Navigating Regulatory Changes: An Investor’s Guide to Staying Calm and Stay Informed by Samco Securities

If a central bank or market regulator identifies companies that may be failing to meet any compliance requirements or engaging in unscrupulous practices, they may impose restrictions necessary to protect investors. While this is generally beneficial to retail participants, such sudden changes or regulatory restrictions can also cause panic among traders, encouraging them to make impulsive (and often wrong) financial decisions.

Are such extreme reactions to regulatory changes justified? Or should investors take a more measured approach to this development? Nilesh Sharma of Samco Securities provides some clarity on this point.

“A quick look at the history of many of India’s leading companies shows that such changes are nothing new. Many companies have come under the RBI scanner or SEBI regulatory scrutiny at various points in market history. While the stocks of such companies undoubtedly experienced temporary fluctuations, stocks of fundamentally strong companies tended to recover and remain on investors’ watchlists. Sound business models and good management practices can also help a company withstand pressure and even emerge stronger.

Therefore, investors need to adopt a balanced approach that will help them make more informed decisions rather than impulsively reacting to the news. Panic selling such stocks can only lead to missed opportunities when these stocks rebound.”

In short, investors must actively focus on the bigger picture. Regulatory changes are often intended to improve market practices and ensure long-term stability. So while there may be some short-term volatility, the overall impact could be positive for the health of the market.

Lessons from history: stocks under the scanner and their state today

As the participation of retail investors and traders in the market increases, both the RBI and SEBI are becoming more vigilant on compliance and conduct in a bid to protect the interests of investors. Looking back at the recent past, we can point to many instances of specific companies coming under regulatory scrutiny.

Here is a detailed discussion of some such cases that have shaken many traders’ confidence in the stock.

Adani’s fight with Hindenburg

In January 2023, the Adani Group came under intense scrutiny following a report by Hindenburg Research. The report raised concerns that several offshore funds with significant stakes in Adani companies turned out to be shell companies linked to the Adani family. This potentially inflated share prices and violated public shareholding regulations. These allegations led to a sharp decline in share prices of Adani Group companies, which at its peak resulted in a loss of market value of around $150 billion.

In response to these allegations and the resulting regulatory actions, the Adani Group has taken steps to reassure investors and stabilize its financial situation. The group repaid more than $1.1 billion in loans and secured the release of pledged shares to restore confidence.

Restrictions on Bajaj Finance products

In November 2023, the Reserve Bank of India (RBI) had requested Bajaj Finance to stop sanctioning new loans under its ‘Insta EMI Card’ and ‘eCOM’ products. This decision was taken after the company failed to comply with key provisions of the RBI’s digital lending guidelines, particularly by failing to issue declarations on key facts to customers. The RBI’s action was aimed at protecting consumers from potential abuses and ensuring fair digital lending practices.

That said, these impositions were temporary. The restrictions were lifted in May 2024 after Bajaj Finance took remedial actions to address regulatory issues. The company has now resumed lending under these products after implementing necessary corrective actions to the satisfaction of the RBI.

Paytma Saga

Paytm, India’s leading digital payments company, faced major regulatory scrutiny from the Reserve Bank of India (RBI) in early 2024. The RBI has directed Paytm Payments Bank Ltd (PPBL) to halt new deposits and credit transactions from February 29, 2024. This action was necessitated by the company’s continued non-compliance with regulatory norms and serious supervisory concerns that were highlighted in external auditors’ reports.

In response to the regulatory action, Paytm’s share prices saw a significant decline and the company was forced to enter into talks with the RBI to resolve the issues. However, in early May, the company’s stock rebounded from its all-time low and rose 8%.

Kotak Mahindra Bank needs IT modernization

Recently, in April 2024, the Reserve Bank of India (RBI) flagged certain deficiencies in the IT infrastructure and management of Kotak Mahindra Bank. The bank was then instructed to suspend the onboarding process of new customers via online and mobile banking platforms and to stop issuing new credit cards. However, existing customers could continue to use their services without any interruptions. The RBI stressed that these measures were necessary to prevent potential long-term outages that could impact not only the bank’s customers but also the broader digital banking ecosystem in India.

Kotak Mahindra Bank was tasked with conducting a comprehensive external audit, resolving identified issues and upgrading IT systems to regulatory standards. The restrictions will be reviewed and potentially lifted once the RBI acknowledges the corrective actions taken by the bank.

A handy guide for traders in panic-inducing market situations

The cases highlighted above are proof that even industry leaders often come under the scanner of the RBI or SEBI. So if investors find that the stocks in their portfolios are subject to temporary regulatory restrictions, what should they do?

Samco CEO and President Nilesh Sharma offers advice to investors who find themselves in this difficult situation.

“In the face of sudden regulatory changes, it is extremely important for investors to remain calm and avoid impulsive decisions. Regulatory actions are typically intended to protect the market and its participants, even if they cause short-term volatility. I would therefore advise traders to stay informed on this issue, which is the first step to take in such situations.

They must stay up to date with the latest news and understand the specifics of regulatory activities. Knowing the reasons for regulatory scrutiny helps you assess the real impact on a company and its shares. Additionally, investors should also focus on the company’s core strengths and financial health. If a company has a strong track record and financial foundation, it will likely withstand regulatory pressure and bounce back.

Companies that proactively address regulatory issues often emerge stronger. Therefore, traders and investors should also adopt a balanced approach rather than reacting decisively and impulsively.

Nilesh also emphasizes the importance of diversifying your trading or investment portfolio to reduce risk. Too much reliance on one stock or sector can lead to concentration of risk, but diversification reduces the impact of single-stock volatility.

Samco Securities helps investors make informed trading choices

The right tools can help investors avoid reacting impulsively to regulatory changes. Samco Securities Limited offers a comprehensive range of such tools and analysis on the Samco trading app. To get started, users gain access to traders’ Ka Andekha Sach – that is, hidden information about their trade winning and losing percentages, average profit and loss size, average trade holding period, and even the proprietary Samco Trade Score.

In addition to this detailed information on ka Andekha Sach, traders can also benefit from other tools offered by the brokerage firm such as the Samco options calculator, integrated TradingView charts and Options BRO, a cutting-edge options strategy builder for options traders. An added benefit is that all these features are available to traders for free after registering a Samco demat and trading account.

About SAMCO Securities

SAMCO Securities was founded by Jimeet Modi, Founder and CEO of SAMCO Group in 2015. As the country’s leading flat-fee brokerage and wealth technology platform, SAMCO Securities provides retail investors with access to advanced financial technologies and empowers them to create wealth, consciously and profitable. SAMCO Securities’ mission is to eliminate the existing challenges faced by traders and investors and democratize every Indian’s access to the wealth management process. With a customer-centric focus, at SAMCO we implement a quantitative approach to provide differentiated solutions that enable our clients to enter the capital markets.

SAMCO Securities is a pioneer in stock trading, introducing industry-first features as part of its CRP strategy such as My Trading History, Personal Index and Trading Spreadsheet, just to name a few.

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