SEBI may make net worth certificate submission compulsory for retail investors

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The aim is to keep a check on retail investors' trading limits, which cannot exceed their level of income

The Securities and Exchange Board of India may soon ask retail investors in the stock and commodity markets to submit a net worth certificate to their brokers, according to a report by The Hindu BusinessLine.

The aim is to keep a check on retail investors' trading limits, which cannot exceed their level of income.

The regulator's decision to pursue this course of action follows a recommendation by the committee on fair market conduct, headed by former Law Secretary TK Vishwanathan.

SEBI will likely approve and implement the move by the end of 2018, a source told the newspaper. The cap on retail investors' position limit in the derivatives segment could be as high as 40-50 percent, the source said.

Net worth is defined as the value of all financial and non-financial assets owned by an individual, minus his or her liabilities.

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When looked at in light of the light existing SEBI stipulations on upfront margin requirement and lot sizes, the net worth criterion seems 'blunt', brokers told the financial news daily.

"Over-regulation often leads to higher compliance cost and could be counter-productive for the markets," said Deven Choksey, Managing Director, KR Choksey Investment Managers.

Experts are of the opinion that the stock market thrives on leverage and any attempts to curb leverage have often led to sharp declines in volume and widening price spreads, making the market seem unattractive.

According to market participants, the move can have major ramifications for India's stock and commodity markets, as it could lead to a severe dearth of liquidity.

If a trading limit is really enforced on retail investors, it could lead to a massive unwinding of positions in the derivatives segment and trigger a cash market sell-off as retail participants rush to adjust their trades.

Disclaimer:-The views and investment tips expressed by investment experts are their own. Ripples Advisory advises users to check with certified experts before taking any investment decisions.

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