Responsibility vs. Powers

Statutorily, SEBI has been enjoined upon to develop the Indian securities market,regulate it, and, importantly, to protect the investors. Responsibility mustnecessarily be accompanied by commensurate authority or power. The last yearn (2002) witnessed the enhanced empowerment of SEBI by virtue of amendments in SEBI Act. The strength of the Board of SEBI would be increased to nine, including three wholetime Members; SEBI has been granted the powers of a Civil Court to inspect the books or records of any listed or to-be-listed companies. The powers given to SEBI included those to levy penalty against corporates and individuals for violation of regulations, manipulation of market, Insider trading and unfair practices. It can suspend the trading of any security, restrain persons from accessing the securities market or prohibit any person associated with the securities market from buying selling or dealing in securities or direct any intermediary or person associated with the securities market not to dispose off an asset forming part of transaction under investigation or impound the proceeds or securities of such transactions, and attach bank accounts Significantly, search and seizure powers have also been vested with SEBI. It can even issue immediate cease and desist order, where warranted.

Transparent, vibrant and efficient secondary market is necessary to provide avenue for deployment of savings and also to prop up the primary market, to mobilise savings for investments needed for economic growth. SEBI has been endeavouring to ensure this.

1. Automated On-line Screen Based Trading System: The trading system has become on-line, fully automated, screen-based. Open outcry is now outmoded and discarded. Manual trading has yielded place to terminal trading. It has brought about efficiency and transparency. It has cut down the cost, time and risk involved. A large number of participants, irrespective of their location, now trade with one another simultaneously, improving the depth and liquidity of the market. The system provides perfect audit trail. Given the size and complexity of the country, that we could click the system and stabilise it so successfully is, by no means, a mean achievement.

2. Dematerialisation of Securities: A cent percent dematerialisation-trading dream, too, has virtually materialised. Today, the investing public has been saved from the botheration of safe keeping, bad delivery, delayed delivery, share duplicity, bogus documents and also from irritating headaches of intimation of change of address, watching the receipt of bonus or rights shares etc. While the convenience is conveniently enjoyed, even the modest cost involved is mostly disliked, as is the human nature. Still, this issue is being addressed by SEBI to explore the possibility of further cost or tariff reduction.

3. Rolling Settlement: Gone are the days when the seller had to wait for weeks for settlement. Rolling settlement on T+5 basis, initially made compulsory for 200 actively traded scrips on BSE and NSE, was extended to cover all the scrips in December 2001. Within a little over two years we moved to T+3 and then to T+2 by April 2003 The transition has been so smooth and successful that it has received word wide acclamation. We should now look forward to a day when the settlement would be on T+1 basis or even Real Time Basis.

4. Elimination of Counterparty Risk & Investor Protection: Following introduction of T+2 rolling settlement, the risk containment measures were rationalised. Based on classification of the scrips depending on liquidity and volatility, VaR based margins have been made applicable to these scrips.

5. It is our aim to have unique client ID for all investors. In the absence of any single identity code for investors in India such as the social security numbers as available elsewhere, the code could be the passport number, ration card, driving licence or pan card with a provision available on stock exchange for mapping it to do one-to-one correspondence. SEBI is in discussion with NSDL to work out a system of providing unique number to all investors.

6. G-Sec Trading in Stock Exchanges: In order to make the market more efficient and provide more investment opportunities to the investors, trading in government securities on stock exchanges was permitted. Probably, ours is the first country to have screen-based, automated, anonymous trading on G-Sec.

7. Eastablishment Central Listing Authority: With a view to harmonising the listing requirements across the various stock exchanges and centralising the listing powers in one single authority, an independent body viz. Central Listing Authority has been conceived and is to come into being.

8. Demutualisation of Stock Exchanges: In order to eliminate conflict of interest situation and ensure alignment of investors’ interest with the Exchanges, the process of demutualization and corporatisation of stock exchange has already been initiated. Almost all the stock exchanges have submitted their plans. These are under process.

In the changing competitive environment, survival will call for adaptation. According to Charles Darwin, it is not the strongest of the species that survive nor the most intelligent, but it is the one most responsive to change. This Darwin’s theory is very relevant in today’s context. The Regional Stock Exchanges would need to be responsive to the change and be alive to the reality. Pragmatism would demand creative destruction. The coming years will, hopefully, witness structural consolidation.

9. Trading in Derivatives Products: The introduction of the derivatives in the market and the gradual enlargement of the basket of products has further enhanced the liquidity, efficacy of the market and also provided hedging opportunities. The Risk management system which include VAR based margining, on line monitoring of margin and automatic disablement features has stood the test of stress. We can derive immense satisfaction from the success of our derivatives market.

10. Corporate Accountaqbility & Corporate Governance: The corporate governance standard is a crucial factor for ensuring investors confidence. While the Company Law would take care of the basic requirement of the form of corporate governance structure, SEBI is concerned with the corporate governance practices on on-going basis. SEBI constituted a new committee on corporate governance under the Chairmanship of Narayana Murthy to look into existing corporate governance practices and suggest improvement wherever necessary. Based on this report, revised corporate governance standards have been finalised. Disclosures on corporate governance standard observation would form part of the listing agreement requirement. Simultaneously, SEBI encouraged the credit rating agencies- ICRA and CRISIL, to evolve a suitable corporate governance index as a measure of wealth creation by the corporates. Some of the companies have been rated against this index. I understand that this institute, too, has developed a measuring model. It is our belief that the economic compulsions would increasingly induce the companies to go for the corporate governance rating. Corporate governance is essentially ethics-based. No amount of legislation or regulation will serve the purpose fully, unless there is an attitudinal change in the management of the corporate.

11. Enforcement of Code of Conduct for Market Intermediaries: In the dynamic conditions of the market, the regulation cannot remain static. As a measure of regulatory dynamism, various regulatory guidelines concerning intermediaries, listed entities, trade practices have been reviewed and suitably modified. Such a view would be a continual process. Code of Conduct for various intermediaries have also been finalised and would be in their hands shortly.

12. Public issues - Disclosure & Investor Protection Norms: Over the years, SEBI has taken several initiatives to improve the operational efficiency and transparency in equity market and to provide investors with the security issues of high quality and to enable entities to raise resources in cost effective manner. The disclosures prescribed for new issues in India are comparable, in terms of contents and stringency, to those obtaining in most of the advanced markets. Entry norms and track record criteria have also been attuned to ensure the quality of new issues and to protect the investors. The continual disclosure requirements for listed companies are also at par with any international standards. These relate to publication of annual audited results and quarterly results in prescribed format and time frame, consolidated results, segmental reporting, cash flow, auditors qualifications and their impact quantification, and disclosures of certain transactions. To enable electronic filing of information, Electronic Data Information Filing System has been set up in association with National Informatics Center.

13. Vigilance Enforcement & Curbs on Market Manipulation: The basket of products has been enlarged; regulations have been revamped; risk management system has been streamlined; code of conduct for various intermediaries and players has been put in place. While these can be reviewed and modified from time to time as the circumstances demand, the major area of concern for the regulator and the investors should be the possibility of price manipulation and malpractices. Normally, once bitten, one is twice shy. The Indian investors have been bitten twice. Therefore, to pre-empt any further biting, the intensity of shyness must necessarily be high. As a regulator, we keep a constant watch to spot any unusual movement or activities for possible preemptive action. Interestingly, it is observed that authorised trading terminals, in some places, give birth to unauthorised dabbas. Possible action is being taken in this regard.

14. Investor Awareness Programmes: Invariably, while manipulators play, the retail investors fall a prey. Often, there is a fatal attraction to hypes and greed. On its part, SEBI has started conducting Investor Awareness Programmes at various places across the country in collaboration with different agencies. But it is for the retail investors to be diligent enough not to be led by some invisible hands via garden path to prickly desert.