Going into 2011, there was an eager sense of anticipation among securities markets practitioners and observers. The markets regulator, Securities and Exchange Board of India (Sebi), had spruced up its investigation and enforcement capabilities considerably, and the results were evident in well-drafted orders in the Pyramid Saimira case as well as the HDFC Mutual Fund front-running case. Given the regulator’s new-found zeal for enforcing its laws, and also considering that it was involved in some high-profile cases such as MCX Stock Exchange’s equity ownership structure, Sahara Group’s fund-raising, and Reliance Industries Ltd’s insider trading case, it did seem like 2011 has much in store.
In contrast, going into 2012, expectations seem to be running quite low. About a year ago, there was a raging debate in the securities markets about the proposals of the Bimal Jalan committee. Most people had expected that policymakers will rule one way or the other and put down a structure on the ownership and governance of stock exchanges and other market infrastructure institutions. But a whole year has passed and no decision has been taken. The committee’s proposals and the various market feedback on the issue doesn’t even seem to be on the immediate agenda of the regulator.
By Shyamal Banerjee/Mint
The regulator has also said this year that it is reviewing the consent order mechanism, which essentially means that one will have to wait longer for some orders. Of course, a review of the consent order mechanism is in order and market participants must have the assurance that it isn’t a haphazard process. Having said that, the review must be done quickly and Sebi must start settling the cases before it soon. The Reliance Industries insider trading case, for instance, has dragged on for years now. It’ll be unfortunate if another year passes because the regulator is still in the process of reviewing its processes.
To be fair to the current Sebi team, it needs to be given some more time. It must be said that the regulator’s functioning, especially with respect to the law enforcement function, hadn’t improved immediately after C.B. Bhave had stepped in as chairman in February 2008. 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 in April 2009, more than a year after the new chairman had taken over.
Under new leadership, a review of the existing structure and the hiring of a new team can take some time. Having said that, it must be noted here that a Sebi chairman typically has only a three-year term. U.K. Sinha doesn’t have the luxury of time, and must complete the review of its processes soon. The delay this year in hiring whole-time members hardly helps the regulator’s cause in this regard.
One of the important areas where the regulator must give its judgement is on the issues related to the ownership and governance of stock exchanges. The MCX-SX case has made it evident that the policy guidelines for starting and running a stock exchange need to be clearer. Additionally, the fiasco at United Stock Exchange, where one of the owners of the exchange reportedly cornered most of the trading volumes at the exchange as well as the decision-making at the exchange, has given proof that issues of ownership and governance of stock exchanges should not be brushed under the carpet.
Also, while the securities markets are functioning well in pockets, there are areas where there should either be policy intervention or decontrol. The interest rate futures segment has been a non-starter, and the single-stock options market continues to be illiquid. The liquidity in the cash market, too, is restricted mainly to the top 100 or so stocks. The lack of a corporate bond market, too, needs to be addressed. In some of these segments, Sebi will need to work with other regulators in getting things going.
The regulator is doing well to apply its mind on the electronic trading space and with already one bad experience of a rogue algorithm running havoc in BSE Ltd’s derivatives trading, this review must be completed sooner than later.
There’s a lot to be done in 2012 and here’s wishing that the new Sebi team will come into its own in the coming year.
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