Drastic need for restructuring!. Review on SEBI

The Securities and Exchange Board of India (SEBI) is the Indian equivalent of the Securities Exchange Commission (SEC) in the US and was established in 1988 to regulate and develop the growth of the capital market in India. Among other things, its objectives require it to prohibit fraudulent and illegal trade practices in the securities markets, regulate the working mechanism of the Stock exchanges, mutual funds, venture capital companies and the derivatives markets, registering and regulating brokers, sub-brokers, etc., prohibiting insider trading and promoting investor education on various aspects of the financial markets.

As with various other Government bodies, SEBI too was started with a limited set of objectives and an even more constraining set of guidelines to regulate the markets. The now legendary stock market scam triggered by Late Harshad Mehta in 1992 caught the SEBI napping. A lot of committees were formed, their tenures extended, reports running into thousands of pages were submitted and re-submitted with little or no changes and at the end of it all nothing could be done to bring the culprits to book. Exactly ten years later, on March 1, 2001, history repeated itself when the BSE index crashed by an eye-popping 176 points after Mr. Sinha had presented a dream budget. I will not narrate the reasons for that as most of you know it by now. Suffice to say that the SEBI has become like a programmed watchdog. The robbery takes place right under its nose but it barks only the next morning when its owner (the Ministry of Finance) asks it to do so.

The follow-up action on the part of SEBI and the Ministry of Finance was a scene-to-scene encore of what happened in 1992. The culprits (bulls/broking entities/bear cartels) were identified, a Joint Parliamentary Committee (JPC) was setup, some heads rolled at the Pherozeshah Jejeebhoy Towers, a lot of fingers were pointed, nobody was willing to take the blame and at the end of one year, we are exactly in the same position. The SEBIs inability to pro-actively identify holes in the financial markets and plug them satisfactorily has been a hot topic of discussion for the last few years. Agreed that a regulatory authority cannot do much when it comes to protecting investor’s interests in the midst of market booms and crashes but the least it can do is to ensure that all players in this field stick to the guidelines laid down by it. It also needs to be more forceful when it comes to investigating mal-practices in the market and taking punitive action against the marauding parties in question.

Mr. D.R. Mehta who was the SEBI Chairman for nearly 7 years shouted himself hoarse all along that SEBI was not being given enough teeth when it came to punishing the guilty parties. SEBI's laxity in monitoring the secondary markets during the recent stock market scam of March 2001 would be probed in detail by the Joint Parliamentary Committee (JPC) which is also expected to suggest ways and means to strengthen the powers of SEBI. A bold step has already been taken in this direction by mooting the proposal to segregate the trading membership, management and administration functions of the stock exchanges to end the interference of brokers. This is a welcome step and the sooner the stock exchanges are corporatised, the better it will be for all the market participants. However, we still have a long way to go in terms of integrating our local markets with the International markets.

Here are some suggestions that might help in establishing SEBIs credentials as a better market regulator:

1. There appears to be a serious deficit in the staffing requirements of SEBI. I came across a report which states that out of the 350 strong staff in SEBI, only about 20 comprise the investigative staff! Even by conservative standards that figure is woefully short of what it ideally should be. Adequate staff should be recruited and given training and exposure. There should also be a clearly demarcated line between the investigation and action enforcement departments to avoid potential conflict of interests.

   
   




2. SEBI has often been caught napping when it comes to continuously monitoring the working of the stock exchanges. A system of online surveillance needs to be setup at SEBI, which would keep ongoing tabs on daily transactions. This would obviate the need to seek information from the concerned stock exchanges whenever any malpractice is observed.

   
   




3. The recent stock market scam has highlighted the nexus between bluechip corporates, brokers and banks. The scam revealed that big brokers had impressive war chests running into several thousands of crores provided by companies and banks. Towards this end, RBI should tighten its norms for Bank lending to brokers though I’m not very sure how the flow of funds from companies to brokers can be monitored.

   
   




4. The scam also brought out the non-existent guidelines that currently exist with respect to the operational issues of Overseas Corporate Bodies (OCBs). These bodies have been given a free hand and royal treatment because of their NRI status so far. While they were asked to register themselves with RBI, SEBI was entrusted with the task of framing the guidelines. This anomaly needs to be corrected. Simply banning the OCBs from making purchases in the secondary market will not have the desired effect so long as they have millions of shares already picked up in the past. I would not rule out another scam, this time pertaining to the OCBs in the future.

   
   




5. SEBI was hitherto only given the responsibility of framing guidelines and ensuring their adherence and this policy. What is now required is to give it the all-round powers to act the lawmaker as well as the law enforcer. To this end, a separate cell could be created within SEBI that gives it ample powers to act the tough policeman as well. What’s the point in laying guidelines and investigating mal-practices when the actual action is taken by another body like the CBI? There’s no point in “distributing” responsibilities among half a dozen agencies as every tom dick and harry knows that nothing will ever come out of it.

   
   

For its part, the SEBI has done a good job in introducing some radical reforms for improved transparency, computerisation of the trading and settlement systems, enactments against insider trading, phasing out of the badla system, introducing compulsory rolling settlement, banning naked short sales shortly after the scam, etc. However, the debits in its books far outnumber the credits and that’s what ultimately counts in the final reckoning.

Irrespective of whether or not the SEBI was bestowed with wide ranging powers, it has been a clear failure when it came to the task of administering the law. Past instances indicate that whenever a scam or irregularity surfaced, the SEBI stepped in with knee-jerk reactions, blaming system-centric collapse or lack of power in its hands. Mr. Gyanendra Nath Bajpai, previously head of LIC, took over as the new Chairman of SEBI on February 20, 2002 and immediately got the whip cracking in the house. It however remains to be seen whether or not he does a better job than his predecessor.