Mint has recently carried a few articles and columns on market infrastructure. It started with a piece on supposed flaws in Forward Market Commission’s recent order against National Commodity and Derivatives Exchange Ltd (NCDEX), promoted by National Stock Exchange (NSE), and was followed by two successive articles questioning the desirability of competition in the exchange space, currently dominated by NSE.
This, in an indirect manner, questions the ability of regulators to oversee the governance of stock exchanges.
The three articles, when read together synoptically, clearly tilts to a bias in favour of the status quo, which is the monopolistic dominance of NSE, a private sector for-profit corporate entity, whose last innovative product was rolled out nearly seven years ago.
Had the paper been around for long, it might have offered us an interesting viewpoint when the Reserve Bank of India (RBI) began issuing licences for private sector banks.
Drawing on the same theme, it perhaps would have questioned the issuance of a banking licence to, say Uday Kotak whose 54% stake in Kotak Mahindra Bank Ltd gives him effective control of the company.
It might have outlined unseen dangers such as the temptation of promoters to do anything to increase their valuations, such as making risky loans, ignoring adequate prudential risk norms, lending money to a favoured few and generally throwing caution to the wind.
It might have raised the bogey on “banking integrity” and warned against conflicts of interest (such as sanctioning a loan to your aunt).
It also might have advocated separating ownership from management so that promoters such as Kotak have to necessarily forego their stakes if they wanted to run a bank. Finally, in all probability, it would have brought in a couple of pseudo academics from public policy think tank institutes to give selective quotes on how thousands of innocent citizens would lose their savings if these newly sanctioned banks went under.
The articles have been, at best, narrow in their approach. First, the paper should have given some sense on how shallow and retarded our financial markets have been with the presence of a near monopoly entity such as the NSE.
Sure enough, the NSE emerged out of the inefficiencies of the Bombay Stock Exchange and, in its initial years, did a very commendable job in bringing transparency and a credible alternative to equity transactions. It introduced single stock futures and derivatives successfully, as an alternative to the erstwhile “badla” system, but that was seven years ago.
NSE never went beyond that. While India liberalized, which led to the emergence of hundreds of new businesses, there was no financial market created to keep pace with that. Entrepreneurs could not find any takers for smaller initial public offers and their volumes languished if at all they managed to get themselves listed.
There was no alternative investment market (AIMS) or a market for small enterprises. After all, why take the trouble to cater to children of lesser gods, when there was enough volume being generated from the listings of larger enterprises?
Or, take the emergence of corporate bonds. Foreign currency convertible bonds (FCCBs) or even straight yielding bonds are listed in most overseas exchanges but we have yet to see an efficient traded market for such instruments in India. As a result, they get illiquid or the seller has to necessarily accept the best offer he has, over the counter, rather than be assured of best price discovery. So much for our ambition to be a global financial sector of some standing.
So, when the Mint articles cover the single issue of corporate governance and ignores the apathy that we have seen in financial innovation, it is clearly missing the wood for the trees. And by voicing this concern, are we not belittling our regulators or their regulatory competence? Under RBI’s supervision, India has produced some of the finest banks in recent times, delivering results and customer service on a par with any in the world. Indeed, the proliferation of banks has galvanized even the most mundane public sector banks and we, all of us, are seeing a vibrancy in services we never experienced before.
In fact, hasn’t RBI come out shining in safely steering our banking system away from the world’s present turmoil? Or take the case of Securities and Exchange Board of India (Sebi). What may have started out as a relatively ineffective organization has today got the corporate world on its toes, introduced legislation covering every aspect of good governance with an eye on enforcement that all, except the foolish few, would comply with.
If, therefore, Sebi were to induce competition in the exchange space, are we doubting its ability to effectively regulate multiple entities or its capability in installing appropriate checks to monitor their activities? When Mint suggests that promoters are being tempted to “produce fraudulent trades that yield fake turnover”, is it not suggesting that Sebi may be incompetent to check such illegal practices? An exchange works clearly on trust and the credibility of the institution. A promoter, whether of an exchange or even of a newspaper indulges in questionable practices, just once, with a desire to improve valuations, he risks losing it all in an instant as customers will begin to doubt his credibility. India is no longer fumbling its way, as in the ‘80s, but can today boast of an environment that can support the creation of world class enterprises with world class regulators supporting them in their growth.
The author is a director and shareholder of Financial Technologies Ltd, promoter of MCX-SX.
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