Are all crashes bad?

Amit Trivedi of Karmayog Knowledge Academy on why the great Indian securities scam resulted in a better and safer market for the investors.
By Guest |  10-04-17 | 
 
No Image
About the Author
Morningstar invites thought leaders from the investment community to share their insights. Views expressed are personal and should not be construed as investment advice.

Every time a market crashes, people start asking questions, “Why did this happen?” “Why the Governments or the regulators could not prevent the crash?” “What were the experts doing?” These seem to be valid and important questions. But there is a problem with these questions. It seems that those seeking answers consider the crashes as unwanted and avoidable. However, not all crashes are bad and very often it is from the crash that the seeds of development take roots.

The market euphoria and the subsequent crash of 1992 is a well-documented event. It brought the stock markets in limelight – whether for better or worse is a different question. The market was shallow at the time of the rise and fall of the markets during this entire period. The highest daily turnover was in the range of Rs 120 crore on the then premier and the then largest stock exchange – the Bombay Stock Exchange (as it was known then). Today, we have many individual companies whose stocks register higher volumes on each of the two large stock exchanges – BSE and NSE.

The rise in stock prices brought may first time investors to the stock markets. The flow of household savings to stock markets recorded in 1992 @ 24% has been highest so far in the history.

The rise was exceptional. Sensex – the lead index of the Bombay Stock Exchange was the one followed by investors as a barometer of the markets. From January 2, 1991 Sensex almost doubled in a year. What happened thereafter was unbelievable. Sensex jumped another 125% in around three months. The mood was frenzied. The fall was devastating, as many had invested borrowed funds.

After the fall, a Joint Parliamentary Commission was set up to look into the reasons behind the market crash and recommend measure to ensure such event does not happen in future.

We saw many new systems being set up post the crash.

First of all, SEBI Act was passed by the parliament giving regulatory powers to SEBI. This started the current regime of SEBI that moved the regulatory philosophy from control to disclosures. Prior to that we had a Controller of Capital Issues (CCI). As the name suggests, it was a controller. It was the CCI that decided how much money can a company raise from the capital markets, i.e. the issue size as well as the price at which the issue can be made. In the SEBI regime, the pricing decision was shifted in the hands of the company management and the merchant bankers.

Second, we saw major changes in market institutions and the working of stock exchanges. The open-outcry system gave way to the current screen-based trading. Paper securities were replaced by dematerialized ones.

Screen-based trading introduced transparency that the investors could not believe. Now anywhere in India the investor had a real-time access to the prices in the stock exchanges. The investor would know exactly at what price the trade happened unlike the earlier days when one had to wait for the end of day to get a trade confirmation.

Dematerialisation did away with paper securities and with that all the risks associated with handling of paper – mutilation of share certificates, fake certificates, signature difference, loss of certificates in transit – all these were common events in the life of an Indian shareholder prior to dematerialization. Electronic securities only meant that these risks got completely removed from the system.

While these changes might have been on the horizon, probably the 1992 market crash served the purpose of being a trigger to speed up the process.

All these developments only meant the markets grew further and became safer for the investors.

Amit Trivedi is founder of Karmayog Knowledge Academy – a business imparting knowledge in investment markets. He is the author of "Riding The Roller Coaster - Lessons from financial market cycles we repeatedly forget"

Add a Comment
Please login or register to post a comment.
<>

Most Popular Articles

 (Last 3 months)
Top
Mutual Fund Tools
Feedback