In 2001, just as the scam broke, I remember discussing the implications and role of the Securities and Exchange Board of India (Sebi) with then chairman, D R Mehta, who at the time was under fire for failing to act against the scamsters on time. Mr Mehta, prone to presenting tough ? even if at times far-fetched ? defences, was busy explaining to me how Sebi can only go up to a point, and not beyond, in preventing scams of this nature, and how Sebi had issued more than one warning to the market to be careful as stock prices were soaring. Even at that time, I remember finding this logic pretty weird, since it was akin to the police department telling the citizens to lock their doors and sleep since there was a gang of robbers on the prowl. The rest, as is now known, is history.
Today, two years on, there is a Joint Parliamentary Committee (JPC) report which has gone in detail into the causes of the scam and the manner in which Sebi failed in its duty. One of the most important issues which the JPC report highlights is the poor inspection mechanism of Sebi, and the need for effective inspection and follow-up action. Current Sebi chairman G N Bajpai appears to have got the message loud and clear from the report, if his newest move ? that of setting up an exclusive inspection division in Sebi ? is anything to go by.
The new division will be headed by a division chief but will come under the overall supervision of the secondary market department which is headed by executive director Pratip Kar. Cynics may well ask, going by past Sebi performance, whether the mere creation of a separate division will achieve anything at all. Will the separation of one function under a new division improve the efficiency of Sebi?s inspections?
Valid question, to which Mr Bajpai has his response ready. He is clear that the setting up of the department is just a
first step towards empowering the division with more. Sebi will hire new recruits ? young people drawn from the field of management and finance, to man the division as it gets more responsibilities. To begin with, the division will inspect stock exchanges, and then go on to inspecting brokers and other intermediaries. Its exclusive task will be to hone its skills in the field of inspecting intermediaries.
This has quite a few advantages: One, the division, over time, will become specialised in a most critical area of regulation ? inspecting the books of market players. Two, the quality of inspections is bound to improve, making it easier for Sebi to spot market misdemeanours early, and take prompt preventive action even before a problem surfaces. After all, spotting a problem early and preventing it from snowballing is almost half way to solving it. By creating its own in-house department, and not outsourcing the inspection work, Sebi has also taken a good degree of risk.
The inspection division will also work in close contact with the surveillance departments of the stock exchanges, so that their own findings and those of the surveillance departments can be compared and a common strategy to prevent market misdemeanours arrived at. Over time, Sebi also plans to increase the coverage of brokers and the frequency of inspections, another aspect which has been highlighted by the JPC. Eventually, Sebi will also have to ensure that it generates its own alerts electronically as well, just like stock exchanges do with their surveillance systems.
These alerts can then complement the physical inspections, leading to a well-rounded surveillance mechanism at the regulator?s end.
Mr Bajpai, I recently noticed, has given up the old PTI Stockscan machine he had in his room, and depends more on his workstation and other sources for market information. If this is a reflection of Sebi?s penchant for greater sophistication and more contemporary regulatory technology, this is good news. Hopefully, we?ll see a more wired-up regulator in the coming days, able to crack down swiftly on those violating market discipline. Here?s looking forward to that. In the interest of the market.