Stockquake

Stockquake

It has taken 125 years and a stock market crisis of as yet unknown proportions for the authorities to recognise the major conflict of interest that exists when practising brokers sit on the governing board of a stock exchange, in this case, one of the key bourses in the country, the Bombay Stock Exchange. The Securities and Exchange Board of India and the finance minister have now both decided to end a practice that should have been stopped long ago, and certainly after the last great BSE scandal of 1992.

And it is fair to ask just what kind of comfortable club of regulators and brokers drafted rules to prevent insider trading but failed to take into account the structure at the apex of the biggest exchange in the country. The dead heat of a crisis is not the best time to axe all the brokers on the BSE board. Even a temporary vacuum at the top risks deepening the crisis. However, after the revelations about insider trading, drastic action going beyond the resignation of BSE president Anand Rathi was essential.

The most striking feature of the taped conversation between Rathi and the BSE's chief surveillance officer is the routine way in which confidential information is solicited and provided. Evidently there was a well-worn channel there and it involved others besides the former president. Investor confidence in the functioning of the BSE is deeply shaken. Despite the risks, Sebi is correct to get rid of the brokers and try and restore public confidence. But for Sebi or the government to run the BSE is not the answer. The `corporatisation' of stock exchanges which the finance minister favours sounds logical but may not be the only, or best, option. The important thing is to deal with systemic problems in a thoughtful and sustained fashion. Bursts of energy when crisis strikes are not going to work.

Like every previous stock market scandal the latest one is also provoking outrage in Parliament and a spate of fresh allegations. But a joint parliamentary committee investigation is not recommended. Such probes usually balloon into unmanageable operations to accommodate all kinds of vague fears. By the time a JPC announces its remedies a different malady has emerged. The government needs to respond to the concerns expressed in Parliament about the condition of the markets and the failure of regulators but not by announcing grand clean-up schemes which will degenerate into half-baked action. The country is looking for assurance of two kinds: confident handling of the immediate crisis and a clear-cut plan for dealing with longer-term systemic problems. Immediately the effort should be to restore order and transparency to the market. This will be difficult in conditions of a global equity market meltdown but it does not help for the the finance minister to announce action which is in Sebi's purview. D.R. Mehtahas announced a series of tough steps and should be allowed to get on with the job of monitoring operators. Quick, firm action from the RBI against banks exceeding prudential norms will also be salutary. The government and opposition should discuss structural issues at a later date. Right now they should work together to prevent panic from spreading.