Mumbai: The new head of India’s stock market regulator is the first person with a background in stock market regulation to be named to the position and while some experts say he is just the man for the job, others point to the significant challenges he will have to address.
On Friday evening, the government announced the appointment of Chandrasekhar Bhaskar Bhave as the new chairman of stock market regulator Securities and Exchange Board of India (Sebi) for a three-year term that begins Monday. He will replace M. Damodaran, who served as head of Unit Trust of Indiaand in several positions in the Indian Administrative Service before becoming the Sebi chief. Damodaran’s predecessor G.N. Bajpai came from the state-owned insurance firm Life Insurance Corp. of India.
Bhave, a bureaucrat, worked for four years at Sebi between 1992 and 1996 and was responsible for drafting regulations related to the fees brokers pay to Sebi and capital adequacy norms for brokerages. He witnessed (and facilitated) the transformation of trading from the open outcry method, to electronic trading. He left to set up the depository system that converted physical share certificates into electronic ones. National Securities Depository Ltd (NSDL), Bhave’s brainchild, is the depository for shares worth $1,192 billion (Rs47.32 trillion).
Still, the sixth chairman of Sebi, which was founded in 1992, comes back to a regulator that will have to address a different set of challenges than those that it faced in the mid-1990s. The stock market has moved from the badla system, which allowed the person buying or selling a share to carry the transaction forward without settling it at the end of the settlement period to the so-called T+2 system where transactions have to be settled two days after a buyer or seller enters into one.
He also comes back to a regulator that oversees a vibrant derivatives market. And Sebi now has an integrated market surveillance system that tracks marketwide and stock-specific movements.
Two people familiar with Bhave’s style of functioning say he has what it takes to run Sebi. “Bhave is known for his impeccable integrity and efficiency. Besides, he is quite decisive” said D.R. Mehta, former Sebi chairman. “He will bring to bear a keen eye for systems and processes,” added Somasekhar Sundaresan, partner at J Sagar Associates, a law firm that advises NSDL.
Among the issues Bhave needs to address is one related to innovative capital market instruments. In October, Sebi partially closed the participatory note route for foreign institutional investors—this allowed them to invest in Indian equities without identifying themselves. Soon after, it gave exchanges the go-ahead to launch longer-tenure options and other innovative products (required to widen the range of capital market instruments on offer), but nothing has been done on this front thus far.
Sebi will also need to create a vibrant securities lending and borrowing market if it wants to allow active short-selling by institutional players—something that a few experts believe will help rationalise stock prices.
Bhave should also do enough to integrate the country’s banking and stock market systems, say brokers. “There is a huge gap between the exchange platform and the banking platform, which becomes more apparent when the market crashes,” said Dinesh Thakkar, chairman and managing director at Angel Group, a Mumbai-based financial services firm. For instance, during the recent market crash, a lot of brokers couldn’t take orders from clients because it would take banks two days to clear cheques through which customers made their payments, while the brokers had to make immediate payments to the exchange.
C.J. George, managing director and chief promoter of Geojit Financial Services Ltd, said that structural reforms are a must to avoid crashes such as the one seen in January.
That’s the kind of thing Bhave is used to doing, according to a person who has worked with him at both Sebi and NSDL. “He is not a firefighter, but a fire-preventer,” said this person who did not wish to be identified because he now works for an entity regulated by Sebi.
Bhave will also need to build the quality of human resources at Sebi with a recent report from US Agency for International Development saying the regulator “lacks the required level of trained staff to conduct effective surveillance, investigation and enforcement...”
It isn’t just people; Sebi will also have to become process driven, said Ajay Shah, senior fellow at the National Institute of Public Finance and Policy. “The real challenge for him (Bhave) is to not let Sebi remain as a personality-driven organization. The people and processes of Sebi have to be put into shape,” he added.
Bhave was part of an expert committee on making Mumbai an international financial centre. Besides recommending full capital account convertibility, its report made a strong case for reducing the Reserve Bank of India’s role in monetary management and shifting the regulation of banks to Sebi. “Bhave is one of the few people around, who can rise up to the challenges,” associated with the liberalization of the financial sector, said Percy Mistry, the former chairman of this committee. In 2005, when Sebi investigated the phenomenon of some market operators cornering a large number of shares on offer in initial public offerings by using multiple demat accounts, it held NSDL as one of the parties to blame.
Over two years, NSDL appealed to the appellate tribunal thrice, and won an order in its favour. Bhave saw the depository though this period. The finance ministry said in a release he won’t be involved in the case.