In many ways, 2004 has been an outstanding year for the Indian capital markets. It opened strongly, put the Tsunami of May 17 (which saw two closures of trading in a day and an intra-day fall of over 800 points in the Sensex) behind it, and ended at an all-time high. The primary market revived after a 10-year hiatus and according to Prime Database, it set a record by raising almost as much money in 2004 as it had in the previous nine years put together.
It is easy to be complacent about such an achievement. Everybody loves a bull market, and this one is especially satisfying because it is pumped up by $8 billion of Foreign Institutional Investments (FIIs) rather than the machinations of a rogue trader. But complacency just now would be a big mistake.
As the FIIs have been telling us, part of the sharp increase in index stock prices is due to poor liquidity and lack of good investment opportunities. This is fertile ground for dubious companies to tap the primary market, for sleazy industrialists to manipulate their stocks and for illegal markets to flourish. The government has to use the good times to strengthen capital market infrastructure and improve the legal and supervision functions at the Securities and Exchange Board of India (Sebi). When Finance Minister P. Chidambaram reviews Sebi’s operations on January 7, he must use the opportunity to raise and resolve a few outstanding issues.
For starters what happened to the May 17 investigation report? The last time the Finance Minister (FM) was in Mumbai, we were told that the report would be released ‘very soon’, but 2004 has gone without a peek out of Sebi about whether there was a deliberate and concerted attempt to depress the markets that day. Delayed investigations should be a matter of great concern for the Finance Ministry, especially because Sebi has recently lost an important case relating to Scam 2001, only because it couldn’t complete its investigation and issue orders in time. Unless senior Sebi officials are held personally responsible for such delays, this would be the easiest route to letting off powerful and politically connected scamsters.
The FM may also want to review the need for a Central Listing Authority (CLA) and give it a proper burial. If the primary market raised a whopping Rs 30,000 crore in 2004, without needing the CLA, it is clearly redundant. Sebi must focus on winding up the smaller exchanges so that they don’t end up providing a trading platform to dubious companies through lax listing procedures. The National Stock Exchange (NSE) and now the more professional Bombay Stock Exchange (BSE) are probably more capable than Sebi of weeding out shady listing proposals. Astonishingly, instead of helping wind up the smaller exchanges, which have no future, Sebi is allowing itself to be pressured into keeping them alive. These exchanges live through subsidiaries, which are members of the two big national bourses.
A Sebi order aimed at cleaning up the markets by barring sub-brokers from issuing separate contract notes (the order said that only the main broker can issue contract notes on behalf of sub-brokers) has suddenly been put back to March 31, 2005, when there will probably be a new chairman in office.
Another area that probably needs the FM’s personal intervention is the debt market development. Debt market volumes have shrunk 40 per cent for various reasons. And although everybody acknowledges the need for a strong corporate bond market, there is little real progress on that front. The government hasn’t even made up its mind about whether it wants to support the Reserve Bank’s plans to divide the debt market by limiting entry to the automated, order-driven Negotiated Dealing System to institutional investors, sans broker intermediation. Similarly, while the Pension regulator was born in the dying hours of 2004 through an ordinance, Commodity Market regulation continues to be neglected. The runaway speculation in guar seeds has cooled down and there is no immediate threat of manipulation, but it is unclear why the government is so slow about merging the Forward Markets Commission with Sebi and strengthening the commodity markets infrastructure.
Finally, the FM needs to look at Sebi’s MAPIN database, which requires all market intermediaries, their key employees and ‘large’ investors (anyone who has a single transaction of Rs 1 lakh in equity or mutual funds) to get a unique, biometric identification number. Sebi’s MAPIN programme has been secretive and without any public consultation. Although one supports Sebi’s efforts to find innovative ways of nailing manipulation by trailing operators through different brokerage firms and across various investment companies, it is not clear how exactly MAPIN will help the process.
The FM could ask Sebi to run him through a few important cases that it has lost and explain how MAPIN would have made the difference in tracking market manipulation, insider trading or fraud. Or, how MAPIN would help complete investigations in time, so that the appellate tribunal does not throw them out. If Sebi can convince the FM that MAPIN indeed helps improve supervision, then investors and intermediaries must accept it with grace, even if they are offended at the invasion of privacy.
Finally, long-term investment in the stock market can be encouraged by responding to the long-pending demand from investors to reduce high custody charges and annual maintenance costs on depository accounts. So far, Sebi has appointed multiple committees, which have all concluded that there is a need reduce these charges. These committees have concluded that companies have been the biggest beneficiaries of dematerialisation of shares (by being able to wind up their share transfer expenses) and they must be asked to bear a part of the burden. Interestingly, companies too have no objection to bearing a part of the costs. But for some curious reason, Sebi has stubbornly refused to reduce demat charges for the last two years. Consequently, over 70 per cent of investors continue to hold physical shares and some even prefer illegal alternatives like ‘dabba’ trading, which do not require any shareholding at all.