regulators and a possible intervention from the North Block. But what the regulators are aware that the Finance Ministry will not intervene on regulatory action for violation of rules. The action will be harsh and hard hitting, sending a message to the industry.
The aim is to stop liquidity. That can be done by reducing leverage, and the only way to get it done is to strike the big boys fueling it, whether via personal loans, lending against gold, IPO financing or other unsecured short-term loans. SEBI and the RBI are working in tandem to ensure markets cool down.
Regulators usually work in their own space and seldom share information, but SEBI and the RBI are on a mission to cool the markets. The last time it happened was during the global financial crisis of 2008-09, when both the regulators worked in tandem to ensure there is enough liquidity in the market. This time around, they are trying to reduce the liquidity.
How do you explain no dearth of liquidity in the IPO financing market despite the RBI keeping a tight hold.
Derivatives have become 30-minute trading products, IPOs have become four-day trading products and easy financing has ensured retail investors are lured into these high-risk products.
Expect more such action from the regulators in the next few weeks, bringing other broking-to non-bank lending companies in the eye of the deleveraging storm.
