Recently, the Supreme Court of India raised concerns about safeguarding middle-class investors from market volatility. The question arose after the Adani Group was suspected of stock manipulation and accounting fraud by the American firm Hindenburg Research. This incident led to significant market fluctuations and a subsequent fall in the shares of the Adani Group, causing small investors to lose substantial sums of money.
Supreme Court’s Observation on Stock Market Participation
The Supreme Court noted that the stock market is no longer exclusive to “high value investors”. Changes in the financial and tax regimes have prompted a larger section of the middle class to invest. This development underlines the need for safety mechanisms like circuit breakers to prevent severe losses during market volatility. With capital moving seamlessly and funds flowing internationally, it’s crucial for robust mechanisms to be established to protect Indian investors.
Understanding Market Volatility
Market volatility refers to the unpredictable, sharp price movements – upwards or downwards – in the stock market over various periods. Such fluctuations can be triggered by surprising economic news not aligning with investor expectations, sudden changes in monetary policy, political developments, geopolitical events, or market-specific occurrences such as overvalued stocks.
Strategies to Address Market Volatility
One can address market volatility through various measures:
Monetary Policy: The Reserve Bank of India (RBI) can adjust interest rates to influence money and credit supply, impacting market sentiment and stability.
Fiscal Policy: Governments could boost economic activity and support affected sectors and individuals through tax cuts, increasing spending, and targeted subsidies.
Regulatory Measures: Measures increasing transparency and stability in financial markets could be initiated by governments and regulatory authorities.
International Cooperation: Central banks and regulatory authorities can collaborate to mitigate market volatility’s global impact.
Financial Education and Literacy: Promoting financial education can reduce market speculation risks.
Diversification: Spreading investments can help investors manage the impact of market volatility on their portfolios.
Investor Protection Measures in India
In India, investor protection legislation is implemented as per Section 11(2) of the SEBI Act. The measures taken include regulation of Stock Exchange and securities market businesses, registering and regulating investment schemes, and controlling self-regulatory companies. Protection funds like the Investor Education and Protection Fund (IEPF) have been established by the government.
Understanding the Capital Market
The capital market is where securities, such as stocks and bonds, are bought and sold. It provides a platform for entities to raise capital and for investors to invest. Comprising two segments – the primary and secondary markets – it plays a crucial role in an economy’s function by connecting savers with borrowers. It also assists investors in portfolio diversification and risk management.
Previous Year Question from UPSC Civil Services Examination
In 2019, the following question was asked: Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly? The options were Certificate of Deposit, Commercial Paper, Promissory Note, and Participatory Note. The correct answer was Participatory Note.
