Regulation is the invisible hand that shapes every market infrastructure business, and investors who ignore it do so at their own risk. Anyone tracking the NSDL Share Price should pay close attention to circulars and consultation papers issued by the regulator. The same applies to the CDSL Share Price, since policy shifts can alter fees, competition, and operating costs. Understanding the direction of regulation can improve your decision-making considerably.
Why Regulators Take a Keen Interest
Depositories house the ownership papers of crores of investors. Its misadventures, fraud or disruption will shake the faith of the entire market. Hence, the Securities and Exchange Board of India keeps a watchful eye on these institutions, specifying standards in governance, technology, risk management and redressal of investor grievances.
Since they serve a public function in addition to being a business, regulators want the depository to be focused on safety and security over profitability, which sometimes becomes a drag on their ability to increase tariffs or diversify operations.
Fee Structures Under Scrutiny
Charges payable by issuers, participants and investors form an important part of the depository’s revenues. Regulators keep an eye on whether the charges are appropriate and transparent. A move to lower or rationalise tariffs will have a direct impact on revenues, while a looser regime will allow for expansion.
Investors should keep track of any announcements related to revision of tariffs, grading of fees or harmonisation of charges between institutions, as the impact of even a marginal change gets multiplied manifold given the volumes processed by a depository.
Investor Protection Initiatives
The regulator has mandated several initiatives in the recent past to protect small investors. These relate to know your client norms, mandatory nomination or declaration of opting out, preventing unauthorised transfer of shares and restrictions on brokers dealing in clients’ securities. Such moves increase the cost of compliance and require upgrading of IT capabilities but build confidence in the system which will benefit all players in the long run.
Technology and Cybersecurity Requirements
Technology and cybersecurity requirements are evolving by the day and regulators mandate periodic reviews of systems to guard against risk of disruption. Such guidelines specify back up and disaster recovery norms, localisation of data, incident response and management. The costs of compliance with ever-evolving technology norms is a burden to some, yet it helps build a sustainable ecosystem where all players have skin in the game. The commentary on technology spend and incidents faced by the company provides useful inputs for assessing the quality of controls.
Ownership and Listing Norms
Norms relating to ownership structure and public float for market infrastructure institutions impact the movement in share price as well. Thus, any significant sale or purchase of shares by promoters or insider trading, entry of strategic investors and adherence to minimum publicly traded share norms will impact the supply-demand equation. It pays to follow news relating to these norms to avoid taking positions on the back of such movements.
How to Stay Informed
Investors should track announcements made by the regulator and stock exchanges and read the management’s take on them in the MD&A of the latest available annual report. Listening to the earnings call to understand the management’s response is recommended to build a view.
Do not get carried away by what social media might say. One paragraph in a circular will rarely have the same impact as a thousand tweets. A lot of hyperbole is often associated with regulation-related news.
Balancing Opportunity and Risk
Regulation really is a double-edged sword. While it can cut both ways, a healthy regulatory environment often serves to build moats around an industry, which benefits all players. It reduces uncertainty, which helps in building long-term confidence. At the same time, sudden changes in regulations or enforcement could hurt earnings expectations and prompt investors to take profits. Spreading out investments across sectors and regularly reviewing the risk versus reward matrix for each investment will help in riding out short-term noise and focusing on the bigger picture.