The Hindu Business Line : Conflict of interests and investor responsibility

Sunlight is the best disinfectant. When you disclose your conflicts, you give others the opportunity to decide to what degree your conflicts might affect your judgment and actions. The news media, especially, should disclose to their audience the conflicts and interests of those they interview.

TV commentators and their guests: when you speak to mass audiences, do more educating and less stock-picking. Viewers: listen only for investment ideas to research; don't rush to act on "recommendations" that are not tailored to your personal circumstances.

The recent SEBI order on Mathew Easow highlights that if the investment community had taken to heart these suggestions, we may never have had a case in which a financial consultant is barred by SEBI from making a recommendation on an investment in any public media.

The case also suggests that if investors had taken note of such suggestions, there would be no reason for SEBI to spend its energy unearthing such unfair practices in order to cleanse the market.

Mathew Easow's case: SEBI's order in the case of Mathew Easow highlights the efficiency of its current management team including the Chairman, Mr M. Damodaran, and Mr G. Anantharaman, Wholetime Member. The order clearly reflects the groundwork SEBI has put in to build its case against the financial consultant. This order may put the fear of law into those who want to build a false market in small-cap and mid-cap stocks by using their access to media.

According to the order, Mathew Easow bought a few stocks, recommended these stocks on a Web site as `buys' but subsequently started selling these stocks. At the time of his recommendation, he did not disclose his interest in these stocks.

In the case of some stocks, he sold them on the date on which he gave a buy recommendation. The full order is available at http://www.sebi.gov.in/cmorder/order082006.html. If the facts culled by SEBI stay unchallenged, then it provides an insight into how brazenly the media is being misused. It also casts a shadow on unsolicited, yet independent research.

The going is already tough for analysts who are involved in unsolicited, independent research and publish them through media. They are pitted against analysts working for institutions, who have better access to information but whose interests may be compromised.

Incidents such as these make the going even harder for such analysts as their credibility comes into question. Even a call that is made in good faith but goes wrong for some other reason will be viewed as one made with mala fide intentions.

In addition, such cases also make life difficult for individual investors. For them, the media is an important source for price-sensitive information that is culled by analysts from the mosaic of publicly available data. If the role of the media comes under a cloud, scores of genuine investors may be robbed of a source of credible information. A few more such incidents, and the value-adding media-individual investor interaction could get bogged down in a rut from which recovery may be impossible.

Can't protect investors: However, if the media has a role to play in sifting through information, so have the investors. In the order, SEBI has cautioned investors to take informed decisions. A number of investors are virtually clutching at straws. They look at the stock along with the recommendation given and, without bothering to verify, put their money into the stock.

With the confidence of new converts to the republic of stock market, these zealots invest in stocks in anticipation of 20 per cent plus returns. A few lines about a stock on television or on a Web site is enough to convince them that they are on to the next hot tip.

A number of investors also labour under the impression that mutual funds have performed badly in India and it would be best if they take upon themselves the burden of managing their portfolio.

Such investors could become victims of their own ignorance and over-confidence. SEBI is, after all, responsible only for the orderly and legal conduct of the various market participants. Stronger language, it seems, should be used in investor education initiatives.

In India, it has become common for investors to lose money on speculation and in the end blame the regulators for not doing enough. No amount of regulatory action can protect an investor from himself.

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