How retail investors can be protected from market volatility and fraud

Retail investors have lost around ₹15 lakh crore in the last three weeks, wiping out gains seen over the past year. Much of this is due to factors as varied as rising commodity prices, a slowing economy and Russia’s war in Ukraine. India’s retail investors, many of whom are pouring their savings into the market for the first time, have seen elation, then concern, then dismay and even hardship.

Consider how young investors in India invest. Many park their savings in mutual funds and equity assets. Others seek additional earnings in ‘savings plans’, which can often be fraudulent. Take stocks as an example, where even publicly traded companies have lost their shine. New-age firms, which would ideally offer credible assets to retail investors through an initial public offering (IPO), have become notorious for overvaluing their public issues.

The case of Paytm is instructive. The share price has continued its relentless decline, significantly below its initial public offering price, while financial results continue to show losses. Such developers have generally talked about leaving value on the table for investors. Unfortunately, it has been a loss of theoretical value for many.

The exuberance of the past has also masked many corporate governance challenges. Irregularities witnessed at the National Stock Exchange (NSE) highlight a deeper institutional rot, while the Securities and Exchange Board of India (Sebi) recently retracted its previous mandatory position that required the top 500 listed companies to separate the roles of chairman and CEO. it may be an indicator of regulatory capture.

With around 300 of India’s top 500 companies still ‘promoter driven’, these companies typically continue to combine both roles, leading to a conflict of interest between board responsibilities and day-to-day responsibilities. The recent ABG Shipyard fraud, carried out over five years, with around 28 banks and ₹22,842 crore in debt, also highlights that the NPA rot remains deep.

fraudulent slip

Meanwhile, anecdotal reports indicate a significant increase in the number of independent directors resigning at publicly traded companies, with many companies beset by fraud. In an ideal world, Sebi would encourage such independent directors to provide information about governance concerns at their former company. While we still have lots of regulations upholding investor protection, actual funding has been limited. NSE had an investor protection fund (just to reimburse investors who lost money when a broker went bankrupt) of ₹594 crore, while BSE’s was ₹784 crore (as of March 31, 2020) . Sebi also needs to review its corporate governance rules, with a push towards strengthening the investor protection mechanism.

For many new investors, such losses are exacerbated by additional sink money in fraudulent investment schemes. Around 500,00 Indians lost around Rs 150 crore of investments between May and June 2021, in multi-level marketing (MLM) schemes in India. In December 2020, it was reported that around 400 unauthorized digital lending apps were removed from the Google Play store. In December 2020, thousands of investors lost ₹6.3 billion rupees in the Agri Gold Farm Estates chit fund fraud case before the Enforcement Directorate (ED) could intervene.

Even cryptocurrency, itself a vast unregulated terrain, has seen its fair share. BitConnect founder Satish Kumbhani has fled India, after orchestrating a $2.4 billion global Ponzi scheme and being indicted by a US jury in New York. More locally, there was the ₹15,000 crore ‘Bike Bot’ scam in Noida, running since August 2017. This involved Sanjay Bhati scamming over 2 lakh investors out of around ₹15,000 crore through a simple scheme on the that each investor was asked to invest. Rs 62,100 for a motorcycle, with a promised return of Rs 1.17 lakh a year.

India has a pretty strong regulatory framework. However, it needs to improve investor awareness and provide an institutional system for examining chit fund schemes, in effect a clearing house. Ideally, such a system would verify the scheme beforehand and serve as an intermediary platform for aggregating payments.

We need a mechanism for the common Indian to also verify that their subscription is to the correct scheme, with relevant background. Integration between Aadhaar, UPI and GST could help achieve this.

For investors who have chosen to simply keep their money in bank accounts, there has been an increase in cases of fraud. India saw 4,071 cases of bank fraud (with an estimated value of ₹36,342 crore) between April and September 2021. Internet and card-related transactions accounted for 34.6% of such cases. These numbers are expected to rise, given poor institutional cybersecurity and the push by customers to increasingly use non-branch banking channels. We should also impose a strict ban on people with commercial interests joining the boards of banks (including cooperatives).

PPE Kit for Investors

Finally, for those who simply kept the faith that the government will support them in their retirement, there are worrying cases of illegal withdrawals of money from Employees Provident Fund Organization (EPFO) accounts that have increased over the past year. The CBI itself booked eight EPFO ​​officials for ₹18.97 crore fraud in January 2022. We need more transparency from EPFO, along with better customer service.

We must also save our retail investors from themselves, many of them with little investor education and insufficient institutional guarantees. As investors gain access to new asset classes and thus ease of investing, institutional bulwarks are needed to prevent them from mis-selling and outright fraud.

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