SEBI needs to demonstrate its own ability to adapt to an automated system, before imposing a super automated primary market on to investors
Change mindset before changing infrastructure
By Sucheta Dalal
Right at this moment the Securities Markets Infrastructure Leveraging Expert Task Force (SMILE) is working hard to replicate in the primary market the revolution that has happened in the secondary capital market. It wants greater automation to create a seamless process for applying to Initial Public Offerings (IPOs) and getting an allotment/refund.
Readers would recall that SMILE was set up by the Securities and Exchange Board of India (SEBI), as a reaction to the massive mess in the allotment of shares in the six public sector issues this March. The allotment fiasco has yet to be entirely cleaned up, but SEBI clearly wants to ensure that there is no recurrence. It expects that automation suggested by SMILE will reduce problems associated with paper-based transactions, eliminate data entry mistakes and shorten the time required for post issue formalities; and help achieve the same level of efficiency as the secondary market.
Any new system that improves market efficiency and reduces investor risk is always welcome. But the aggressive push for greater automation raises several important questions that the regulator must answer.
The investor must remain at the core of all SEBI efforts. But, as an Asian Development Bank study of the Asean markets points out, ‘‘the rapid growth of equity markets in the region has not adequately broadened the investor base’’. India’s investor population too has stagnated at around two crore for almost a decade. During the same period trading volumes generated by the two National Stock Exchanges has grown over ten-fold.
This suggests that automation may have improved market efficiency and brought in a higher level of institutional participation — especially Foreign Institutional Institutions (FIIs) — but large segments of Indian investors have distanced themselves from the market. This fact is underlined by the tally of Depository Participant (DP) Accounts, which is a mere 60 lakh (including multiple accounts), even after the jump of 10 lakh new accounts during the IPO boom of March. The remaining 1.4 odd crore of investors are either dormant or disinterested.
India’s secondary market trading system is now efficient, paperless and operates as a T+2 (settled two days after the trade) rolling settlement. But the benefits are restricted to a small group of sophisticated investors. It hasn’t managed to attract new investors despite being around for over seven years.
Anecdotal evidence suggests that investors in smaller towns are intimidated by automation, because they do not understand it. Also, the mandatory paperless trading is a big inhibitor, because investors are wary of online fraud and the high cost of opening and maintaining DP accounts. Even high net worth investors find it unacceptable that they pay such high demat charges merely for holding on to shares, especially of those companies that skip dividends. Sometimes investors pay custody charges for shares that are delisted, because re-materialising them into physical shares only adds to their cost.
It would appear that although India’s sophisticated and automated trading system does the country proud, the ordinary investor continues to be taken for granted and there is no serious attempt to grow the investor population.
A survey of Indian households by Dr L.C.Gupta, (Indian households’ Investment Preferences) confirms that the investor population has not only stagnated, but also that the spectacular developments in the secondary market have provided no tangible benefits to economic growth in real terms.
Worse, Dr. Gupta’s survey says the risk perception about the IPO market is greater than the secondary market. Dr Gupta says, his study also reveals ‘ample evidence of gross failure of the regulatory system in dealing effectively with fraudulent promoters and managements and with corporate governance problems’.
Taken together, these findings suggest that a more automated and sophisticated IPO application process may eliminate problems related to refund and allotment, but it could inhibit investors further. Also, unless more automation is accompanied by a big spread in secondary market infrastructure and a drastic reduction in costs (especially of holding and operating depository accounts), the capital market will remain confined to a tiny population of sophisticated, urban investors. It would be fair to conclude from Dr Gupta’s findings that infrastructure improvements alone will not make a big difference.
Funnily, while SEBI is trying to drag Indian investors kicking and screaming into the seamless world of automation, the regulator itself hardly shows much tech savvy or willingness to adopt automated systems, including the Internet.
After the March debacle over allotment of PSU shares, SEBI began to accept investor complaints on e-mail, which immediately received an automatically generated confirmation.
Investors, however, complain of a lack of follow-up action. Senior SEBI officials rarely respond to specific queries and complaints sent electronically through e-mail. Although Chairman G.N.Bajpai has begun to put out more information, orders and discussion papers on the SEBI website, the design and display needs dramatic improvement.
What is urgently needed is a call-centre approach to dealing with investor queries and complaints. Or, the regulator could ensure that each intermediary creates a cell to answer investor queries and receive complaints, by e-mail or by fax. After all, SEBI cannot expect investors across the country to adapt to highly automated systems while it functions like a typical, sluggish government office.
SEBI also needs to train its communication team on the basics rules of user-friendly communication and classification of information for easy accessibility and searchability. SEBI’s most embarrassing product is the EDIFAR (Electronic Data Information Filing and Retrieval System) database, which is turgid, incomplete, out-of-date and redundant. If automated systems are to reduce the availability of printed information for investors then EDIFAR must either be scrapped or quickly revamped.
SEBI needs to recognise that the investor dissatisfaction is not as much due to the lack of automation as it is due to SEBI’s inability to use its regulatory and supervisory powers more effectively.
This writer has repeatedly drawn attention to SEBI’s slow investigation processes and its reluctance to hand out stiff punishments. And, the fact that major offenders are let off with a meaningless suspension, although the amended SEBI Act empowers it to inflict severe monetary punishment. SEBI has to investigate the wrongdoing more swiftly and follow it up with deterrent punishment.