Market regulator Securities and Exchange Board of India’s (Sebi) current chairman C.B. Bhave’s term is set to expire in February. How does his performance compare with some of his predecessors? Put simply, the difference is as stark as night and day.
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The primary distinction is the improvement in the enforcement function at Sebi. Before his term began in February 2008, Sebi’s orders were almost invariably challenged successfully at the Securities Appellate Tribunal. It was almost as if the regulator didn’t have the strength to enforce rules.
Things didn’t improve immediately after Bhave stepped in, but that was because it took some time to hire the right people and create the right institutional framework to strengthen the enforcement function. Sebi’s first top quality order under Bhave was in the case related to Pyramid Saimira Theatre Ltd in April 2009. The investigation done by Pradnya Saravade, an Indian Police Service officer, was top-notch, and the case made against the culprits was watertight.
And it wasn’t a flash in the pan. There were other well-investigated and well-drafted orders such as the one against front-running in HDFC Mutual Fund. In both the above-mentioned cases, the culprits were brought to book.
One important feature about the improvement in the enforcement function is that Sebi under Bhave hasn’t been scared to take on large and influential industrial houses. A case in point is the recent consent order issued to the Anil Ambani group. While one can argue that a consent order does not amount to admission of guilt, it’s unlikely that this large industrial house would have agreed to a Rs50 crore fine and a one-year hiatus from the markets if Sebi’s case wasn’t very strong. The regulator has also taken on the Sahara group and the Financial Technologies-MCX group with well written orders.
The improvement in enforcement is crucial because it ensures a smoothly functioning marketplace. India has a reasonably good market infrastructure and market rules that have been refined over the years. While there is certainly place for improvement in some of these rules, it’s imperative that existing rules are observed by market participants, so that markets continue to function smoothly and market integrity is maintained. Thanks to some of its tough orders, market participants will think twice about breaking rules. This has been a refreshing change in the Indian market place.
Another major change under Bhave—one which has received much more attention—is the ban on entry load charged by mutual funds. In a related move, Sebi also took on unit-linked plans (Ulips) offered by insurance companies and the net result of all this is that investors are now saving substantially on commissions on these investment products.
Of course, the counter argument is that the quantum of investments has fallen since the ban was imposed and that the move was done in a hasty manner. But on the whole, investors have gained by saving on unnecessarily high commissions, especially on new fund offers by mutual funds and Ulips.
The regulator has also made many changes in the processes involved in the primary market, such as the introduction of Asba (Application Supported by Blocked Amounts), and this has improved the system. There have been a number of changes in the secondary market as well, such as the introduction of direct market access and algorithmic trading and the reversal of the ban on participatory notes.
Another first under Bhave is that Sebi has started to give stock exchanges a little flexibility in market design—starting with flexibility in choosing trading hours (within a prescribed band). Exchanges also have four choices with equity stock options, with the regulator permitting European and US style options and a choice between cash-settled and physically settled options. Of course, much more needs to be done in this area as there is still a lot of micro management by Sebi; but at least a start has been made.
Other highlights from Bhave’s term include his decision to reject a demand to ban short selling in late 2008, while many regulators world over were imposing a ban. And while there has been a chorus of protests that Sebi is anti-competition, Bhave did relax the rules for MCX-SX so that it could launch currency futures despite not meeting the prescribed shareholding norms at the time of launch.
However, because of his tough stand on the mutual fund entry load issue and some other tough orders, many market participants tend to disagree that Bhave’s term as Sebi chief was a fruitful one. Another criticism is that he has been rigid about some policies and hasn’t taken market feedback seriously on issues such as the design for interest rate futures and securities lending and borrowing.
But one must note that three years is a short time and quite a few changes have been in the primary and secondary markets, and the enforcement function. One could argue that a lot more could have been done; but, as pointed out earlier, compared with his predecessors, Bhave has done a great job.
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