Sucheta Dalal :Market Reforms Gather Pace
Sucheta Dalal

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Market Reforms Gather Pace  

November 20, 2009

In November, SEBI announced a series of plans and actions aimed at pushing capital market reforms to protect investors. What are their implications for investors? Here is a quick look:

Extending trading hours: It does not help retail investors at all; at best, it helps the National Stock Exchange (NSE) wean away trading from the Singapore bourse, which has been granted a licence by the NSE to trade the Nifty index. In fact, brokers are groaning under the pressure of ensuring that back-office staff works longer hours to process transactions and complete trading formalities while they work on wafer-thin margins. Mutual funds are also unhappy. Already, they manage to release their net asset values (NAVs) after a complex reconciliation process only at 9pm. Additional hours will mean that investors will get to know the NAVs only the next morning and newspapers will carry it the following day. This is not desirable. Even among the bourses, it is only the NSE that is keen on longer trading hours. The NSE is a virtual monopoly and operates on high operating margins of 53%. Other market intermediaries, excluding depositories, do not earn such extraordinary profits and have to worry about the higher cost of longer trading hours. But, today, the NSE's regulatory capture is so complete that it gets its way.

SME platform: After four years or more of discussion on the need for a separate exchange for small and medium enterprises (SMEs), the regulator has decided to drop plans for a separate bourse and gone back to the failed concept of a separate trading platform. It announced a new set of eligibility rules for listing SMEs including the waiver of eligibility norms for initial & follow-on offers and exemption from announcing quarterly results. It also wants IPOs (initial public offerings) of SMEs to be fully underwritten by investment bankers who will also be market-makers along with a ‘nominated investor’ and there will be a compulsory market-making process. While SEBI announced these rules, it did not even bother to allude to IndoNext, the BSE's failed trading platform for SMEs that was inaugurated with much fanfare in 2005 but failed to take off. Wouldn't it have been nice if the regulator had started with IndoNext (which had the participation of 18 exchanges) as the base and told us why the new set of rules will lead to the creation of a genuine SME exchange? Interestingly, 56% of BSE companies have a paid-up capital of less than the Rs25 crore required to qualify for the SME platform. Will they switch because reporting requirements are less onerous? Only if there is an active market in stocks. Both the earlier experiments for SME exchanges—IndoNext and the OTC Exchange of India—failed because of their inability to create an active market.

FPO auctions: Another important decision which appears pro-retail-investor is to allow an auction-based book-building method for institutional investors in follow-on public offerings (FPOs), while retail investors will be allowed to buy the shares at a fixed floor price decided before the auction. This is an interesting and important move that may improve retail participation in the market. It is well established that retail investors prefer IPOs and FPOs to secondary market purchases. Retail participation in recent IPOs was extremely poor, indicating a growing disenchantment with high-priced IPOs. However, retail investors deserve a facility that enables them to subscribe to the equity offers of public sector undertakings at a reasonable price, built with public funds. SEBI needs bring in this change before the PSUs begin their divestment.


-- Sucheta Dalal