SEBI & RBI: Aren’t regulators accountable for the USE mess
May 2, 2012
The United Stock Exchange is the worst example of SEBI’s dereliction of duty. The fourth forex-derivatives bourse, set up by a bunch of institutions, was permitted to start operations without a revenue model, SEBI and the Reserve Bank of India did not question this
In India, poor public memory allows regulators to get away with the worst kind of capriciousness. Remember, KM Abraham, who grabbed media headlines by complaining to the prime minister about the finance minister’s ‘interference’ in his investigations at the Securities & Exchange Board of India (SEBI)? His allegations even got some very eminent Indians to embarrass themselves before the Supreme Court of India by filing a public interest litigation against the SEBI chairman’s appointment (which they had to withdraw twice). Over the past two years, the capricious regulatory actions by the team headed by chairman CB Bhave have come unstuck. All we have is bland news reports without any consequences to those responsible. The United Stock Exchange (USE) is the worst example of SEBI’s dereliction of duty. The fourth forex-derivatives bourse, set up by a bunch of institutions, was permitted to start operations without a revenue model and a brokerage firm (Jaypee Capital) holding a significant stake and a board directorship. The USE levied no transaction charges and waived membership fees, even though it had no other income, unlike the National Stock Exchange (NSE) and MCX-SX, whose other businesses subsidised the forex derivatives segment. SEBI and the Reserve Bank of India (RBI) did not question this, even though, at that very time, SEBI was working overtime to keep MCX-SX out of the equity trading market and alleging that it was not ‘fit and proper’ or that the promoters held over 5% of the equity.
The consequence: NSE’s anti-competition action of not levying transaction charges was struck down by the Competition Commission of India in a landmark judgement. The BSE’s forex derivatives segment shut down in less than three months. The BSE then bought a 15% stake in the USE in a hair-brained decision that has yielded no positive results. The USE attracted no regulatory scrutiny from SEBI or RBI, despite its dubious announcement of first-day trading volumes that were higher than the combined volume of the BSE, MCX-SX and NSE. Both SEBI and the USE had ignored Moneylife’s queries in 2010 about its non-existent business model. In India, prejudiced and dubious regulation is rarely challenged. So RBI or SEBI have never been asked why shareholding rules for forex bourses are vastly different from those of bourses for equity markets, or how a broker, Jaypee Capital, was allowed significant shareholding, a board position and the biggest share in daily trading volumes without any questions being asked.
An investigation began only after a change of guard at USE. As always, several directors of the USE including two former CEOs, have quit in quick succession. Meanwhile, Shyamala Gopinath, the RBI deputy governor in charge, who inaugurated all four forex-derivatives bourses, has moved on to a nice post-retirement directorship at the NSE. We believe that these openly capricious rules were all designed to help the NSE. Curiously, while SEBI persists with ridiculously restrictive shareholding rules for equity markets (it has now decided that there will be no brokers on stock exchange boards), the USE had allegedly amended its articles of association without SEBI’s approval to say that no quorum for board meetings would be acceptable unless nominee directors of Jaypee Capital, the BSE and Federal Bank were present.
The finance ministry should have asked SEBI to explain the vast difference in its rules and regulations governing stock and forex derivatives markets and the mess in the forex derivatives segment in less than three years since it began operations. Members of parliament or the parliamentary standing committee should have raised questions. Instead, at the end of their three-year term, the top management of SEBI has quietly moved on and no questions have been asked about the mess they have left behind in this and other areas. As always, the mainstream media, with their journalists writing PR pieces, is more focused on huge advertising revenue in the form of ‘investor protection campaigns’, workshops and seminars that emanate from all bourses these days.