Desirable moves but take note of stock market reality

By C. R. L. Narasimhan

It is not clear whether the rapid-fire announcements on capital market reform measures will have the salutary effect of calming the stock markets over the shortterm. Even by current standards, the volatility levels have been extreme. On Tuesday, (March 13), for example, the BSE Sensex swung wildly by 900 points during the day and closed 227 points below the previous day's closing. Since then there has been a revival but that cannot be construed as stability, at least for now.

March 13 will be remembered for other reasons too. It was on that day that Mr. Yashwant Sinha, Finance Minister, announced in the Rajya Sabha a few major initiatives concerning the capital market: (a) Corporatisation of all stock exchanges; (b) extension of rolling settlement for 200 category A stocks in the modified carry forward scheme (ALBM and BLESS) and (c) greater powers to the Securities and Exchange Board of India (SEBI) for which the Act will be amended. Amplifying these, the Finance Minister had said that the Government would bring in necessary administrative and legislative changes by which ownership, management and trading membership of exchanges will be segregated. The extension of the rolling settlement will be accelerated and SEBI will get its extra powers soon.

No immediate impact

The announcement did not make any immediate impression on the stock prices. Moreover, cynics have pointed out that such major initiatives are announced only in the face of a market crisis. Actually none of these are new and have been on the anvil for a long time. Almost certainly there have been vested interests blocking them so far. Will the Finance Minister's intervention give the necessary impetus?

More importantly, even if these are undertaken in double quick time will there be a radical transformation of the market and its culture? As a general rule capital market intermediaries everywhere have been quick to innovate and remain one step ahead of the regulator. In India capital market regulation through the SEBI was virtually thrust on a system that had existed for more than 105 years when the regulator came into being. Before that there was a multiplicity of regulations: some functions were under the stock exchange division of the Central Government and others under the RBI.

That was not a happy state of affairs and in any case not adequate to take on the boom that came in the liberalisation era of the Nineties. It is worth noting that even SEBI was not given any meaningful powers in its initial years. It needed the 1992 stock market scam to give it a legal status.

Market regulation, the laggard

There are other reasons as to why market regulation in India has followed and not led certain important developments. Stock market operation was not understood by those outside the system. Mystification of the subject followed. Even at the start of the Nineties there were few ``outside'' (the system) experts. Two decades earlier, when one or two Indian and foreign banks breached the stock market divide by entering merchant banking, it was difficult for them to recruit senior personnel who had both experience and a wide acceptability.

The name of Mr. R. S. Bhatt, UTI's first chairman, comes to mind as an icon of that era who transcended narrow stock market sectarian interests. Interestingly, very few non-broker luminaries survived the tumultuous stock market upheavals of the Nineties.

Another reason has been that even those who had professional reasons to dabble in share business - bankers for instance - were not familiar with stock exchange nuances. Banking tradition in India is derived from the British and has insisted on a segregation of commercial banking functions from stock market operations. Barring the occasional loans against shares (with stiff margins), bankers had kept away from the stock market.

The upshot of all these is that there have been few independent capital market regulators, a point not given its due weightage when SEBI came on the scene. While both Mr. G. V. Ramakrishna and Mr. D. R. Mehta have a civilian background, SEBI's operating staff have been drawn from one or other of the Central services and the private sector. The early Nineties were the time when the salary structure of finance professionals exploded and there was no way a regulator could match outside salaries. Besides, regulation everywhere is a dull affair devoid of the excitement which the stock market gives.

One is not sure how handicapped SEBI was in its early years and whether it is still constrained in a human resources sense.However, it is clear that some of the easily identified ills such as broker dominance over the exchanges could not be prevented because no alternative model was practicable. Maybe that is why the proposal to overhaul the exchanges has taken such a long time to fructify. The same can be said of the other reforms too. Not only do you need the will but have the acumen to carry them through.

Defensive or reform?

March 8: The BSE President Mr. Anand Rathi demits office.

March 13: His firms are debarred from trading. All broker directors of BSE sacked.

March 13:The Finance Minister announces a three-point reform package.

March 15:The SEBI announces fresh guidelines on ethics for SE functionaries.

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