New teeth for the watchdog

A regulator like the Securities and Exchange Board of India (Sebi) can do little to prevent stockmarket booms and crashes, which are more systemic in nature. But it can ensure that market operators play within the rules of the game and punish insider trading and price manipulation. An analogy has been drawn with the ball game of basketball, where fouls are permitted and a referee’s job is to spot them in time and blow the whistle. So too in regulating the bourses, Sebi has to be pro-active in spotting the fouls, so that the markets function smoothly. The recent stockmarket crash has predictably led to government contemplating ‘‘concrete steps’’ to give more teeth to Sebi. On April 15, this regulator submitted an interim report to North Block on the stockmarket crisis, triggered by the bear hammering of scrips after the presentation of the union budget for 2001-2002. The government believes that Sebi has been slack in not pro-actively responding to market rumours of insider trading and price manipulation. That it is good with postmortem analyses of the crisis instead of checking the malady in time.
So what sort of steps would strengthen Sebi? For starters, its investigative staff must be beefed up. Currently, only 20 out of a Sebi staff of 340 do such work, which is woefully short of requirement. The regulator also must be given powers to investigate sources of funds behind a bull or bear run, which can now be done in some cases only. Perhaps this was a reason behind Sebi acting with greater alacrity when the bears went on the rampage than during the bull run from October 1998 till March 2000. The markets then were agog with rumours of funding from leading corporates to the major bull operator, Mr Ketan Parekh. Sebi of course denies this charge, stating that it then issued warnings to small investors and raised margins on volatile scrips. But more powers would have helped it to bring the problem to light. As things stand, Sebi also cannot impound documents — it has no search and seizure powers. It does not have powers of search and seizure. The government should fully implement the recommendations of the Dhanuka committee report in this regard. A more fundamental problem is that Sebi is only a second-level market regulator. The bourses in the country are run by brokers, a pattern that holds the world over. Greater control by Sebi over them is imperative without impeding the functioning of the stock markets.