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Drumbeat: Ad Buzzaar
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Tuesday, July 14, 1998
Sebi, finance ministry need to work together
R Jagannathan
It doesn't take a genius to figure out that there's something wrong with our capital markets. The primary market is dead. The secondary market doesn't know whether it is coming or going. The regulator frequently gets worked up about the markets and intervenes just to prove it is around -- regardless of whether the intervention makes good sense. The finance ministry aids this mess by poking its nose in matters that are none of its business (why are stock prices going down?) and blithely ignoring those which are (like strengthening the Sebi board).It is a well-known fact that ever since P Chidambaram openly criticised the functioning of Sebi under DR Mehta, the relationship between the market regulator and the finance ministry has been poor. At first there were disguised efforts to reduce the term of the Sebi chairman from five to three; when this didn't succeed, North Block mandarins shifted to undermining the Sebi chief's authority by other means. For its part, Sebi chief has been busy fighting ghostsfrom the finance ministry -- regardless of whether the exist in reality or not. Rightly or wrongly, Sebi sees the NSE as having direct access to the powers-that-be in the ministry; the finance ministry, for its part, sees the regulator as having too soft a corner for the BSE. Compounding it all is the fact that neither Sebi nor the finance ministry has any regulatory vision about how the markets should develop. Most decisions are, therefore, the result of a compromise between the two -- with vested interests contributing their mite to skewing decisions in their favour. For the healthy development of the capital market, it is not necessary for either the ministry or Sebi to take sides. All their decisions have to pass one basic test: is it good for investors? If it is, it should not matter whether the NSE benefits from it or the BSE. It does not matter whether small exchanges disappear or survive. It does not matter whether derivatives take off first or badla conquers all. It does not matter whether theNational Securities Depository garners all the demat business or the proposed BSE depository does. Look how the skewed relationship between the ministry and Sebi has vitiated several decisions relating to the capital markets: Bolt expansion: The investor is best served if various stock exchanges compete to drive down transaction costs and improve service to customers. But for years North Block was suspicious of BSE brokers and did not allow the exchange to compete with the NSE. When it finally got around to allowing the expansion of BSE's Bolt terminals, Sebi chipped in with its own small-exchange bias and restricted BSE's expansion to cities where the local exchanges don't object to the competition. It's like saying P&G should not introduce competing products unless HLL agrees. Result: competition has been stunted -- and a true national market for equities is yet to emerge. Depositories: The sane and sensible way of reducing paper trading -- with all its risks of bad deliveries and fraud --would have been to mandate compulsory dematerialisation of scrips from the outset. The finance ministry, however, allowed investors and companies the option to stay with paper. Sebi, under its previous chairman, complicated matters by making multiple depositories a likelihood. The idea was that competition would improve customer service and reduce transaction costs. This is true upto a point: the BSE depository can certainly help keep a check on NSDL raising charges; but, on the othe hand, the existence of two depositories can slow down the pace of reconciliation of demat trading between various exchanges. If all shares were traded within one depository, trading would be totally foolproof. Now it all depends on to what extent the two depositories cooperate with each another. Badla and derivatives: From the outset, the Sebi-finance ministry standoff has vitiated the badla vs derivatives debate. The right way to look at the issue was: how can badla and derivatives trading be made livelier and safer? Butthe question was always addressed as though the two forms of hedging were mutually exclusive. The finance ministry was for long opposed to the reintroduction of badla. Sebi, which under GV Ramakrishna had temporarily banned badla, failed to remove the ban under ministry pressure. When it did, it introduced an unworkable badla -- which had to be suitably reviewed.But once again, Sebi tied itself into knots to please the ministry and to appear balanced and fair. The committee to review badla included an inveterate anti-badla member; the committee set up to suggest derivatives trading had, not surprisingly, a congenital derivatives-hater. Thus both the badla and derivatives reports have dissent notes -- something that could have been avoided. If one wants good market regulation, the antagonism between the finance ministry and Sebi has to be reduced. Three things need to be done for this. One, the Sebi board must be weighted more in favour of market experts and have fewer ministry bureaucrats on it. Thiswill both make Sebi more independent and more market-wise. Two, Sebi decisions should not be reviewed by the ministry's appellate tribunal; they must directly go to the high courts. Nowhere in the world are quasi-judicial decisions by market regulators reviewed by an arm of the executive. This one fact has done more to vitiate the relationship between Sebi and the finance ministry than any other. And three, both Sebi and the ministry must jointly declare a vision for the markets -- one where the concern is not about day-to-day Sensex movements, but about ensuring market safety, reducing investor risks and transaction costs, and increasing competition between market intermediaries like stock exchanges. Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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