Dr RH Patil’s recollection of the early days of the National Stock Exchange (NSE) at the launch of Pathbreakers2 got us curious about where it is today. From an exchange struggling to find media support and get its stock quotations into print, it has grown into a virtual monopoly which has powerful influence on policy-making. More pertinently, it is obscenely profitable. Look at the numbers. In the year ended 31 March 2008, NSE’s turnover was Rs1,039 crore and it had a pre-tax profit of an incredible Rs735 crore. This probably makes it the most profitable company in India with a pre-tax margin of 71% and no challenge to its equity business. (How it has reacted to challenges in the currency markets is another story that is already being played out in the media. The turnover is up nearly 67% from Rs624 crore in FY07. NSE’s affiliate, the National Securities Clearing Corporation (NSCC) is even more profitable. Against a turnover of Rs377 crore in FY08, its expenditure was a paltry Rs42.41 crore giving it a pre-tax margin of nearly 89%. NSCC is virtually an extension of the NSE.
NSE’s profits come from increasing turnover in spot and derivatives trading. No wonder the Exchange was reluctant to reduce the number of speculative scrips in the derivatives segment. It also extracts several other charges from its members. For instance, a big source of revenue is NCFM certification which is mandatory for brokers. This is another area where NSE has a monopoly and can fix any fees it wants. The income from certification jumped from Rs16.46 crore in FY07 to Rs21.85 crore in FY08.
This kind of profitability naturally gives the NSE a massive cash kitty of nearly Rs2,500 crore. At the end of March 2008, its investment portfolio was Rs657.25 crore and its liquid assets portfolio was Rs1,691 crore; it had another Rs153 crore in the bank. This makes it one of the biggest investors in the market.
NSE’s virtual monopoly in the capital market, the fact that its name begins with ‘National’ (something that the Registrar of Companies is not supposed to allot to private companies), and its initial shareholding of public sector entities, gave it the status of a government entity. But that is history. Today, many of its original investors have been replaced by foreign entities. Senior management salaries are much higher than those in public sector entities. For instance, the NSE chief, Ravi Narain, is paid a hefty Rs3.34 crore per annum plus fantastic perks and foreign travel benefits.
Yet, the NSE uses its financial might and its clout with the government and the regulator, as well as its near-monopoly status, to fight for its status as a private company. It has gone to the Delhi High Court over a ruling by the Central Information Commission that it is a public authority under the Right to Information Act. This means, that it has all the privileges of the public sector without its accountability. NSE’s private profits and public image makes it a fit case to be sent before the Monopolies Commission or the toothless Competition Commission. Fortunately for the NSE, investors have no resources and its members and intermediaries would not dare take it on.
Boost to Investor Groups
Almost a decade ago, the Ministry of Corporate Affairs set up the Investor Education and Protection Fund (IEPF), which was carved out of unclaimed interest, dividend and redemption of fixed deposits with companies. However, it has hardly fulfilled its objectives. IEPF first stumbled when the finance ministry insisted that investors’ unclaimed funds would go into the Consolidated Fund of India (approximately Rs385 crore, when this writer was a part of the IEPF administrators) which, in turn, would dole out what IEPF hoped to spend. This killed any prospect of IEPF having its own independent infrastructure and it began to be stifled by bureaucratic red tape and procedures. The ministry officials also seemed to view its administration as a chore, although they fought hard to stop the Fund from being transferred to SEBI. Now, SEBI has its own investor fund with an initial corpus of Rs15 crore and has made some ambitious announcements. MS Sahoo, a whole-time SEBI director speaks of an ‘Investors Group Protection Scheme’ that would support investors if they approached it as a group to seek court’s help.
Such a move, if it works, will be a big boost to the growth of investor associations in India and we will watch it with interest. Most SEBI-recognised investor groups cannot attract investors because the regulator does not offer any special recognition to complaints routed through such associations. Naturally, they seldom have the resources for class-action suits. During M Damodaran’s tenure, SEBI even turned intolerant of protests from investor groups on issues such as changing reverse book-building rules, IPO ratings, abridged annual reports and clearance of the DLF IPO. Given this background, will the regulator actually support class action where the MCA, the finance ministry or SEBI itself is a party to the suit? If SEBI goes beyond promises and actually finances such litigation, then it deserves kudos.
SEBI’s Valentine for First Global
In a surprise development, the SEBI has banned Shankar Sharma, vice-chairman and joint managing director, First Global Stock Broking from dealing in securities for one year for his alleged role in manipulating the prices of 10 scrips including Zee Telefilms, Wipro, Satyam, MTNL, SBI and Infosys Technologies in 2001.
SEBI’s order covers Sharma and his firm Vrudhi Confinvest India and will come into effect after four weeks, giving him time to appeal against the order in line with an advance stay already obtained by Sharma from the Bombay High Court. SEBI has accused Sharma of fictitious trading by taking opposite positions at First Global Stock Broking and Bang Equity (owned by the late Nirmal Bang) and giving false orders for the purchase and sale of securities that did not lead to any change in ownership. Sharma has dismissed the SEBI order as absurd and is reportedly confident of having it quashed at the Securities Appellate Tribunal. That could well happen, because SEBI’s orders and circulars are hardly known for meticulousness. The last time around, Shankar Sharma's case was thrown out on technical grounds because SEBI forgot to check its own rules bound it to initiate regulatory action within a prescribed time. SEBI fixed that loophole but did not appeal against the decision.
SEBI’s belated action against the high-profile Sharma is itself a surprise, but another dimension to it is causing a bigger buzz. SEBI’s order was issued just a few days after Business Standard reported that Shankar Sharma was unfairly targeted in the ‘Ketan Parekh scam’ based on a Right to Information query filed by the broker. It followed this up with an editoral which said that SEBI’s standing as an independent regulator was undermined by its silence over its 'vindictive action' against Sharma in 2002. It said, “Cases of state vendetta against individuals are not unknown, but this is the first case where the political authority seems to have influenced stock market regulators. Is it coincidental that First Global received SEBI’s adverse verdict during the tenure of the Vajpayee government? And that the appellate tribunal set aside that SEBI order a few months after the Vajpayee government completed its tenure?”
Well, what does one make of SEBI's recent order, issued under a Congress-led government that was perceived to be sympathetic to Sharma? SEBI insiders say that a supplementary show-cause notice was issued to him in February 2008. These sources also say that SEBI has filed a caveat with the Bombay High Court to ensure that no ex-parte order is passed in the case. It will be interesting to see what transpires in the coming weeks and whether SEBI is able to make its charges stick this time around.