The perversion of regulation in India follows a predictable course. Introduction of strict legislation is immediately followed by relentless lobbying to dilute the rules and create room for misuse. The revival of badla trading was an example of this strategy, the ordinance permitting companies to buyback shares is a more recent example.First, industry argued that buyback was an important tool for restructuring. It then ensured that the government issued a badly drafted ordinance to permit buyback. The ordinance itself did not allow retail investors a bigger say in the buyback decision through a postal ballot. And while it provided checks, the penalty for fudging certification were not really deterrents. Predictably, industry wanted the guidelines relaxed. Ironically, the champion of its cause was SEBI, whose mandate is to protect investors. Last week, SEBI chairman, D.R.Mehta, used an international conference to make a strong pitch to dilute buyback guidelines. He asked that the two yearmoratorium on fresh public issues after buyback to be reduced in order to help "growth oriented" companies. A growth oriented company, one would assume, would be looking for more and more capital and not buying back its equity, unless it is for short term price manipulation.Mehta, then argued, even more dangerously, for a dilution of the debt:equity ratio mandated by the buyback proposal from 2:1 to 4:1 - in order to allow "big projects" to buyback shares. Firstly, big projects require large equity so that they can borrow morethey do not need equity buyback. Secondly, the working group which wrote the new companies bill, had arrived at the 2:1 ratio only after a long debate about the need to protect the interests of company lendors. The group noted that while buyback enhanced share price, the depletion of reserves endangers the security of creditors. It concluded that debt:equity ought to be maintained at 2:1.Surprisingly, the financial institutions (FIs) didn't challenge Mehta. Either becauseof their usual indifference to protecting their lending or fear of contradicting a powerful regulator. But industry was jubilant at Mehta's help. Within hours of this, two leading industry associations - ASSOCHAM and FICCI - submitted a memorandum with an even longer wish list. In addition to the dilution suggested by Mehta, industry wants buyback to be permitted for treasury operations, where there will hardly be any check on price manipulation.It also wants buyback through negotiated deals, speciously arguing that FIs will not participate in open market purchases. Too bad for companies if FIs do not participate in buyback, but negotiated deals hurt small investors. Already they have been denied a say in the buyback decision through postal ballots, the negotiated deals ensures that they are out in the cold. The SEBI chairman's arguments and the quick follow up by industry associations only confirm our fears that industrialists view buyback of shares simply as a tool to jack up share prices -sensible restructuring of capital is hardly on anybody's agenda.Murkier explanationsLast week, I had said that the BSE management had tampered with the trading system. It inserted late night trades into the system in order to paper over a payment crises in June and let off several brokers. BSE Executive Director, R.C.Mathur, reacted to the charge by telling another newspaper that the late night trades were "negotiated deals" and that the exchange had merely extended its "end of the day" session, late into the night to accommodate a few trades. He then makes the shocking confession that the deals arrived at after "long discussion" had to be inserted into the computers to prevent the traders from changing their minds by morning. Mathur's defence which is full of contradictions, underlines the murkiness of BSE's dealings. He knows that end of day transactions are allowed only to facilitate completion of trades and have to be done at the closing price. The late night trades in BPL, Videoconand Sterlite were well above the days' closing because they were meant to bail out certain brokers. If the BSE argues that there was nothing unusual about this, then it would imply that the trading system is routinely opened to insert trades. Why would BSE officials then demand written instructions and why did the BSE feel the need to consult SEBI before following its own bylaws? Mathur's fears that the brokers would back out of the deal also implies that the buyers were coerced into bailing out brokers. It is an open secret that the bailout was funded by the respective company managementsa fact that has also been established by SEBI's investigations which are yet to be released to the public.Add to this the sensational revelations by India Today of the ex-BSE vice president Rajendra Bhantia's underworld connections and the case for a complete revamp of the BSE administration is obvious. Mr.Bhantia, a close associate of Harshad Mehta, was one of the chief architects of the murky bail out in June.
