Credibility of Regulators  

In a game of cricket, players cannot even question wrong umpiring decisions or call for the electronic umpire. Even a bias against an individual or a country is established only after a series of questionable decisions; only then is the umpire removed. Only decisions about a player’s behaviour leading to suspension are put through an inquiry proceeding. If these rules were not strictly enforced, every game of cricket would be mired in controversy and probably never completed.

 

Isn’t it ironical then that, when it comes to the markets, where a few thousand crores of shares or commodities are traded everyday, the rules and regulatory hierarchy have been completely blurred in the past few years? What is worse, the government has been a silent spectator in the conflict between market regulators and certain self-regulatory entities, which has eroded the credibility of independent regulators. This happened when the Securities and Exchange Board of India (SEBI) acted against the National Securities Depository Limited (NSDL) and, to a lesser extent, the Central Depository Services Ltd. SEBI inspected the two depositories in the wake of what is known as the multiple-application scam for IPOs (initial public offerings). It charged them with dereliction and faulty systems and ordered tough action. It also raised certain pertinent issues such as high depository charges (all investor groups had complained about this) and the regulatory structure of the depositories, since they were undertaking a host of other businesses that do not come under the regulatory ambit of SEBI.

 

Unfortunately, SEBI’s action smacked of vendetta. Its order was inconsistent and it did not give NSDL due notice or a hearing to present its case. Worse, it concocted a bizarre disgorgement process for profits made through multiple IPO applications. Bizarre, because it wanted the depositories to pay up the money and, in turn, collect it from individuals and other intermediaries responsible for the scam! While SEBI was on a rampage, the finance ministry could easily have reined it in, but it did nothing. And, although finance ministry representatives were apparently at loggerheads with the regulator, the then SEBI chairman, M Damodaran was in the running for an extension, signalling the government’s approval of his actions. Meanwhile, NSDL went to the appellate tribunal where SEBI’s order was initially stayed and later thrown out.

 

Then, in yet another twist, the NSDL chief, CB Bhave was appointed as the SEBI chairman, although several cases against the organisation were pending before the regulator. At the time of his appointment, the finance ministry said it was ring-fencing SEBI’s actions against NSDL and would have a committee of directors to deal with them. It is a year since Mr Bhave was appointed, but we, the public, have no clue about the composition of that committee and how the so-called ring-fencing has worked in practice. All this at a time when SEBI’s board agenda and minutes are put in the public domain! We have, however, noticed that the IPO scam is almost wound up by speedily processing and settling cases related to it through the consent system which involves paying up a fine without admitting or denying guilt. Other issues such as high depository and custody charges have not even been touched. Anger over high depository charges had abated during the bull run; but, with markets in a prolonged slump, they are bound to resurface.

 

Let us switch to the commodity and currency markets. Even here, SEBI and the government are watching silently as the National Stock Exchange (NSE) and Financial Technologies Limited (FT) slug it out in court. NSE suddenly put FT’s software (with 80% market share) on a ‘watch list’, only after MCX-SX (of the same group) began to give NSE a run for its money in the currency market. At the same time, the NSE invested in a rival software company and is furiously promoting it. Isn’t this a fit case for SEBI’s intervention? And shouldn’t the finance ministry be pushing it to act? Nothing has happened.

Let us now look at the Forward Markets Commission (FMC), which stopped the National Commodity & Derivatives Exchange (NCDEX) from slashing transaction costs to absurdly low levels (5 paise/lakh of trades after 3.30pm as opposed to Rs3/lakh of trades) in order to gain market share against the MCX, by far the market leader. NCDEX first challenged the FMC order in the Bombay High Court, which rejected the plea for lack of merit. The Court correctly observed that decisions of expert bodies and regulators should be left to the authorities empowered to take such decisions. NCDEX has now decided to challenge the Bombay High Court’s decision in the Supreme Court.

 

It is easy to forget that FMC is not the first regulator to reject predatory pricing. Even TRAI (Telecom Regulatory Authority of India) had rejected Reliance Infocomm’s (as it was then named) proposal to charge only 40 paise per minute on local and long distance calls as a predatory move. Reliance’s move was rejected, although it would have benefited ordinary phone-users but damaged the finances of State-owned telecom companies. Now that the FMC has put its 17-page order against NCDEX’s predatory transaction charges on its website, there is a subtle attempt to paint its action as being vindictive. But FMC has raised a serious issue about the drastic depletion of the settlement guarantee fund from a mandated minimum Rs5 crore to a mere Rs5.05 lakh! There are issues of risk and solvency of NCDEX because it was banking on a fee structure that was based on expectation of future income from higher trading volumes which may not translate into reality. In fact, the NCDEX’s predatory pricing may force all commodity bourses to slash fees and leave the entire trading system vulnerable and unviable.

 

Ironically, the NSE is a big shareholder of NCDEX and ought to understand the dangerous implications of a badly depleted settlement guarantee fund for the integrity of markets. But my bigger worry is the government’s silence over these dangerous developments. It suits politicians to have faceless, toothless regulators who lack credibility and the fastest way to achieve that is for regulators to remain silent or have self-regulatory organisations such as NSE, NCDEX and NSDL to question their decisions.