Thursday, August 15, 2013

Invest only in regulated cos or pick long-term funds: Sebi

"Investors cannot be an expert in determining whether a company is genuine or not, while investing in an equity market. If someone does not possess that expertise, then it is best advisable in long-term funds that will give assured returns," he said in CNBC-TV18's show Depositor Protect Thyself.

For the past three to four years, con jobs or fraudulent companies attracting investments from individuals have risen, so an ordinary investor should first find out whether that company is regulated or not, he added.

He also elboarted on the role of Sebi as a market regulator.

Below is the edited transcript of his interview to CNBC-TV18.

Q: First, a broad outline as to how Sebi prevents fraud. What, basically, are the kinds of fraud or con jobs that companies indulge in? Can you give us a broad outline?

A: What we are noticing in the last three, four years is that companies which are not regulated by any central agency, are trying to reach out to individuals and raising money.

For example, if you are a collective investment scheme, you have to get registered with Sebi. If you are a non banking financial company (NBFC), you have to get registered with RBI.

However, there are many companies which only get registered as a company under the Companies Act. Under the Act there are lakhs of companies and they have their own style and purpose of business. What we are noticing nowadays is that some of them are saying that they are in the business of real estate, timeshare, multi-level marketing etc.

To an ordinary investor they reach out as being a registered company. And then they start raising money. The problem is that which regulator will act when a compliant is given to him.

For collective investment scheme Sebi is the regulator, for NBFCs RBI is the regulator. So, for an ordinary investor, my first advice would be that find out whether they are regulated by any of the financial sector regulators or not.

Q: Chandigarh is a city of employees. And they are generally interested in investing in initial public offering (IPOs). At one time there was controller of capital issues (CCI). It always fixed the prices of IPOs, rights all that and they were very genuine prices. It is only when Sebi came in CCI was no longer there. Then the prices which were fixed by the companies were absolutely wrong. The fixation of prices, of rights and IPOs must be fixed by Sebi. It should take up this point as henceforth, people will not be cheated that way. I am a victim of a company known as Zylog Systems. This company was very popular at one time and I invested quite heavily. Thereafter, for 15-20 days, the stock was on the down circuit and Sebi took no action. It behaved just like a policemen who comes after the crime and the criminals are at their home; this is very sad. The day Sebi took action from thereafter, the stock is everyday under down circuit for 5 percent. As a result even if the promoter has their hands, so to say, but the investor has been equally hanged, investors are suffering. A share which was being sold at Rs 600 now yesterday it was sold at perhaps Rs 20.

A: First question was about the pricing of the IPO and the issue being made was that, earlier in the CCI days, CCI used to fix the price. It also used to fix the number of shares that can be issued. It also fixed the time of the year when those shares can be issued. The law of the land has changed and Sebi cannot fix the price of the share. The share price has to be determined by the market.

What Sebi can do is to ensure that proper disclosures have been made. If disclosures have not been made properly, then Sebi can take action against a company. You began your speech by saying that Chandigarh is a city of retired people or of government servants.

I presume you also meant to say that these are people who are not experts in the capital market. So, my counter question to you would be an advice; would it be that if you are not an expert in the capital market, why are you playing in the primary or the secondary market?

There is a hierarchy of risk in the capital market and the basic principle is that if you are not an expert then don't start taking risk in the secondary market -buying and selling shares in the secondary market or even in the primary market. The right route for you is to come through mutual funds, through informed investors where there are experts who are investing on your behalf.

Sebi has been advising again and again that unless you are an expert, you are capable of looking into the results of a company and analyzing it on a day-to-day basis or even real-time basis, which is what experts are doing. It is what CNBC does on a minute-to-minute basis during the marketing hours then I would advice that people who you describe as they are government servants or retired civil servants they should not be going into the market this way.

You are bound to have a risk. However, I would like to add that when a share price falls it can on a statistical basis maybe a short-term thing. I must also add that on a long term basis Indian capital market has given a very good return.

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