It's double trouble for lending to buy shares

IMAGINE THIS: A short-term investor wants to make listing gains in an initial public offering (IPO) or small and medium enterprises IPO (SME-IPO).

- JOYDEEP GHOSH

Typically, he would approach his brokerage for funds for a fee (loan for a few days) to make that punt. If the brokerage makes the due diligence much harder or simply refuses to lend, getting those funds to make a quick buck may become far more difficult.

Extend this same behaviour to many brokerages and there is a good chance that markets, especially risky segments like small-caps or SMEs, could see a significant cooling down something that the  Securities and Exchange Board of India (Sebi) has been wanting to achieve for months.

Against this backdrop, Tuesday's 'cease and desist' order on JM Financial Products by the Reserve Bank of India (RBI) makes things more interesting. The banking regulator's move may help the market watchdog realise its own end since the coming together of the two key regulators can ensure that punters are starved of a key ingredient - liquidity.

Said Deepak Shenoy, founder, Capital Mind, "That Sebi coordinates with RBI is a welcome revelation, as the functions of both are interlinked when it comes to markets and financing. Too often, capital markets are used, such as with certain debt alternate investment funds (AIFs), to override regulatory limits that apply to RBI-regulated entities."