Navigating Regulatory Changes: A Guide for Traders to Stay Composed and Informed by Samco Securities - Hindustan Times
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Navigating Regulatory Changes: A Guide for Traders to Stay Composed and Informed by Samco Securities

Published on May 27, 2024 06:28 PM IST

SAMCO Securities provides retail investors access to sophisticated financial technology and makes their wealth-creation journey simple and cost-effective.

Samco Securities
Samco Securities
ByHT Brand Studio

The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) together oversee the financial and securities markets in the country and ensure that investors’ interests are always protected. For traders and investors, this is reason enough to rest assured that the financial markets are safe spaces.

If the central bank or the market regulator identifies companies that may be defaulting on any compliance requirements or engaging in unscrupulous practices, they may impose the restrictions needed to protect investors. While this is fundamentally beneficial for retail participants, such sudden regulatory changes or restrictions may also trigger a case of panic among traders — encouraging them to make impulsive (and often poor) financial decisions.

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Are such extreme reactions to regulatory changes warranted? Or should traders adopt a more composed outlook to such developments? Nilesh Sharma from Samco Securities, offers some clarity on this issue.

“A quick look at the history of many of the top companies in India reveals that such developments are not new. Many companies have come under the RBI scanner or the SEBI’s regulatory check at different points in the market’s history. While such stocks have undoubtedly experienced temporary fluctuations, those belonging to fundamentally strong companies have typically bounced back and continued to remain on investors’ watchlists. Robust business models and good governance practices can also make it easier for a company to withstand the pressure and even emerge stronger.

So, traders must adopt a measured approach that will help them make more informed decisions rather than reacting impulsively to the news. Panicking and selling off such stocks may only lead to missed opportunities when these stocks rebound.”

The long and short of it is that traders must actively focus on the bigger picture. Regulatory changes are often aimed at improving market practices and ensuring long-term stability. So, while there might be short-term volatility, the overall impact can be positive for the market's health.

Lessons from History: Stocks Under the Scanner and Where They Are Today

As retail investor and trader participation in the market grows, both the RBI and the SEBI are becoming increasingly vigilant about compliance and conduct in a bid to protect investor interest. Looking back at the recent past, we can pinpoint many instances of specific companies coming under the regulatory scanner.

Here’s a deep dive into some such instances that rattled many traders’ confidence in the stocks involved.

Adani vs Hindenburg

In January 2023, the Adani Group came under significant scrutiny following a report by Hindenburg Research. The report raised concerns that several offshore funds holding substantial stakes in Adani companies appeared to be shell companies linked to the Adani family. This potentially inflated stock prices and violated regulations regarding public shareholding. These allegations led to a sharp decline in the stock prices of Adani Group companies, wiping out approximately $150 billion in market value at its peak.

In response to these allegations and the ensuing regulatory actions, Adani Group made efforts to reassure investors and stabilise its financial standing. The group prepaid over $1.1 billion in loans and secured the release of pledged shares to restore confidence.

Bajaj Finance Product Restrictions

In November 2023, the Reserve Bank of India (RBI) required that Bajaj Finance stop sanctioning new loans under its 'Insta EMI Card' and 'eCOM' products. This decision came after the company failed to comply with key provisions of the RBI’s digital lending guidelines — specifically the non-issuance of Key Fact Statements to customers. The RBI’s action was aimed at protecting consumers from potential misuse and ensuring fair practices in digital lending​.

That said, these impositions were only temporary. The restrictions were lifted in May 2024 after Bajaj Finance took remedial actions to address the regulatory concerns. Now, the company has resumed issuing loans under these products following the implementation of the necessary corrective measures to the RBI’s satisfaction.

The Paytm Saga

Paytm, a leading digital payments company in India, faced significant regulatory scrutiny from the Reserve Bank of India (RBI) in early 2024. The RBI directed Paytm Payments Bank Ltd (PPBL) to halt new deposits and credit transactions starting from February 29, 2024. This action was necessary because of the company’s persistent non-compliance with regulatory norms and serious supervisory concerns, which were highlighted in reports from external auditors​​.

In response to the regulatory crackdown, Paytm's stock prices saw a significant decline and the company was forced to engage in discussions with the RBI to resolve these issues. However, earlier in May, the company’s shares rebounded from an all-time low and witnessed an 8% rally.

Kotak Mahindra Bank’s Need for IT Upgrades

More recently, in April 2024, the Reserve Bank of India (RBI) flagged some deficiencies in Kotak Mahindra Bank’s IT infrastructure and governance. The bank was then directed to halt the onboarding of new customers via online and mobile banking platforms and to stop issuing new credit cards. Existing customers, however, could continue using their services without any interruptions. The RBI emphasised that these measures were necessary to prevent potential prolonged outages that could affect not only the bank’s customers but also the broader digital banking ecosystem in India.

Kotak Mahindra Bank has been given the task of conducting a comprehensive external audit, rectifying the identified issues, and upgrading its IT systems to meet the regulatory standards. The restrictions will be reviewed and potentially lifted once the RBI is satisfied with the remedial actions taken by the bank​.

A Handy Guide for Traders in Panic-Inducing Market Scenarios

The instances highlighted above are proof that it’s common for even industry leaders to come under the RBI’s or SEBI’s scanner. So, if traders notice that the stocks in their portfolios are under such temporary regulatory restrictions, what should they do?

Samco’s ED & President Nilesh Sharma offers some guidance for traders who find themselves in this predicament.

“When faced with sudden regulatory changes, it's essential that traders remain calm and avoid impulsive decisions. Regulatory actions are usually aimed at protecting the market and its participants, even if they cause short-term volatility. So, I would advise traders to remain informed about the issue, which is the first step to take in such situations.

They must keep up with the latest news and understand the specifics of the regulatory action. Knowing the reasons behind the regulatory scrutiny helps assess the real impact on the company and its stock. Additionally, traders should also focus on the company's core business strengths and financial health. If the company has a strong track record and financial fundamentals, it is likely to withstand regulatory pressures and bounce back.

Companies that address regulatory concerns proactively often emerge stronger. So, traders and investors should also take a balanced approach rather than reacting strongly and impulsively.”

Nilesh also emphasises the importance of diversifying the trading or investment portfolio to mitigate risk. Relying too heavily on a single stock or sector could lead to risk concentration but diversification lessens the impact of volatility in any one stock.

Samco Securities is Helping Traders Make Informed Trading Choices

The right tools can make it easier for traders to avoid reacting impulsively to regulatory changes. Samco Securities Limited offers a comprehensive range of such tools and analytics in the Samco trading app. To begin with, users get access to traders’ ka Andekha Sach — or hidden insights about their winning and losing trade %, average profit and loss size, average holding period and even a proprietary Samco Trade Score.

In addition to these in-depth details about traders’ ka Andekha Sach, traders can also utilise other tools offered by the brokerage firm, such as the Samco option calculator, integrated TradingView charts and Options B.R.O, the state-of-the-art options strategy builder for options traders. An added benefit is that all of these features are available to traders free of cost once they sign up for a Samco demat and trading account.

About SAMCO Securities

SAMCO Securities was incorporated by Mr Jimeet Modi, Founder & CEO of SAMCO Group in 2015. As the country’s leading flat-fee brokerage and wealth-tech platform, SAMCO Securities provides retail investors access to sophisticated financial technology and makes their wealth-creation journey simple, informed, and cost-effective. SAMCO Securities' mission is to eliminate the existing challenges faced by traders and investors and democratise access to the wealth management process for every Indian. With customer centricity at SAMCO’s core, we implement a quantitative approach to provide differentiated solutions that empower our customers in acing the capital markets.

SAMCO Securities is pioneering the stock market trading by introducing industry-first features like My Trade Story, Personal Index and Trade Spread Sheet to name a few under its CRP strategy.

Disclaimer: This article is a paid publication and does not have journalistic/editorial involvement of Hindustan Times. Hindustan Times does not endorse/subscribe to the content(s) of the article/advertisement and/or view(s) expressed herein. Hindustan Times shall not in any manner, be responsible and/or liable in any manner whatsoever for all that is stated in the article and/or also with regard to the view(s), opinion(s), announcement(s), declaration(s), affirmation(s) etc., stated/featured in the same. The article does not constitute financial advice.

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