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Sucheta Dalal

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Crosshairs by Sucheta Dalal  

October 16, 2012

FSLRC's Approach Paper is impractical to implement

Sucheta Dalal

Even before India embarked on economic liberalisation, the chairman of a financial institution used to say that we Indians suffer from the MAFA syndrome —Mistaking Articulation for Action. So the government sets up innumerable committees which articulate excellent plans for India’s development that are killed by a venal neta-babu-business nexus and remain forever on paper. For instance, about 50 years ago, the Wilber-Smith report recommended that Mumbai be linked to the hinterland by a bridge across the sea. But builders, in cahoots with politicians who wanted to ensure that realty prices remain artificially high in the island city, have never allowed it to happen. Much the same is bound to happen to the recommendations made by the Financial Sector Legislative Reforms Commission (FSLRC) headed by Justice BN Srikrishna. It has pointed out that there are “60 Acts and multiple rules and regulations that govern the financial sector” which need to be consolidated to ensure that various issues and shady fund-raising practices do not fall between the cracks of strictly demarcated regulatory turfs. The optionally convertible debentures, that raised over Rs17,500 crore for the Sahara group, and sundry art funds, which have cheated people, are examples that come to mind. So FSLRC’s approach paper recommends the merger of four financial regulators (insurance, capital markets, pensions and commodities)—other than the Reserve Bank of India (RBI)—into a single Unified Financial Agency (UFA) and the creation of a separate financial redressal agency (FRA). It makes many other suggestions, but let’s look at the first one.

The UFA will not be comprehensive until it includes regulation of spot trading in commodities. This, strangely enough, is under the ministry of consumer affairs, which unfortunately is among the most opaque and backward of government departments. (The ministry has recently stirred itself to issue a show-cause notice to the exchange in connection with a carry-forward contract promoted by the electronic spot exchange and touted as providing a steady and stable return to investors). The FSLRC clearly anticipates that each independent financial regulator, which has created a fat fiefdom, will fight hard to block merger plans. It also throws in carrots like the need to ‘enshrine’ regulatory independence and the appointment process of senior regulatory staff with fixed contractual terms and making board meetings more transparent. With due regard to the honourable members of the committee, it must be said, that ‘enshrining’ tenures can do a lot more damage to the system if the appointments themselves are part of dubious deals. Regulators are compromised right at the time they do deals to wangle top posts. They also bring in their own vested agenda to the job. It is a fact that in 20 years of SEBI’s existence, only GV Ramakrishna, its first chairman, put his job on the line for his principles. One must remember that the decision to create separate financial regulators less than two decades ago was, in all probability, deliberately done to create job opportunities for powerful retiring secretaries of the government of India. Every member of the FSLRC is fully aware of how this game is played. So what is the point of an approach paper that has no practical value and will only be junked?

Dire need to monitor the stock exchanges more closely. But is Sebi up to the job without a better quality of chairmen?

While the FSLRC is focused on legislative reform, there is far more urgent need to have a stronger capital market regulator who understands market mechanics and trading technology and is willing to act quickly and decisively without fear or favour. In fact, this needs to be in place before MCX-SX launches its equity-trading segment in November and competition between India’s three national bourses turns more vicious than it already is. Consider some simple facts.

  As recently as August 2012, the chief technology officer of the National Stock Exchange (NSE) preposterously told the Business Standard that the Exchange had ‘attained nirvana’ in technology by being able to put through transactions at the speed of light. This when the Exchange had already had serious issues in three consecutive months—March (ONGC), April (Nifty futures algorithmic trading) and May (derivatives snag) and a fourth bigger one was about to happen in October.
   The NSE quickly blamed Emkay stock brokers for the crash, but has not bothered to explain why its market-wide circuit filters failed to work. Brokers are increasingly getting angrier at being held responsible for all technology problems and want a fair and open investigation. Many are simply cutting down their operations.

   The secondary capital market is already a cabal of a small group of large institutional traders who have the money power and technology to trade at the speed of light. The rest, including retail speculators and day-traders, play on the sidelines. It is not clear if SEBI has any clue about who the key players in the market are and their operations. For instance, NSE, which has a 90% market share, told Business Standard that “Tier-III cities contributed more than 45% of the total cash market retail turnover in 2011- 12 on NSE.” This is contrary to statistics in the previous decades when both SEBI and NSE were a lot more transparent. So what has changed the trading pattern? Has the regulator even bothered to examine this amazing new trend? Or is there something hokey about the trades and their source of funds?

   As Moneylife has already said in its online publication, the NSE as well as the Bombay Stock Exchange (BSE) seem to have ignored every check prescribed by SEBI. Trading was not halted in both bourses and across market segments; but the regulator’s only reaction is to launch an investigation.
    The NSE has always successfully evaded a close scrutiny of all technology issues for over a decade. This has got to stop. In its initial years, especially under the leadership of the late Dr RH Patil, the NSE was seen as an extension of the regulator and the government system. Not any more. Today, the NSE is driven by profits, pay and perks of senior executives, which are tied to a desperate need to maintain market share. This was evident in its malicious moves to prevent MCX-SX from getting a licence to offer an equity platform.
   The BSE is now entirely the fief of one former NSE executive Ashish Chauhan—all of SEBI’s attempts to make it a professionally-run organisation have come a cropper.
   MCX-SX, headed by Jignesh Shah, is going to be a street-fighter with a point to prove and a new bourse seeking to find a foothold anyway needs close monitoring.
In other words, the secondary market is in dire need of a tough regulator, who understands complex technology and is in a position to act quickly to protect market integrity and avoidable losses of money and confidence. Instead, the government has given us two successive SEBI chairmen —CB Bhave and UK Sinha—who have spent their entire tenure under a cloud or facing issues relating to their appointment or previous tenures.  FSLRC’s recommendations would be more effective if they were less theoretical and took the ground realities into account.


-- Sucheta Dalal