Sucheta Dalal :Taken for granted?
Sucheta Dalal

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Taken for granted?  

Sep 13, 2004


All over the world, citizens have to place their trust in government agencies and believe in the data and information that they put out. For instance, we had implicit faith in the Census numbers, but the dangerous mess over the growth rate of the Muslim population and the Government’s decision to investigate the goof-up makes us wonder what else could be wrong.It is the same with investigations by the police or regulatory agencies.


Despite dozens of financial scandals over the past 15 years, the guilty have gone scot-free and investors have lost their money. Yet, confidential reports available with us show that the Reserve Bank of India’s supervision department had failed to act in the Global Trust Bank and Nedungadi Bank cases; we also have reasons to believe that the May 17 investigation is making no systematic attempt to nail all of those who may have depressed prices. The preliminary report submitted by the Securities and Exchange Board of India (SEBI) when matched with raw trading data during the initial minutes of May 17 raises many questions about the regulators’ ability. We now learn that in one investigation, SEBI’s lawyers have written to the regulator that it cannot be certain of a favourable order from an appellate body because of the (poor) quality of its investigation. This pertains to one of the biggest individual trader in the stock market. It brings us back to our original question. What can ordinary people do if the basic investigation and information gathering by regulatory agencies is deficient and faulty?


Reviving the BSE


Expectations are running high about Madhu Kannan, the man from the New York Stock Exchange (NYSE) who seems set to occupy the hot seat of Executive Director (ED) at the Bombay Stock Exchange (BSE). The NYSE, unlike the BSE, changed rapidly to keep competition at bay and remain the numero uno American bourse. Kannan is expected to do even better in Mumbai. He is expected to put the BSE back on top, restart derivatives trading and turn around the exchange financially. Coming from an intensively competitive country, he will probably compete hard with the National Stock Exchange (NSE) and leverage the popularity of the Sensex by launching Sensex futures and other derivative products. But look at what he will inherit.


The BSE will soon be corporatised and like the NSE will have to pay taxes. For several years now, the BSE has been fighting attempts by the Income Tax Department to remove its tax-exempt status. And there is a huge pending tax demand of Rs 500 crore (including interest), which has been contested by the bourse. Also, its operational income has dwindled until it remains in the black mainly because of interest and other income. The new ED will have the tough job of increasing turnover, while cutting ostentatious expenditure that has been the norm under its professional ED. For instance, the official farewell party for Manoj Vaish (no wives invited) had ballroom dancing demonstration that embarrassed the staid old-timers of the bourse.


Automation barrier


Indian regulators and the Government are so happy with foreign investment in India that they have little time to worry about the disinterest of the retail investors. While we are indeed proud that NSE is the third-biggest bourse in the world (in terms of number of transactions), we are unconcerned that all these volumes are generated by a stagnant investor base of under two crore. Survey after survey of retail investors reveals three reasons why they stay away from equity investment — lack of clarity about complicated stock market processes, especially due to the high level of automation. A fear of dematerialisation and the high costs that are involved (especially custody charges and high fees extracted by Depository Participants) is another serious concern that has not been addressed as yet. And the biggest turn-off for investors is abysmal grievance redressal measures by all regulators. Prem Gupta, the Minister of Company Affairs has promised to open 32 investor cells across the country to handle investor complaints. Even if they start acknowledging and indexing investor complaints, it will be a good start.


Re-examine STPIs


A few years ago, the government set up the Software Technology Parks of India (STPI) — an autonomous organisation under the Ministry for Information Technology — by offering huge tax rebates on local taxes and custom duty exemptions. Over 7,000 companies registered with STPI and scores of software parks sprang up all over the country. However, over the years, many ‘software’ parks have remained empty as top Information Technology (IT) firms preferred to remain outside. Part of the reason was that equipment costs and customs duties were dropping steadily and it wasn’t worth braving the cumbersome red tape at the STPIs. Meanwhile IT sources allege that ‘‘all sorts of non-active STPI companies went into major ring-billing and imports’’ under the STPI cover. Isn’t it time the Finance Ministry cracked down on rebates that have outlived their utility?


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-- Sucheta Dalal