IMPACT OF SEBI ALLOWING DIRECT MARKET ACCESS TO RETAIL INVESTORS: BY RANU TIWARI

Introduction

The news of SEBI allowing Direct Market Access (DMA) to retail investors has been surfacing since the past week. The said decision is causing a stir in the business circles. Several brokers have petitioned the Finance Ministry to undo the decision. There are also reports to suggest that SEBI is not entirely in favour of such a system. Looking at the gravity of the decision, it becomes essential therefore to look into the matter in depth and understand the implications of the same.

Starting with the basics, discussion will firstly be dealing with the meaning of DMA.  In stock exchange, DMA refers to access to order books and electronic facilities of market exchanges, which aids in the day-to-day securities transactions. It needs an advanced technology infrastructure and it is mostly brokers and firms who own these currently.

Currently, it is impermissible for the retail investors to buy or sell shares directly through stock exchanges. SEBI’s decision will lead to retail investors (these are ordinary participants in the market who generally invest small amounts of money as against big institutional investors), not having to rely upon brokers to see the financials of a company and invest. This is being seen as a huge threat for the broking industry in the country. Nithin Kamath, co-founder of Zerodha, one of the biggest online stock trading platforms in India, tweeted his concerns, “If DMA is allowed to retail investors, can exchanges take place smoothly, along with acting as a regulator to regulate itself when it comes to customer grievances? Maybe not.”  

The problems that may arise

First, broking functions are complex. The retail investors might not have all the important knowledge relating to how investments should be made. This is where a brokerage firm comes into the picture. They help to simplify things for client and give proper advices with their experience and knowledge in the field. An individual investor might face more risks when investing without such aid.

Second issue that crops up is technology. It will be important for the agencies implementing the decision to ensure that the sophisticated technologies are in place. The Risk Management systems will have to be equipped to deal with trades of millions of customers daily. The number is very less when such needs are taken care of by a brokerage firm. Multi Commodity Exchange (MCX) has started talks with 63 Moons Technologies for such a software. How such systems will be materialized is a big question.

Thirdly, exchanges also act as first level regulators. They help in overseeing all the activities of the brokerage firms and check whether they are complying with all the mandates and rules or not. If the exchanges would have to engage directly with the retail investors for their complaints, the process might prove to be not so conducive for them. As per one industry expert, “this would not be possible without a complete change in the Indian capital market structure”.

Fourthly, risk management will shift from brokers to individual investors. Brokers have a great role to play to mitigate various risks involved in this business.

Fifthly, the industry might see job losses as the options available to the brokerage firms would either be to quit or diversify their business. This is only a possibility, since even after such decision comes, some investors might still opt for brokerage firms to invest.

Lastly, a questions that looms large is, if not brokers, then who? It will be important to address that who will take up the additional roles performed by the brokers. If the intention is to transfer the responsibilities to the Exchanges, then they will be burdened with functions (like exchange of issue contract notes, updating clients on their combined margin limits, etc). They might also be required to set up customer care operations to handle grievances. Market experts say expanding functions will raise the cost-burden on exchanges and impact their financials.

There are certain advantages too

The elimination of middleman in the investment process in the present scenario will help give greater power to an individual investor. No extra expenses will be incurred in availing of such a facility to invest. Stock exchanges will be an important beneficiaries here. They may make higher revenues in the form of brokerage and fee from demat holdings. Job losses can be tackled to some extent. The brokerage firm can come up with new ideas as to keep itself going. Although, this will not be so easy.

Conclusion

The decision is going to impact a big chunk of stakeholders involved in these industries. While there are certain advantages of facilitating such a system, the author is of the view that it entails a lot of unnecessary risks. However, it seems that at this point of time, a lot of things are unclear. SEBI and the Finance Ministry should clear all the doubts which the investors and brokers have. Only then can the impact be assessed in greater det