•Hello and welcome to Walk the Talk. Im in the heart of what has always been not just corporate Bombay but corporate India,and my guest this week is somebody who manages your fortunes in good times and bad times,but whose face you usually see in the media during bad times C B Bhave, the SEBI Chairman. Welcome to Walk the Talk.
•We were all trying to figure out what is the best time for us to have this conversation because either the markets were too volatile,or there was one crisis or the other. So,we thought when there seems to be a respite of maybe three days and when there is no crisis,lets have this conversation.
Thank you for inviting me.
•So tell me about the last six months. Youve just finished a year in this job,but the last six months have been more eventful than anyone would have expected in the whole tenure.
Yeah,especially in September. After September 15 when Lehman was allowed to go bankrupt,we had quite a crisis. The crisis got transmitted to the Indian market through the credit markets. It had its effect on the stock market as well because a lot of FIIs withdrew their money; hedge funds were reducing their leverage. So all around,there was withdrawal of money.
•So,did you have sleepless nights?
No,not really. I think the confidence weve got over the last 10 years or so is that our stock exchange settlement mechanism is very robust,and we did not have to postpone a settlement for even a single day. So since the paying and payout was happening on time without any difficulty,people had that confidence that this market can take the ups and downs in its stride.
•It was also not the kind of panic you would have expected if we had gone down from 21,000 to 8,000. There was a certain philosophical acceptance of the crisis.
Yes,I think people understand that markets go up and markets go down. What worries them is the uncertainty,that is if you tell them that we dont know if you will get your money for the shares you have sold. That would be more upsetting for an investor than being told that todays prices are,say,10 per cent less than yesterdays prices.
•And that did not happen even on a day when there was a net fluctuation of 1,000-1,500 points up and down.
•Did the system come under stress?
No,actually because these clearing systems have already been stress-tested for things like a number of brokers not being able to fulfil their commitments. Do the stock exchanges have sufficient money in their guarantee funds to be able to see that the counter-party doesnt suffer? And I think the key in the market is that people understand that they will have their own problems. What they dont want is the problems of the counter-party being transmitted to them.
•Well,one thing people acknowledged during this period,in fact globally,is that when a real crisis comes,the most liquid and,in some ways,the most realisable investments are in equity.
That is true. In fact,what this crisis has taught is that you didnt have a problem in any of the exchange credit instruments. It was the OTC markets that created the maximum problem.
•But somehow one reason why the crisis looked so great was that we did not anticipate the global credit crisis transmitting itself to India so quickly.
Yes,that is right because we had probably underestimated the linkages that corporate India has built over a period of time through imports and exports.
•So take us back to those days of crisis management.
As you know,September 15 was when Lehman went bankrupt and that was also the time when in India it was the last date for payment of advance taxes,so there was the liquidity squeeze. People were aware of it. Probably,the thinking was that this is because the last date for advance tax has come. It took a little while for us to realise that.
•Its a bit like somebody has fever and thinks it is normal viral flu and doesnt carry out a dengue test.
Yes,thats right,thats right… In a couple of weeks,we realised that normally the liquidity tightness that happens around September 15 and then flows back into the systems wasnt happening,and the tightness continued. So very quickly the central bank had to take steps to release liquidity into the market.
•There were weeks when you burnt the midnight oil.
Yes,the crisis,which was essentially a problem of liquidity,got into the capital market arena through the money market mutual funds. And the corporates,as they found their access to credit was getting squeezed,started withdrawing from the mutual funds. And mutual funds had these underlying assets which they did not know whom to sell to.
•The debt mutual funds?
Yes,the debt mutual funds. There were no buyers in the market. And RBI and SEBI had to take some exceptional steps.
•Even the bank CDs were selling at 18 per cent,19 per cent?
•Certificates of Deposits in good banks?
Yes,that created a problem for mutual funds but that was solved by this special line of credit that was extended to them.
•So,tell us about that crisis management because to me,that is one of the sort of glowing chapters of financial sector management in India how we prevented a systemic crisis. I think you,RBI,Ministry of Finance,many banks,mutual funds,it was quite a gang that got together in a virtuous conspiracy.
I think that was the time when all the elements of the system came together. RBI,Ministry and we sat together and decided that a special line of credit needs to be made available to the mutual funds. The line of credit worth Rs 20,000 crore was made available,though at that time our estimate was that so much may not be required. But liquidity issues are such that it is better to err on the safer side and give this confidence to the market that there is money.
•Because if there is less liquidity,people use more,isnt it?
Yes,thats right. People tend to hoard. And even though I do not need liquid money today,I say that I may not get it when I want it. So I want to hoard it today… Its like water supply. If a city has 24-hour water supply,people will store less water. If you give them only three-hour water supply,they will buy huge storage tanks… And a lot of wastage occurs.
•So you realised that it was time to flood the market with liquidity.
That is right,and I think the system realised that and the RBI took its own steps to reduce CRR.
•But did you sort of arrive at an internal conclusion that under no circumstances,would we allow a debt mutual fund to go under?
Yeah,that was very necessary because if you allow any one element of the financial system to go under, the whole financial system can be paralysed. The risks can be very,very high.
•But were we close to this? Were we close to a systemic crisis developing?
Yes,if all the agencies had not acted together and not shown the capacity to take steps in their own respective areas then we were very close to a crisis.
•And that would have then led to a domino effect?
•Because once corporates realised that mutual funds were not going to close,they stopped withdrawing money,isnt it?
Yes,thats right. Its amazing,you know,we made this 20,000 crore available but I dont think at any point of time more than Rs 11,000 or Rs 12,000 crore was used. And by the end of November,all of that had been repaid. So,there was nothing outstanding.
•Now will you take us through that night of a Sunday when the RBI Governor was on his way back from Washington. He was going to be in the air for a long time and that Monday morning,it looked like the apocalypse would hit anytime. What happened then?
Yeah,we had this difficulty that the RBI Governor had to be in Washington for some meeting but I think the entire RBI machinery worked. They were in long-distance contact with him.
•And he managed it from Washington?
•And Chidambaram in Delhi. I believe it was like he was running a control room at night,a police control room.
Yes,the Finance Ministry was extremely supportive of the efforts that were being made and they goaded us in the right direction.
•Right,two more crises after that,because you know bad news doesnt come alone. There was Satyam.
Yes,Satyam was quite a shock. A promoter coming out and saying Rs 5,000 crore that are supposed to be in the bank are just not there.
•Which the auditor had certified as being there?
And the auditor had certified not once but over several quarters. We had to act very quickly and again this was an issue where multi-agency coordination was required. And I think again the way the Ministry of Corporate Affairs,SEBI handled this matter just showed that if governmental agencies in India come together then we can… I think the Government did a very good thing by superseding the earlier board and under the supervision of the Company Law Board,they appointed a new Board of Directors.
•But a Board of Directors entirely in private hands. Usually,the Governments instinct would have been to put two joint secretaries there?
Yeah,I think that was another key decision that here was an industrial enterprise that needed to come back on course,and if we wanted to do that then we needed people with industry experience.
•But tell me when did you first suspect that something was wrong at Satyam,or was it as much of a surprise to you as to the rest of us?
Of course,I got the surprise probably half an hour before the rest of the market because there was this email that was sent. Our first concern was that we need to verify that the email had indeed come from Raju… So it took about half an hour to get a confirmation from the company… My first reaction was to just pick up the phone and talk to the Secretary of the Ministry of Corporate Affairs and tell him that look,this is a crisis that both of us need to handle jointly and we will be very happy to work along with the Ministry of Corporate Affairs. So I briefed him on what we intended to do. He was good enough to tell me what his course of action would be.
•In SEBI itself,was there some soul-searching as to whether this could have been caught earlier by our system?
I have asked myself this question many times. If you look at the trust that the investors are supposed to have in the accounts that are presented to the company then we have different mechanisms that have been created which should check this sort of thing. Our first layer of defence is the auditors,then we have the audit committee,then the board. In this case,all these mechanisms seem to have failed,and this is one of the subjects of our investigation: to detect as to where it went wrong. As we get to some conclusive positions,we will take corrective actions.
•Tell me something,your predecessor had said that he sees that one of his responsibilities is to bring the common man to the markets,is to convince the common man that this is not a casino. After the crisis in September-October and the fall subsequently,do you think the aam aadmi is less convinced or more convinced?
I think that people who understand that the settlement processes in the stock market remained intact despite the fall in the market are convinced that the market is strong. Where you need to worry about the aam aadmi is during the times which are exuberant,because then what people tend to do is they will not only invest what money they have but they will borrow in order to invest. That is very dangerous.
•And individuals get leveraged.
Yes,in fact,leverage is one of the issues that is bothering the world. Even the institutions went the same way over-leveraged themselves,invested and when their assets came down,they had nowhere to look except the taxpayers money.
•So aam aadmi has to be protected more in times of a boom than in bust?
•So how do you see the current period? Going from 8,000 to 11,500 is also an exuberant time or not?
This is still not an exuberant time because a lot of people are uttering words of caution and people are saying there is no real rally and markets are still in trouble. We also see that the economies in the west have not yet recovered. So there is no immediate reason to believe that everything is hunky-dory.
•The economy in India has not recovered.
Yes. Thats right. So we dont see this as a boom time… I think the main caution that the investors need to take is that they should invest the money,which is really spare,into the equity markets because two things you cannot do about equity markets: one,you cannot go there on borrowed money; and the other is you cannot time it. If I need money in six months and I invest it today,I dont know if the markets will be down,and I may just suffer. So I should put that money which does not put this constraint of having to withdraw it at a particular time so that I can withdraw when the time is good.
•So that I can choose my time instead of being forced to withdraw it?
•But we need some reform in terms of SEBIs own access to some of these situations. You had to haul them to the Supreme Court just to be able to have a conversation with Raju and his auditors.
Yeah,that was the first time that SEBI was seeking to interrogate somebody who was in judicial custody and the law in that matter in this country was not settled because,invariably,it was the police who would request such access.
•After Satyam is the Pyramid Saimira case. I believe your investigation has been almost like a CBI forensic investigation. Tell us a bit about it?
See,this arose out of a very peculiar thing,weve not come across a situation like that so far. Somebody faked a SEBI letter which said that a promoter had been asked to offer a certain price to the shareholders which was way beyond the market price. When we started figuring out how this forgery occurred,we kept on getting one link after another. So this comprehensive order in the case of Pyramid Saimira also gives a lead into other things as well.
•What are your current worries? Are you worried about the fact,for example,that effectively there is only one exchange now? The BSE is declining?
We are in dialogue with BSE,and I think we are close to appointing a CEO.
•As you said the regulators challenge is more serious when the markets go up and people start pawning their jewellery or borrowing from their uncles or neighbours?
•So all the best for that.
Transcript prepared by Gayatri Verma
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