My philosophy about capital markets can be summed up as follows: it must be a fair, open, transparent market and have a competition,’’ said Finance Minister P. Chidambaram in Mumbai on Friday. He was appropriately speaking at the 10th anniversary celebration of the National Stock Exchange (NSE), now the world’s third largest bourse.
NSE is an undisputed success story and everybody wants to own it, especially the government. NSE was promoted and run by a bunch of government institutions. Public memory turns hazy after a decade, and it is easy to pretend that NSE’s success was due to government support. The reality was exactly the opposite.
NSE was never expected to be a great success or that it would set global standards of excellence. It was only expected to prod the Bombay Stock Exchange (BSE) to accept reforms.
The government and the regulator did play a role in framing various market regulations for clearing, trade guarantee, depository, settlements and derivatives. But all this came later, after NSE struggled to attract traders in the ‘‘fair, open and transparent’’ manner espoused by the FM, and despite competition from the entrenched and politically powerful BSE.
A comparison of the capital market with the banking system underlines NSE’s role in transforming markets. While the capital market switched smoothly to paperless trading in under five years, the banking system has struggled for well over a decade to introduce a Gross Real Time Settlement System.
But this column is not about NSE’s achievements. It is about the people who brought them. As IDBI chairman, the late S.S. Nadkarni chose an unusual bunch of persons to draft the blueprint for a new exchange. They preferred developmental issues to the more high-profile project finance portfolios.
NSE’s first managing director (MD), Dr R.H. Patil, was sharp, honest and extremely low-profile, and could harness the best ideas from a young and dedicated team and push for appropriate regulation to implement them. He was a rare individual who turned down the offer to be Chairman of the Securities and Exchange Board of India (Sebi), although the government was willing to change the rule to give him a term beyond 62 years. One needs to have a ringside view of the obscene lobbying that is currently going on for the post of full-time board member at Sebi to understand the significance of his decision.
Dr Patil’s team comprised Ravi Narain (a Wharton School of Finance alumni and now MD), Raghavan Puthran (until recently DMD and head of the Clearing Corporation and Listing) and Chitra Ramakrishna (now the DMD). The first two were earlier part of the team that had attempted to set up SEBI, before the indomitable G.V. Ramakrishna took over.
The NSE trio were honest, competent and determinedly low-profile. Unusually again, Raghavan opted out of the system recently to join the Yogananda Mission. Chitra Ramakrishna, is surely one of corporate India’s most powerful and competent women but firmly shuns media attention.
Another part of the NSE-linked success story is the National Share Depository Ltd. (NSDL) headed by C.B. Bhave, a respected former IAS officer and Senior Executive Director at Sebi. Through NSDL, he put an end to the weekly chaos of completing paper-based settlements in record time and is slowly building the organisation into unique global institution that is a one-stop shop for dematerialising every type of financial paper.
The FM must note that the competence and integrity at these institutions wasn’t imported from abroad or the private sector. Also, these people are working at institutional building at a fraction of the salary that each would have earned (and have been offered) by the private sector. Why then does the government struggle year after year to find competent executive directors, board members to fill key vacancies of Sebi?
The Finance Minister said in Mumbai that he wants India to be the global trading center in bullion and currency. He wants it to be the link market between Dubai and the Far East. And he wants India to become an outsourcing destination for financial services. He also realises that all this will happen only if our market is relatively scam-free and effectively regulated.
For this, the FM needs to get people of vision and integrity at key positions in Sebi, especially its investigation and legal departments, and also at sensitive institutions such as public sector mutual funds. Instead, the top three positions in Sebi, which have a retirement age of 62 have turned into sinecures for retired bureaucrats.
Almost all of them get appointed just around 60 and start to learn about market regulation after retiring from a full public career.
They are now even trying to turn this fatal flaw into an argument in their favour. Colluding with bureaucrats on the verge of retirement they argue that at 62, they are forced to exit just as they are getting a hang of their job, and hence the age bar should be enhanced to 65, giving them a full five years after their first retirement at 60. Even if this fails, this group is apparently powerful enough to keep important posts away from younger and more competent individuals.
This does double damage. It perpetuates the sloth, corruption and ignorance of these retired officials in the sensitive regulatory system. More perversely, it foists this on those very individuals and institutions, I described earlier, who have brilliantly transformed the Indian capital market. Even when it looked outside babudom, the government (deliberately?) opted for a brilliant academic, who espoused minimal regulation but left within a year after another mega-scam and the prospect of facing a grilling by a Joint Parliamentary Committee.
The excitement of building new systems or being part of the transformation process is almost over. And it is only a matter of time before these unsung professionals who led the process, opt out rather than deal with a steady stream of ignorant political appointees who will decide policy issues or conduct ham-handed investigations into highly-technical financial transactions, which sometimes destroy painstakingly crafted regulation.
If the government is serious about making Indian capital market global in quality or a back office to the world, it must give serious thought to appointments at regulatory bodies and key financial institutions.
It must offer challenge, freedom, a five-year term and accountability to younger, proven and knowledgeable professionals, rather than to deadbeat, self-dealing retirees with no vision. Otherwise, the success stories that we are celebrating today will turn out to be a random, one-off event.