Evolving watchdog in new markethttps://indianexpress.com/article/news-archive/web/evolving-watchdog-in-new-market/

Evolving watchdog in new market

Market regulator Sebi turns 25 today.

A look at how it has changed the financial sector,and what else it needs to do

On a hot summer day in 2009,the National Stock Exchange completed 192.25 crore share transactions. The markets had reached a high of 4,509,yet all trades were squared off within an hour of the closing bell on May 19,2009.

Till a few years earlier,any jump of that sort would have made the surveillance officers at the other glass façade building at Mumbai’s Bandra Kurla Complex,too,jump. But the officers at Securities and Exchange Board of India could shut their terminals for the day.

Sebi,set up through an executive order in 1988,leading to an ordinance in 1992 and subsequently an act,turns 25 on Friday.


For years,the Indian equities market had remained wary of any bull run. It happened in 1993,in 1999 in 2001 and even in 2003,but scares of that sort have now become history as Sebi has evolved —its act has undergone changes as late as this year — along with the stock markets. It has found new rogues,but one of its biggest achievements has been creating the conditions where the size of the market has become too big for any single entity or group to hold it to ransom.

“Our big challenge was to shift the centre of gravity of the markets from the ministry to an independent regulator,” recalls P J Nayak,who in the ’90s was joint secretary (capital markets) in the finance ministry.

Along with setting up Sebi,the government allowed the entry of foreign institutional investors (FIIs). From less than a dozen in 1993,it has now expanded into a growing club of over 1,770.

Surveillance systems,which at one time meant carrying sheaves of weekly trade to the Sebi office,have now become one of controlling algorithmic trading,and the exchanges themselves have changed. Bombay Stock Exchange,once number one,is now a distant second to National Stock Exchange,the child of liberalisation,and regional exchanges are now valuable only for their cash reserves.

A young investor in today’s changed environment would be taken aback if told,as he would have been two decades ago,that a stock exchange would take 15 working days to settle his transaction,or that the brokerage charged would be around 2 per cent.

Some things do not change. The markets are still dominated by the top 100 stocks,which account for 76 per cent of the turnover in the spot markets. The wider economy still languishes for inadequate penetration by productive financial instruments. Lagging retail participation takes its toll through informal channels such as chit funds.

But longtime market participants credit Sebi with a lot. Prithvi Haldea,chairman and MD of the market-dedicated Prime Database,praises the disclosure regime Sebi has brought in “not only for public issues but also for subsequent stages”. “Often it seems an information overload,but it is far preferable to the casino style filings of early years,” he says. Vallabh Bhansali,co-founder and chairman of Enam Financial Consultants,says,“Be it the advent of FIIs,NSE or foreign brokers,Sebi has brought in big changes. The capital markets we have today are a complete revolution.” And C Jayaram,ED,Kotak Mahindra Bank,says,“In the ’90s,it was a learning period for Sebi too,but over time it has evolved. Going forward,the expectation from them of a broader regulation and market development will be much higher.”

Then and now

The country’s trading history goes back centuries but,far from playing a role in capital formation,it used to be speculative in nature,lacked transparency and efficiency,and suffered defaults. The first regulations came in the form of the Securities Contract (Regulation) Act,1956,enacted by Parliament.

After Sebi came up,among its first steps was to bring market professionals on the boards of stock exchanges. It faced huge resistance from brokers,which also agitated against Sebi’s decision to levy charges on their turnover,but Sebi managed to overcome it.

Old-timers today admit the changes have been for the better. “Bringing in people from outside (the government) to the exchange boards brought in transparency and improved credibility,” says K R Choksey,chairman,K R Choksey Shares and Securities.

A comprehensive disclosure system was another milestone. “In the mid-’80s,for a secondary market investor it was like the wild,wild west,” says Jayaram. “No investor knew what the brokers were up to. If you bought a share,you did not know when you would get it. We have a come a long way.”

“As markets got regulated and disciplined,defaults vanished and it led to global investors coming in. There is more confidence in a more efficient market,” says Choksey. The net FII inflow into Indian equities has risen from Rs 5,760 crore in 1997 to Rs 127,736 crore in 2012,and the total net investment (both debt and equity) by FIIs from Rs 2,595 crore in 1993 to Rs 163,350 crore in 2012.

The fully automated,electronic and order-driven NSE started functioning in 1993. The National Securities Depository Limited came in 1996,bringing in a dematerialised mode of settlement where paper was once used.

“While many major economies took 15-20 years (for dematerialisation of stocks),we did it in one-and-a-half years despite the hurdles,” says Ashish Chauhan,the current CEO of BSE.

Former Sebi chairman C B Bhave shares an anecdote from his time as chairman of NSDL,which was spearheading the change to dematerialisation. Confronted by reluctant brokers,Bhave asked them if they wished to retain the paper shares. “But next year,the tax guys might be interested to know why the guys who held out had wanted to,” he told them. The brokers signed up overnight.

Parallel to Sebi’s own evolution began the development of a mutual fund industry. Unit Trust of India had been founded in 1964 to channelise small savings into productive investments,but it was in 1993 that Sebi cleared the field for the entry of private sector funds and foreign fund houses in stock markets. According to the assets under management for the quarter ended March 2013,four private sector players top the mutual funds league: HDFC,Reliance,ICICI Prudential and Birla Sunlife. The restructured UTI — UTIAMC — is now fifth.

Challenges ahead

Punishing offenders has been Sebi’s biggest challenge. Since 2010,it has begun moving against ponzi schemes. The biggest disgorgement order in Indian markets’ history,of approximately Rs 24,000 crore against two companies of the Sahara group,is being fought out in the Supreme Court.

Under the present chairman,U K Sinha,the regulator has brought in rules-for-consent orders that companies often used to get away with serious offences,including insider trading. Sebi has a staff strength of just 600; its counterpart in the US,SEC,employs 4,000.

Sebi is sometimes criticised for not being very inclusive; most people in its system are from the industry. Its current chairman has come in from UTI Mutual Fund. Market participants,however,say such examples are rarer in Sebi than in many developed economies.

Analysts feel Sebi can do more in market development,reaching out to first-time investors and ensuring protection against influential promoters.

“We will have to see how better corporate governance practices come in and how the rights of retail investors are protected,” Chauhan says. “While Sebi has done a good job,we will have to see how we can improve on it to build trust among the masses.”

There are some who feel that Sebi alone cannot do that. “Some of the issues are beyond regulatory changes alone,” says Bhansali. “Some products are products of governance,equity is a product of governance,and if you don’t have trust in governance then you don’t get into it. These are outside issues.”

Retail participation in the markets has dipped to an all-time low. Some have run away as interest rates on financial instruments have become negative in a regime of high inflation.

As Jayaram says,there are plenty of weeds in the financial sector. The Sebi chairman says it needs more powers.


Yet the next time the markets hit another high,the chances of a scam emerging are slimmer than earlier,but then not too many Indians will benefit either.