GN Bajpai’s exit as chairman of the Securities and Exchange Board of India (Sebi) was, in many ways, exactly like his entire three-year tenure as capital market regulator. He was friendly, affable, professional and gracious in his handover. Mr Bajpai did not have to deal with, or face parliamentary scrutiny on a major scam; he had the job of investigating one. He also had the simpler task of finetuning regulation, with the basics already in place. The primary market was in the doldrums for most of his tenure and its revival, in 2004, was limited to the biggest and best issues from the public and private sectors. Similarly, mutual funds remained distanced from retail investors, barring a relatively small class of stock market operators and regular traders, till 2005. India’s investor population has remained stuck at two crore for over a decade and reforms were focused mainly on existing investors.
Capital market developments in the past few years have to be viewed in this context. If investigating the second major stock market scam was the biggest expectation from Sebi in the past three years, then its record has been rather miserable. It has the scandalous distinction of losing a case against a large brokerage firm only because it failed to issue its final orders in time. While it has indeed issued fairly stringent orders against Ketan Parekh and his companies, as well as Dinesh Dalmia and DSQ Software, many of their cronies have been let off due to careless investigation or oversight. There is also no sign that Sebi bothered to follow up the joint parliamentary committee recommendation to investigate the role of promoters/corporate bodies in the price manipulation of their scrips. Having got away unscathed, they continue to be treated as honourable corporate citizens, despite clear evidence of their nexus with Ketan Parekh’s manipulation and the fact that they still owe large chunks of money to banks and institutions. One of these scrips was brazenly manipulated again in January 2005 and its price had to hit the upper circuit filter for eight consecutive days before it attracted the regulator’s attention. Whether it is insider trading, market manipulation, or even the high profile case against mutual fund manager Samir Arora, Sebi’s record has ranged from patchy to pathetic. Although the Securities Appellate Tribunal’s (SAT) curious decisions are responsible for overturning several Sebi actions, Sebi’s own orders have often been ill-conceived, arbitrary and unable to stand the test of judicial scrutiny.
In the realm of market development, Sebi had focussed its attention on three broad issues. In the secondary market, it wanted to push for a T+1 trading system to put India on par with the best in the world. But as Sebi officials themselves admit, this fanciful goal had little support among market intermediaries or investors, because it would increase the pressure on broker back-offices beyond their capacity. A constant question asked of Sebi was, what is the big advantage in settling trades within a day and who is expected to benefit from the move? There was no answer. In fact, Sebi sources admit the T+2 system worked only at the exchange level and not the investor level. It also worked for institutions, but not for retail investors. Although brokers made their pay-in on the appointed day, they weren’t able to collect funds from investor clients as efficiently; this increased their costs, as they ended by funding clients.
• Be it insider trading or market manipulation, Sebi’s record is patchy
• Sebi tried, in vain, to set up the Central Listing Authority
It is expected that the new Sebi chairman will pause in the development effort to bring more players on board and increase the depth and liquidity of the market. The demand that investors acquire Unique Identity Numbers (UINs) involving biometric finger printing (strangely, including mutual fund investors) has been another sore issue. The efficacy of such identification is doubtful and likely to deter new entrants to the capital market, while adding to entry costs. Another lost cause that Sebi chased for three years was the setting up of a Central Listing Authority (CLA) to help prevent regulatory arbitrage in the listing standards of national and regional bourses and to keep away fly-by-night operators. Ironically, all the chairman’s best efforts couldn’t get the CLA past his primary market division. That probably sums up all the things that didn’t work, despite GN Bajpai’s dedication and enormous hard work. And encapsulates the core challenges before his successor.