The author is former director general, National Council for Applied Economic Research, and chairman, Central Electricity Regulatory Commision [email protected]
Primary equity markets in India have been dormant since 1995. The reason has been the loss of confidence of investors in the integrity of the many players in the markets and hence in the markets themselves. The loss of confidence, until the latest appointee as chairman took office, extended to the regulator ó the Securities and Exchange Board of India ó as well. The previous chairman, who was in the position for an over-extended term, was considered to have been slow, ineffective, lacking in understanding of the markets and sometimes less than neutral. Humongous scandals occurred during his tenure, most of the misappropriated moneys were never recovered, the losses were primarily of relatively small investors, no one was ever actually punished until many years later, and that too, fairly lightly.
Since then, India, like many other countries, has been pushed into quicker actions to reform financial institutions, personnel and procedures, by the happenings in the United States of America. There, reputed firms of chartered accountants, media personalities among investment bankers and advisors, large banks, big brokerage firms, and many other players in the financial markets, were found to have misled investors. In the case of many large companies, the accounts were fixed so as to show false profits for the benefit of the top management of the companies. In response to these events and to rebuild the confidence of the investing public in the Indian financial markets, SEBI has made some announcements, appointed committees to recommend other changes, and taken some action. These may help to a limited extent. But the urgent need is for SEBI to be seen to be enforcing its rules speedily and without favour.
The issues to be addressed are the exercise of influence, the working of the institutions connected with financial instruments, the manner of functioning and procedures. As far as the exercise of influence is concerned, the worst offender was the Central government. Despite the many denials on record, there is a strong suspicion in the minds of the investing public as well as informed observers that the government interfered repeatedly in favour of selected companies, brokers, bankers and others who had violated some rule. The government also appeared to interfere in the investment decisions of the Unit Trust of India and financial institutions under its control. The joint parliamentary committee may have helped in looking at systems and procedures but it gave time for culprits to salt away their ill-gotten gains.
It appears that these repeated scandals may have finally led to the distancing of government and more independence and powers for SEBI. Stock exchanges and brokers also appear to have been tamed by the pre-eminence of the national stock exchange, and the emergence of online trading in financial instruments along with their dematerialization.
The working of the regulated institutions has not uniformly improved. Merchant bankers, chartered accountants, credit rating agencies, management consultants and media commentators are some of the institutions that have yet to see external regulation. They are able to influence markets but there is no certainty that they do so in a neutral and objective way. Have merchant bankers in India behaved responsibly in giving advice to clients' For example, in some instances of disinvestment, there have been suggestions of conflicts of interest among these advisors. Chartered accountants in the US were found to be colluding with management of large companies to conceal poor performance.
How confident can we be that this does not happen in India, especially when the same firm has audited the accounts of a company for many years and has developed close connections with the top managers' Rated companies pay for the services of credit rating agencies. Like auditors, they also offer other consultancy services to the same companies and similar conflicts are bound to exist.
Management consultants have access to very sensitive information about companies. Is there an enforceable code of conduct for them so that there is no possibility of their misusing the information that comes their way' There have been quiet sniggers about personalities from among brokers and others who vend free investing advice in the media without disclosing their vested interests. Should they also not be subjected to some rules of conduct'
SEBIís manner of functioning also remains secretive and could do with transparency. Why cannot SEBI conduct its investigations into complaints in public and all SEBI documents be made public' Why should appointments to the SEBI board be made by the government and not by an independent selection committee'
There are other procedural matters that need attention. SEBI is at present grappling with the issues of corporate governance, the definition and role of independent directors, de-listing of shares, buy-back rules, and so on. However, it has yet to deal with other issues such as the practical demise of many stock exchanges like Bangalore, Hyderabad, Chennai, Calcutta, and so on and even Bombay. Hence many shares listed on those exchanges have disappeared from transactions.
Why should these companies not be compelled to dematerialize their shares and list themselves on the NSE' In many cases, the so-called promoters have manipulated the shares in such a way that they have now got majority ownership and are therefore the only outlet for the sale of the shares in those companies.
SEBI is said to be considering what to do in the case of companies that offer to buy back shares at low prices after they have got majority control. Such promoters must be made to pay the highest price that they paid in the preceding twelve months when they were buying up the companyís shares.
Then there are the many companies that do not file their annual reports, and when they do, do not send them to many shareholders. Surely there must be a responsibility on SEBI as well as the registrar of joint stock companies to take some action in such cases'
SEBI has yet to insist on a system of independent rating of all companies for the quality of corporate governance. In this there are other issues. For example, who is an independent director, since this person is the one on whom the new rules for governance appear to lay a great deal of faith. How are they recruited, and are they adequately remunerated to do their job comprehensively' Is there a way in which we can prevent a cosy circle of directors sitting on each otherís boards as independent directors' What is the purpose of nominee directors since they have for decades been unable to protect the interests of the lenders'
SEBI should be an autonomous body whose members are independently selected and who have fixed tenures, with termination subject to investigation by the Supreme Court. Members and staff should be selected for professional qualifications, not because they have served in government. Indeed, the practice of selecting generalist government bureaucrats for these positions must be severely limited.
SEBI must report directly to Parliament through tabling its reports and appearing before a parliamentary committee once a year. It must regulate all bodies that operate in financial markets, including those that can influence market behaviour. Its functioning must be transparent and public. It must coordinate closely and share information with the other two regulators in the area, namely the Reserve Bank of India and the Company Law Board. Turf battles must not delay action. It must not be subject to directives from government and must have a quasi-judicial status so that its decisions go to a judicial body in appeal, not to a committee of the finance ministry.
None of this is the case today. Without a system in place that ensures the transparency, independence and accountability of SEBI, we will never get the confidence in markets that is necessary for them to be vibrant. We still have to go a long way before our regulation of financial markets can lead to greater investor confidence.