On the face of it, The Economic Survey’s chapter on Securities Markets gives a neat round up of capital market developments. A closer look, however, shows a curious selection of facts and interesting omissions. A glaring one is the ‘demat scam’, which has raised question about the processes of depositories as well as their inspection and verification procedures. Such loopholes allowed Depository Participants (DPs) to collude with dubious operators to open tens of thousand illicit demat accounts and make multiple applications for IPOs. The Survey not only ignores the entire ‘Demat Scam’ but actually singles out the depository system for gushing comment. It says, ‘‘The number of depository accounts at NSDL continued to grow rapidly, with a rise of 21.9 per cent in 2005, which corresponds to over 5,000 accounts being opened per working day...The sum of NSDL and CDSL accounts stood at 85 lakh’’. In fact, Sebi did discover that Roopalben Panchal alone had opened 5,000 accounts in a single day.
The Survey says that retail investors dominate trading and goes on to discuss impact costs in the Indian capital market and user charges paid by investors. In this context, depositories are again singled for praise. It says, “As an example, the per transaction charges applied by NSDL and CDSL are amongst the lowest in the world”. One would have liked this to be backed by details, especially because all Sebi-registered investor associations are unanimous in their complaint about high dematerialization costs in India. Investor groups are fighting a three-year battle to get Sebi to reduce dematerialization charges. Surprising that the Survey does not seem to apply the perfect market theory to depositories and explain why they are extremely profitable despite low transaction costs but there are only four Registrar and Transfer Agents and banks do not find it viable to increase its DP services. It is not for want of business opportunity, after all the Survey itself says that retail market participation in the market has grown rapidly. Surely the Survey should have made some effort at real answers instead of painting an incomplete picture.
Para 4.31 shows that the Survey authors did not overlook the ‘demat scam’ while praising the depositories, they deliberately ignored it. It refers to the scam as follows: “Recent events revealed individual investors placing multiple bids in the IPO auctions, in order to benefit from the quota that has been made available to individual investors”. The only lessons it draws from the revelations so far is “the need to shift away from a system of quotas to a non-discretionary price discovery through a unified auction” by scrapping the retail investor quota—the perfect market theory will apparently work here. If the Finance Ministry claims ownership of the Survey and its contents, then it shows a sad lack of understanding of the Indian capital market structure. Even an academic overview could not have ignored systemic deficiencies in the depository system that allowed thousands of multiple accounts to be opened in a single day without detection. Ignoring systemic issues and the findings of Sebi investigations, the Survey has dishes gratuitous advice about “strengthening the investigation and surveillance process”.
It is no secret that the Maharashtra Government and the Mumbai Municipal Corporation are strapped for cash. That is probably why officials of the collector’s office prowl around the banquet halls of five-star hotels allegedly checking for wrongdoing. Their task is probably made easy by the fact that there is an abundance of laws, rules and regulations that are redundant or unknown but never formally scrapped. Last week, two officials walked into a function at a South Mumbai five-star hotel claiming to check for ‘live entertainment’ programmes without appropriate permission from the Collector’s office. This could be easily verified without even entering the hall. However, sarkari babus began to grill the organisers about whether the liquor served at the event was sponsored. This too was easily verified since liquor sponsorship was against hotel policy. But the officials were not satisfied until they sought specific verbal confirmation from the hosts. Were these genuine inquiries or were they seeking to extract a few bucks?