Sebi or brokers — Who regulates the market?

Currently, brokers and investors get ample opportunity to manipulate the prices in the badla system. “Brokers get 90 days to square up the deal under the current badla system. This is not possible under the rolling mode where deals will have to be finished within a week. It’s quite natural that top brokers were lobbying against the rolling mode. It’s not possible to rig up prices under the rolling system… that’s why there is a fall in turnover in the scrips which are already in the rolling mode,” said an analyst. Several brokers had petitioned to the SEBI against introducing rolling settlement recently.

Several analysts were disappointed by the SEBI decision. “It was a good opportunity to stop the stock manipulation on the exchanges. But the SEBI had succumbed to the pressure from big broker lobbies. It’s like giving a green signal to continue manipulation on the exchanges,” said another analyst.

Sebi chairman DR Mehta had gone on record in the media saying that “The decision was taken in the light of significant drop in turnover, liquidity and delivery of 163 B1 and B2 scrips already brought under CRS found in a study conducted by the regulator.” Surely, it’s bound to happen. The high turnover in A group shares on the exchanges is due to excessive speculation. Sebi had introduced rolling settlement in several B group shares earlier this year. However, brokers and riggers lost interest in those shares as it went beyond their manipulation. Hence the drop in turnover and poor liquidity.

Influential broker lobbies were directly and indirectly lobbying with the SEBI and the Finance Ministry for shelving the rolling mode in A group shares. Had the SEBI gone ahead with its plan to put A group stocks in rolling settlement, the current badla system would have automatically come to an end. This would also put an end to circular trading and ramping up of share prices.

Brokers were able to `convince’ the SEBI that there would be a chain of `defaults’ if the rolling system is introduced. Experts, however, pooh-poohed this argument, saying that the rolling system would be effective with suitable checks and balances. Top A group shares are already available in the demat form and stock lending facility is also in place. Then why are brokers lobbying against the rolling system? Even badla will be available in a limited way as the SEBI had worked out one-day and two-day badla for the rolling system.

Indian stock exchanges have a track-record of scuttling market reforms. When former BSE president M N Kampani tried to computerise the BSE operations ten years ago, he was thrown out of the top post by influential brokers. There was also tremendous opposition to the formation of the National Stock Exchange, online trading and even derivatives trading. Brokers are also against uniform settlement on various exchanges.

If top brokers are to decide what is good for the market, it’s like inviting the old days of scams and rigging. SEBI needs to put its foot down and bring the brokers in line. But in reality, it’s happening the other way. Brokers are putting their foot down and getting the Sebi frame policies as per their wishes.