Ministry should bring in professional managers to salvage BSE

Sucheta Dalal

MUMBAI, March 26: The biggest merit of the Bombay Stock Exchange's (BSE) series of counter allegations against the Securities and Exchange Board of India (SEBI) is the cleansing effect it has had on the system. BSE's allegations make several first time revelations (several of which have been published exclusively by The Indian Express over the last five months) and expose the mind-set of the BSE office bearers to the very concept of capital market regulations. Here is a look at some key issues.

* Eight months after the BSE hushed up the huge settlement problem of June 1998, sacked BSE President J C Parekh and the executive director RC Mathur, in their various media utterances have for the first time confessed that the payment problem amounted to a whopping Rs 1000 crore. In fact, one paper even puts it at Rs 1000 crore in each of the two settlements where brokers faced a payment problem.

Curiously, SEBI sources insist that this figure is a gross exaggeration and the default, had it not been hushedup would have been far smaller. As against this, the grossly inadequate Trade Guarantee Fund (TGF) was under Rs 300 crore. This position has to be juxtaposed with that of the professionally run National Stock Exchange (NSE) for a clear indication of the BSE's failure in controlling its brokers the NSE has a TGF of over Rs 400 crore, it declared six brokers defaulters during the same crises and its problem, even after the declaration was a mere Rs 27 crore.

SEBI's initial findings have already confirmed that the payment crisis was a result of Harshad Mehta's attempts to re-emerge as a market messiah. It is believed that he engineered the price rigging in four scrips -- BPL, Videocon, Sterlite Industries and Pentafour Software, allegedly in cahoots with the management of these companies and through 20 odd brokers who could not pay up their dues when Harshad Mehta ran out of funds. Given these facts, the amazement of the BSE office bearers at the fact that punitive action has actually been initiated is areflection of their confidence that SEBI would support their actions no matter what they were.

Parekh has said that all of BSE's actions were taken in the interest of the market and finds virtue in the fact that the TGF was not touched and a dozen odd brokers not declared defaulters. What he omits to say is that, the peculiar wording of BSE bye-laws only allow the TGF to be touched after a broker has been declared defaulter. It is precisely because the BSE was working at saving the brokers from default that they could not touch the trade guarantee fund. The BSE President also conveniently fails to reveal that while the TGF was not touched, the BSE dipped into a Common Pool Fund, which has margins collected from all brokers and it was later replenished by a sale of securities.

Both Parekh and Mathur have insisted that their action in opening up the trading system late in the night on three occasions is in line with the BSE bye-laws and in the interest of the market. In fact, bye-law 6 which saysthat the Governing board or the President may reduce, extend, or otherwise alter the timing of any trading session. These powers are delegated to the Executive Director under rule 98. Even a simple reading of the bye-law makes it clear that it cannot be interpreted as permission to tamper with the trading system (as opposed to opening the session for all members), to allow just two brokers to put in trades on an all-or none basis, at prices removed from those prevailing on the market. The BSE opened the trading system at least on four occasions by perverting the rules.

The exchange now alleges that the BSE top brass was kept informed about the tampering with the trading mechanism almost on a hourly basis. In fact, the former BSE vice president, Rajendra Banthia, in his reply to the show-cause notice issued to him, has even demanded the right to cross examine SEBI officials of the investigation department in order to prove the claim that they were aware of the tampering.

R C Mathur, says that thePresident (J C Parekh) and ex-vice president (Rajendra Banthia) forced him to permit shares to be accepted as delivery. In fact, the BSE bye-laws, written during the days of the powerful Chairman Jeejeebhoy, give the Executive Directors powers equal to the entire governing board and the freedom not to be coerced into a wrong action.

Mathur only makes a strong case for the finance ministry to change the rules and install professional managers on all stock exchanges. Clearly brokers on the governing board, wield enough clout to browbeat administration officials, and the ministry needs to look into this issue urgently. In fact, several senior officials of the BSE will testify to constant interference by broker directors in their surveillance and investigation duties.

Lax SEBI regulation is evident from the fact that Rajendra Banthia, a close associate of Harshad Mehta, was not only allowed to be an office bearer for nearly three years (first as treasurer and later as vice president), but actively influencedall market decisions. While it is true that Banthia was a duly elected office bearer, a strong regulator could have easily influenced the stock exchange to keep him away. Instead, Banthia, who has now replied to SEBI's show-cause notice with harsh counter allegations, was virtually running the stock exchange until he was asked to step down after the payment crises.

The finance ministry has the opportunity to initiate sensible changes in stock exchange administration across the country, because the BSE president intends to seek redressal from the Appellate Authority. The ministry should note that the BSE Executive Director has virtually admitted his inability to manage the demands of members or regulate their excessive trading when he says that he sought guidance from the SEBI, which was not forthcoming.

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