SHEKHAR GUPTA - Indian Express

Different Strokes by Sucheta Dalal

March 10, 2001

Who will control the buccaneers of the bourses?
A scam every three years

Why should Yashwant Sinha not have a victim complex? Within a week of presenting a boom budget his markets have been massacred. At a time when foreign institutional investors should have been vacuum cleaning the market of promising shares, they are, instead, bitching about the regulator’s ban on short sales so they can’t even cut their losses and exit in a market with such small volumes. And do not even talk about the small investor. He hadn’t even fully recovered from the earlier scams yet and this one now will probably make sure he will not look at equity for years to come, gratefully settling for the PPFs and the NSCs in spite of the lower interest rates now.

But is Sinha a victim of fate, the glorious uncertainties of stock markets or of a combination of buccaneering brokers who control the trade and half-wit bureaucrats who supposedly regulate it?

There are, actually, no glorious uncertainties in our stock markets just as there are none in our cricket any more. We know each time we play a serious team (except Bangladesh, Zimbabwe, etc) we are certain to lose anyway. Similarly, you can be absolutely certain that every three years the markets will be hit by a scam. You can even call it a cyclical phenomenon. A scandal happens every three years. In 1992, it was the securities scam that gave Harshad Mehta so much fame, 1995 the Reliance share-switching scandal, 1998 the Sterlite-BPL-Videocon that cut short Harshad’s comeback and now, in 2001, the continuing bloodshed. And, if the markets tended to get a bit monotonous in the middle of all this, we had the CRB scam and the MS Shoes scandal. Which other reforming economy can boast of such a consistent record? Our bourses are so scandalous, they have blighted every reformist finance minister since 1991.

How does Sinha handle this now? And how does he ensure that he, and his reformist successors, are not cursed the same way? Surely, he cannot secure the markets by getting Parliament to pass a law banning all crashes in the future? The markets follow their own logic and are as likely to crash as they are likely to boom, and you cannot complain as long as those fluctuations reflect the state of the economy and corporate health. That has not been the case with our markets for years now. A year ago, the markets were booming and the management of the BSE was releasing helium balloons to celebrate the Sensex breaching the 6000-mark. This when the economy was in recession, corporates were reporting poor results, order books were empty and inventories piling up.
But the boom, we were told, was real. Because in the new economy things like order books, inventories, profits were outdated. Fund managers with foreign accents, dressed in $100 Hermes ties, told us this ten times a day on CNBC.

They were the new stars of television, giving stock tips without a mention of their own, or their principal’s, interests. In a more civilised economy they would have been sentenced to hard labour. Now when the economy is in better shape, we have a good budget, the reform process is moving, the markets have hit the bottom. The only conclusion you, I and Sinha can draw from this is that our markets are completely manipulated by a few traders and fund managers and run in a manner totally divorced from the so-called fundamentals. What can Sinha do about this?

First of all, he has to stop pretending he doesn’t care or that SEBI should be able to take care of the problem. He has to worry, instead, about why SEBI and the other regulatory mechanisms have so far been so utterly incapable of doing so. If the head of SEBI is now responding to probably the fourth scam during his tenure by pleading helplessness because he has no powers, the finance minister has something to worry about. He should either accept the argument and give him more powers. Or find himself a regulator whose bite matches his bark.

There has, after all, to be a reason why the very same and very savvy fund managers who stick most diligently to world standards of transparency and rectitude while listing or trading shares on NYSE or Nasdaq violate them without compunction in Mumbai. There is no fear of God or the regulator here. We have a world class trading system but no foolproof framework for transparency. We have a good set of insider trading laws, but neither the will nor the competence to enforce accountability. Consequently, even as the economy reforms or opens up, the most crucial area of all, the stock market, remains trapped in the old, manipulative, insider-trading paradigm. It is, in fact, a victim of deregulation because, in the total absence of a will to enforce insider-trading laws, there is now a dangerous new sense of promiscuity among brokers and fund managers, Indian and foreign. The situation is so bad that if insider trading laws were really enforced in India as they are in the West, a majority of our traders and fund managers would be yanked away from their flat-screen monitors and stuffed into the Arthur Road jail.

Free markets can only thrive in a system where transparency and ethical norms are enforced as brutally as any other law on heinous crime. The markets control our economy and the fortunes of tens of millions of small investors. There is no future for an economy where the markets are not subjected to the highest levels of accountability. The US ensured this two decades ago, with the introduction of very tough SEC laws. In fact, insider trading is one of the very few crimes in the US for which you can be handcuffed, even at work. The idea is to tell the entire financial world not to mess with the law. The SEC, and regulators in other free economies, hire highly skilled accountants, software experts, even brokers, who then ensure no hanky panky goes on. Here SEBI, instead, depends on a motley group of revenue service and IAS officers who have neither skills, nor the motivation or the powers to send anybody to jail.

In Singapore, Nick Leeson has already served his jail sentence. So has Mike Milken in the US. Both were responsible for scandals that coincided more or less exactly with some of ours. The US has also, in the past, jailed two journalists of The Wall Street Journal for 18 years on charges of trading in shares they were writing about. Here, instead of going to jail, our scamsters keep on making comebacks, writing newspaper columns loaded with stock tips and, inevitably, creating more scandals.

The latest crisis gives Sinha a great opportunity. Send some of these thugs to jail and let us, ordinary, small investors who cheer every reform move of his, go and feed them bananas through the bars. It is no guarantee that another scam won’t hit us after three years. But it will at least be a beginning in the process of reversing this very Indian irony whereby the biggest beneficiary of reform, the stock markets, always end up giving reform a bad name.