Sucheta Dalal :Ended in a whimper (11 March 2002)
Sucheta Dalal

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Ended in a whimper (11 March 2002)  

One morning, the largest law firms in the country were confidently advising their powerful corporate clients to move court against the government’s attempt to stop them from beating the dividend tax through interim payouts. The Confederation of Indian Industry too was breathing fire and fury. But by evening, the hot air was had gone and companies were in as much of a rush to withdraw their dividend announcements, as they were to make them. Why did corporate India do an about turn when it had such a strong case? What threat did the government use to subdue industry, or is it that they have reached a quiet understanding over the dividend tax issue? Something about it doesn’t quite add up.

Sensex v/s Nifty

The National Stock Exchange’s (NSE) decision to include Wipro in the 50-scrip Nifty index is creating problems for traders. The scrip, with its large market capitalisation and very low floating stock, is skewing the Nifty, they say. A large number of brokers and investors have already complained to the bourse that its Nifty composition formula is distorting the trading picture; but NSE’s system permits a review of its decision only every quarter. Until then, the Nifty often sends wrong signals about the broad direction of the market. For instance on March 1, the Nifty was 1,178 and Sensex at 3,679 at close of trading. On March 5, Nifty again closed at 1,178 while the Sensex closed at 3,641. A 38-point fall in the Sensex had no impact on Nifty, only because Wipro had remained strong on March 5. As it is, traders of futures have to contend with large discount of index futures prices to the index. Clearly, it is an opportunity for the BSE to cash in and push its own index futures, especially since Sensex is marker that is watched and quoted everywhere. Unfortunately, India’s oldest bourse is sleeping.

For a single Mumbai bourse

While on the bourses, the Asian Wall Street Journal reports that the New York Stock Exchange (NYSE) is in talks to take over the American Stock Exchange (ASE). There are some interesting similarities and differences between the two New York bourses and India’s own BSE and NSE. When the NSE was born around 1992, the Indian capital market was similar to that of the United States before the big crash of 1929 that triggered off a rash of regulatory changes. The ASE was set up to break the stranglehold of brokers over the NYSE management and improve regulation. The NSE was set up in a similar attempt to subdue the broker dominated BSE. The difference is that the NYSE read the writing on the wall, quickly cleaned up its act and professionalised its management. As a result, the ASE became a smaller and inconsequential bourse. BSE brokers on the other hand were confident that the professionally run NSE would fail, and that the New York story would be repeated in Mumbai. The NSE went on to create history in terms of the speed with which it beat the 132-year old BSE’s turnover and changed the face of India’s capital market. Just over a year ago, a NYSE executive (Georges Ugeux, group executive vice-president) startled participants of a capital market seminar by saying that the Ketan Parekh scam of 2001 was a good opportunity for the BSE and the NSE to look at the possibility of merging. Members of both Indian bourses found the suggestion outrageous, but the NYSE was clearly preaching what it was willing to practice. Will the NSE and BSE take the same road a few years hence?

Brokers fees

Incidentally, Indian brokers who continue to fight the Securities and Exchange Board of India (Sebi) over broker fees should thank their stars that they are not in the USA. Last week, the Securities Exchange Commission (SEC) announced that it was doubling fees on stock transactions for the coming fiscal year because of the ‘dramatic decline’ in dollar volume of securities transactions in fiscal 2002. This means that when business is down, American brokers will be paying twice the fees from April 1, this year. In India, brokers continue to agitate about Sebi having refused to grant them permission to start derivatives trading unless they have paid up their turnover fees as ordered by the Supreme Court after a seven year battle. Shouldn’t they count their blessings instead?

Tailpiece: Last week, we wrote that the government ought to cancel the mandate for the National Commodities Exchange if the consortium comprising ICICI, Mahindra & Mahindra, NSE and the Punjab Warehousing Corporation fails to get cracking. We now understand that the government has indeed cancelled the mandate last week. Hopefully it will now call fresh bids and restart the bidding process to set up a National Commodities bourse in the country.

-- Sucheta Dalal