The Much Needed Reforms In Stock Market

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SEBI has done a great job in reforming the stock market. Some more reforms are neweded to make exchanges more efficient.

Fractional quantity: Currently in India, one can not buy shares, of a listed company, which are lesser than 1 in quantity. Many investors are not able to invest in companies, where stock price is very high. For example, an investor can not buy shares of MRF tyre if she has Rs. Fifty thousand only with her, as the price of MRF tyre is more than eighty thousand. This is now worldwide trend that you can buy stocks in fraction also. Just some changes in software need to be made and you are ready for the purchase in fraction. It will gave a big push to liquidity and volume and will bring depth in high priced stocks.

 

Tick size:Tick size for all non-convertible and convertible debt instruments, Mutual Fund Units, Central Government Securities available for trading is one paisa. The tick size for Exchange Traded Fund (ETF) other than Gold ETF is one paisa. For all other securities and Gold ETFs tick size is five paisa.

If tick size is reduced to 1 paisa, it will also give high liquidity and depth in case of stocks as well in all stock exchanges. It will reduce the impact cost for investor and increase revenue of all the participants like exchanges and brokers.
 
Face Value: Investors in India don’t give much attention to the face value of a stock and are not able to take caculated decision while investing. Most of the stocks have face value of Rs. 10 and some have 1, 2 or 5. This is confusing for many and not serving any purpose. Many companies reduce face value from 10 to between 1 to 5. This measure also increases liquidity. Regulator should also ask all companies to reduce FV to 1 across the board to eliminate confusion and to increase depth.
 
Circuit Filters: Circuit filters need to be changed to cooling period. In investment market, a free market is always better as investor can exit any time or can enter any time. Let the market forces decide about the true value of a stock. Because of circuit filter, demand or supply remained pending and that is filled over a period of time. These filters create an artificial market in short term. Instead of circuit filter, a system of cooling period should be implemented. Cooling period system is being already followed in derivative market.
 
Derivatives: It is very easy to manipulate the stocks which are not in dervative. Stocks in derivative are very difficult to manipulate. There are currently around 165 stocks in this segment. To check the manipations in stocks, more stocks should be included in derivative segment, with strict margin controls. The management with manipulative tendency, always wants it’s stock not to be in the derivative segment.
 
 
 
By- Vinod K. Bansal
 
 
Sebi

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