Sebi, as a market regulator, expects total compliance of corporate governance norms. We have given enough time for those who have to meet the requirement of Clause 49," said the chairman of the Securities and Exchange Board of India (Sebi), M Damodaran, addressing corporate chiefs last week. Wonderful news, indeed. But over recent months, letters, complaints and queries from investors suggest Sebi also needs to improve disclosure and communication in its own domain, starting with leading institutions that are market intermediaries and self-regulatory organisations (SROs).
Let's start with the simple disclosure of business activities and annual reports. If Clause 49 of the listing agreement imposes strict disclosure rules on companies, similar standards must apply to SROs, too, especially when they are for-profit companies. Their annual reports, with comparable previous-year numbers, must be available on their website. Two, all their products and services, with segment-wise reporting of expenses, must be listed, with investor protection measures such as the size and scope of insurance cover. A third issue pertains to investor representation on committees set up by those institutions that are mandated by the regulator. A closer look at the top five institutions regulated by Sebi reveal they, too, prefer to keep in-vestors at a distance.
A fourth issue is proper communication. Sebi, as well as its SROs, assume investors can and should get all trade-related information directly from their brokers. So, they tend to be brusque in dealing with investor queries. While broker-to-investor communication generally works well, it is far from perfect. Also, investors sometimes want a second opinion. Instead, they end up running from pillar to post for simple clarifications.
Such as the Securities Transaction Tax (STT), introduced last September. This is electronically deducted and transferred to the tax authorities by bourses. Stock exchanges issued detailed instructions to brokers on tax deduction and accounting when STT was launched. Now that it is time to file returns, many investors are clueless if the authorities would accept tax deduction certificates provided by their brokers. Last week, stock exchanges were persuaded to issue a press release explaining the self-certification process the taxmen have agreed to accept.
Another issue's on Sebi's risk management guidelines, that become effective next month. The new rules allow brokers to make margin payments without first collecting it from clients. This simplifies brokers' operations. But increases investors' risk in dealing with hugely leveraged brokers, with large proprietary trading positions. Leading brokers believe investors need cautioning about choosing safe ones. One way is for stock exchanges to publish, on their website, net worth data and daily outstanding positions of each broker. Exchanges, however, say net worth is a useless metric for judging such risk, especially since they already publish detailed data on the proportion of every broker's proprietary position in the cash and derivatives segments. But is the average investor even aware of this data on the stock exchange websites, or know how to assess it? They do not, and mandatory broker-rating may be better.
Recently, a few investors who do Internet-based trading have alleged their orders were implemented at rates other than those they'd punched in. Yet, even investors with a complaint say errors are very rare. So, such complaints tend to be dismissed as punching mistakes. However, some persistent investors are convinced it is a systemic bug and are determined to pursue it. In one case, ICICI Direct has acknowledged the problem and asked the investor to take it up with the National Stock Ex-change. The NSE has agreed to check the remote possibility of an undetected bug in the software system. But it has been a huge process to arrive at this stage.
Even excellent systems and organisations can turn complacent or overconfident, especially when they operate in near-monopolistic situations. While Sebi is rightly focused on the corporate sector for disclosure and governance issues, it may need to keep an eye on its own backyard, to ensure those who enforce the rules for companies are equally scrupulous in following the same standards in communicating with their main constituency-the investor.