August 28, 2018 09:00 IST

Retail investors will soon have to obtain a net worth certificate from a chartered accountant and submit it to their broker, and their trading limits will be decided accordingly.

Illustration: Uttam Ghosh/Rediff.com

The Securities and Exchange Board of India may soon impose limits on the trading positions that retail investors can take, based on their net worth.

Retail investors will have to obtain a net worth certificate from a chartered accountant and submit it to their broker, and their trading limits will be decided accordingly.

Net worth is the sum total of all the financial and non-financial assets of an individual, minus his liabilities.

Retail investors often do margin trading in the equity market, which means that they borrow money from their broker to trade in stocks.

They also take leveraged positions in the derivatives markets, which means that they are able to take positions that are several times bigger than the amount of capital they have in mind.

The restrictions that Sebi plans to bring in are meant to curb such leveraged trading.

"Once such restrictions come in, retail investors will not be able to take very large and risky positions that have the potential to harm them if the bets go wrong," says Ramabhadran Thirumalai, assistant professor of finance at the Indian School of Business.

Many retail investors may not want to undergo the hassle of obtaining a net worth certificate.

Many may also be reluctant to reveal their net worth to Sebi. Hence, the imposition of restrictions may propel more retail investors to invest through mutual funds.

This measure, however, also has a number of potential downsides.

"Such micromanagement at the retail level is unwarranted. Sebi will only end up increasing compliance costs for retail investors without improving anything," says R Balakrishnan, an industry veteran who is now an independent analyst.