The Securities and Exchange Board of India (Sebi) has been hauled to court by the MCX-SX that has accused the former of delaying a decision on granting it a licence to trade in equities, debt and derivatives. Most commentators have criticised Sebi for the delay in its decision and some have even compared its inaction to the licence raj days. The hype in the criticism apart, there is merit in expecting quick decisions from regulators. Sebi should indeed give its verdict on the case at the earliest. In fact, nothing stops it from doing so even now.
But, the criticism of Sebi?s slow decision seems to come along with a pre-emptive judgement that MCX-SX should be granted the licence. Such a verdict dilutes the criticism of delay in decision making and also makes the criticism apparently motivated. It is best to distinguish the issue of delayed decisions from the decisions themselves. We may criticise the delay but we must wait for Sebi to take its call before we comment on what the decision should be. The media cannot be the jury.
Now, has Sebi indeed delayed its decision to grant MCX-SX a licence in a manner that merits the opprobrium of being called whimsical or autocratic? The facts do not seem to indicate that because MCX-SX was granted two extensions by Sebi to comply with its requirement of dilution of ownership. And, if the compliance now achieved by the exchange is more in the letter than in the spirit of the regulation, then shouldn?t public debate be more about the adequacy (or lack thereof) of the regulation rather than on the apparent delay in decision making?
The fact that Sebi did grant MCX-SX extensions in the past indicates that the regulator was apparently not in a hurry to deny the latter a licence but was keen to ensure that exchanges are not owned privately. To ensure that markets are efficient, we need to ensure that the markets themselves are not owned privately. The exchange is a market and it cannot be owned privately. Dilution of ownership is one way of achieving this objective.
MCX-SX has made efforts to diversify its ownership structure in the past. It has not been very successful at this. It probably requires even more time than it has got so far because the markets have been in turmoil and these have not been the best of times to attract investors. But, it is important that the concept of dilution in ownership and management control is maintained in spirit as much as it is in letter. The case for granting MCX-SX a licence is that there is a need to give NSE competition. It is assumed that BSE cannot give it competition and that BSE is not relevant to the discussion.
Competition alone is not the solution to market efficiencies when it comes to exchanges. Regulation is much more important. Competition helps bring in innovation, but we have had too much innovation in the financial markets in recent years. It is regulation that has failed to keep up with the innovations. It is important that regulation is strengthened to ensure that we have a safe investment environment.
In the past few years, Sebi, under the leadership of CB Bhave, has strengthened regulation in the financial markets in India. This has obviously earned the regulator many enemies in the financial markets industry. However, Sebi?s actions under Bhave have benefited investors, particularly retail investors. The aam aadmi is the greatest beneficiary of these actions.
The application supported by blocked amounts facility has obviated the need for investors to part with monies for shares upon application in IPOs and then wait, first for allotments and then for refunds. Now, funds leave the investor?s account only upon allotment. Further, Sebi has reduced the time that a company takes between the closure of a public issue and its listing on the bourses to a mere 12 days. The transaction costs for the investors have thus been reduced significantly.
The abolition of entry load for all mutual funds was possibly the most investor-friendly move by Sebi. Transaction costs in investing in mutual funds were reduced dramatically by this move. But this has earned Sebi the greatest wrath of the financial markets, which have seen profits suffer as a result. Earlier, Sebi mandated that all close-ended mutual fund schemes should be listed. This provided investors with an exit route even in schemes that had a fixed maturity period. Companies listed on stock exchanges that have been derecognised are permitted to list on other stock exchange so that investors have the option to exit.
All these efforts have benefited investors. These benefits did not accrue because of competition. They are the result of better regulation?regulation with a view to improve efficiency through lower transaction costs.
Intense competition between mutual funds and with insurance companies did not help in increasing transparency or in reducing the transaction costs of Ulips. It required a regulator with guts to intervene and highlight the problems in Ulips. It is unfortunate that government intervened and amended laws affecting the regulators without consultation. It is imperative that we strengthen the regulatory framework in the financial markets rather than compromise them.
Competition is a necessary but not sufficient condition to bring about good corporate governance either. Possibly, the most important move by Sebi, in this respect, is that it stopped companies from issuing shares with superior voting rights. Top companies indulged in this before Sebi stopped the practice.
Competition can bring in a lot of benefits. But, a lot remains to be done thereafter by the regulators. This is the lesson we must learn from the 2008 financial crisis.
The author heads the Centre for Monitoring Indian Economy. Views are personal