Sucheta Dalal :Sebi kicks off new trading system on bourses (7 April 2003)
Sucheta Dalal

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Sebi kicks off new trading system on bourses (7 April 2003)  

Sometimes the most significant developments go unheralded because they take off without a hitch. Last week saw exactly such a development when the Securities and Exchange Board of India (Sebi) smoothly kicked off a T+2 trading system (when trades are settled exactly two days after a trade on a rolling settlement basis) on Indian bourses. It has made India is one of only five countries in the world to offer such a system and is a long way from the messy physical settlements of less than a decade ago.

Simultaneously, Indian banks ensured another landmark development when they kicked off an Electronic Funds Transfer (ETF) facility between 500 branches with a nominal transfer charge of Rs 2. Sebi chairman G.N. Bajpai, who had virtually staked his reputation on these developments, is justifiably elated at their glitch-free take-off. Soon, the two major bourses will launch interest-rate derivatives and add to the portfolio of options and hedging mechanisms available for retail and institutional investors. With these developments, the Indian capital market is on course to dealing with full currency convertibility (when it happens) and competition from global bourses.

But before we get carried away, let me hasten to add that the news is not all good. There is a lot that is wrong with the capital market and need urgent fixing. At a macro level sophistication of trading systems is racing far ahead of supervision and that is why the number of investors has stagnated at the official figure of 19 million or less and the primary market has been dead for seven years.

While on the one hand, we have two major bourses powering ahead in achieving global trading systems, we have not dealt with past baggage. At least 19 stock exchanges have no future, two others are chugging along without direction and the BSE is steadily losing ground to the NSE. In fact, informed sources say that the liquidity shift from the BSE to the NSE will increase rapidly in the months and years to come. How does the regulator plan to deal with such lopsided development? Bajpai has a few answers. According to him, a rough action plan has been developed by culling the best from six international exchanges and its implementation has a green signal from the Sebi board. The regulator is now working on a timeline for implementation of the ‘strategic action plan’ that has three key elements—structural change, systemic reform and improving operational efficiency. The first issue on the agenda is the Central Listing Authority (CLA), which will put an end to the concept of regional stock exchanges and eliminate the incentive for bourses without trading to remain in existence. Bajpai would like to nudge these regional bourses towards three possible actions: to wind up operations, to merge with the BSE or NSE (which has been attempted but is difficult) or to strengthen their subsidiaries, which are members of the two big bourses. The last option, which is the most practical, will allow the regional stock exchanges to turn into large corporate broking firms, through their subsidiaries.

India has nearly 10,000 broking intermediaries, of which 8000 operate on the regional bourses. These entities will have no option but to adapt to the new situation. Once regional brokers accept the changed environment, they will agree to turn into sub-brokers of the corporate brokerage firm while the bigger brokers will seek direct membership on the big bourses.

Unfortunately these core structural changes have been hanging fire for over a decade; and along with them are other unresolved problems such as broker turnover fees which are pending in various courts. Broker finances and their business prospects in 2003 are very different from 1992 when brokers started their ill-considered battle against turnover fees. It is time for brokers and the regulator to abandon their rigid stance and hammer out a workable fee structure in the interest of market development. As far as systemic reform is concerned, the Sebi chief believes that increased transparency will force the pace of change and turn the spotlight on the performance of Sebi’s staff. One of his first moves in Sebi was to put all orders of the Securities Appellate Tribunal (SAT) on the Sebi website. This was later extended to all Sebi orders and releases. These are now reasoned orders, open to public scrutiny. The disclosures, says Bajpai, are to be supplemented through an extensive database of all investors and market intermediaries with a system to track the identity of various players with the help of the National Share Depository Ltd. The chairman would however prefer to keep the details of this database under wraps for the moment. On the question of operational efficiency and faster investigation, Mr.Bajpai believes that Sebi needs some re-organisation. He wants clear separation of operations, investigation and its quasi-judicial role, so that a confusion or overlap of roles and responsibilities do not end up influencing investigations and decisions. All these changes are expected to happen over a one-year period and Bajpai’s reputation for driving himself and his people to work long hours would probably help him achieve his targets. But there is one important area in which Sebi continues to remain weak, and that is the speed and quality of its investigations and its willingness to punish the guilty irrespective of their financial and political clout. So far, Sebi’s record of inspiring investor confidence is poor. Several straight forward investigations pertaining to price manipulation and insider trading that ought to have been completed in weeks have been languishing for over a year and its decision with regard to Larsen & Toubro and ACC have bitterly disappointed investors. Sebi is trying to correct the damage.

Firstly, it has set up a working group to plug loopholes in the takeover code, making it clear that Gujarat Ambuja and Grasim have violated the spirit of the takeover code, but got away on a technicality. It has also decided that the investment banker who advised both companies will be kept away Sebi’s policy-making committees in future. Although these actions are a step in the right direction, it is still a long way towards rebuilding investor confidence and bring new investors into India’s technically sophisticated capital market.

-- Sucheta Dalal