SEBI may pioneer regular risk disclosure for stock markets

If SEBI has its way, then it could become a global pioneer in regular and routine risk disclosure for the stock markets. The idea is to empower investors with more knowledge based on the accumulated intelligence in the markets. This improves the investor engagement with the markets and makes their journey safer. At the same time, it can also help investors avoid the dreaded herd mentality that has been particularly witnessed during the last couple of years, especially around the extreme points in the market.

No other regulator in the world has managed to do something like this, so it will be a pioneering effort in that direction. What SEBI plans to do is to issue regular risk factor disclosures on key market trends. This could include events like a surge in the market, drop in the market, too much volatility intraday, investors gravitating towards IPOs or small cap stocks etc. The list can go on. The idea is to help investors make right decisions by learning from the regulator's insights, which will be communicated in a perspicuous manner.

This is, as of now, still in the preliminary stages of discussion. However, when fructified, it can help investors avoid the herd mentality that has been particularly rampant in the market during the last couple of years. For instance, there has been large scale sell off during the pandemic and again during the Russia-Ukraine war. At the same time, the individual investors showed a lot of enthusiasm to buy penny stocks and also technology stocks at atrocious valuations. All these can be covered in the form of SEBI risk disclosures.

As SEBI put it fairly eloquently, herd mentality in  India is quite simple. The patterns tend to follow certain cycles. Normally, it is seen that everyone rushes to buy shares when the going is good or they tend to indulge in panic-selling when a crisis strikes. While both are logical, it does a lot of damage to their wealth in the long run, just because they take decisions at the spur of the moment. In these cases, the basic tenets of investments are always thrown out of the window and one key reason for that is the lack of truly independent insights.

Today, the warning signals comes in the form of a statutory warning, which is more of a formality than of any real essence. Just saying that certain investments are subject to market risks is too hackneyed and generic to be of any use to the investors. The need of the hour is that the investors get some detailed datasets. These data points will be a lot more credibility if it comes from the regulator rather than wealth managers or financial advisors, who still play much of a sales role. That is where SEBI wants to take statutory risk warnings.

SEBI is right in that they would not really want to come between an investors and her investment decisions or relations with their principal or agent. However, the onus is still on SEBI to ensure that the disclosures reach the investor with the caveat of SEBI learnings which can really add value to the investor. Currently, SEBI has mountains of useful datasets, thanks to the latest application of big data, artificial intelligence and machine learning. The idea here is to encapsulate these learnings as risk warnings to investors.

According to SEBI, such risk disclosures can be fine-tuned over a period of time. For instance, these disclosures can also focus on investor behaviour over a period of time, profits made by them or the losses suffered by them; and the reasons therein. It can also be used to highlight which market segments have been profitable and which have been loss-making at specific points of time. SEBI feels that the time has come for the regulator to take charge of all this data, convert them into intelligence and empower the investors.