The surprise in the MCX-SX suit against the capital market regulator is the length of time it took to reach this flashpoint. The differences between the regulator and, one may say, the finance ministry ranged on one hand and MCX-SX, on the other, has been out in the open for a long time. On its part, MCX-SX has also been quite vocal in airing the opinion that it has been dealt a raw hand in the race to set up an equity platform in India.
Those issues will be dealt with in the respective lawyers? arguments in the courts if Jignesh Shah, the founder chairman and group CEO of FTSL?the promoters of MCX-SX? takes it through to its logical conclusion. But that may not happen. Even now one believes the case is more a means to highlight the perceived delay in giving licence to the company and draw the regulator more deeply into a dialogue than it has possibly done so far.
The more interesting aspect of the development is the timing of the suit. Before one judges the merits of the case, the area of concern is how the market regulator is being suddenly questioned fast and furious by so many entities. To put this in perspective, in the past couple of years, Sebi chairman CB Bhave has taken up a large reforms agenda, including in the mutual funds, stock exchanges and in the primary markets, in a relatively short period. The direction of the reforms is unequivocal. But affected parties argue that the speed with which the changes have been brought in has left them little time to adjust.
In the run in with Irda, for instance, Sebi?s position that equity market-related products should be regulated by the markets regulator is unquestionable. While Sebi says the dialogue was on for a long time, the build-up to the finale was very quick, giving the government little time to digest it. The government?s ordinance shows it did not buy the Sebi position, thereby considerably weakening the position of the market regulator.
Sebi is also facing similar flak from the mutual funds. The abolition of distributor commissions and entry load, among others, has been opposed by the fraternity so strongly that now even politicians are planning to raise it in the monsoon session of Parliament. None of the CEOs have, of course, publicly criticised Sebi, but the declining assets under management of almost all mutual funds has created a large scare zone among the larger fund houses. The smaller ones are more comfortable as they have not had to write off their investment in commissions and agency fees. In his defence, however, Bhave has often said the changes were being delayed for far too long and hence he had to set a deadline in his quiet efficient way.
Surprisingly, the one area where the reforms have not really got going is the governance of the stock exchanges and by extension that of competition among exchanges. The MCX-SX case is a challenge from this very front. Sebi has only recently appointed Bimal Jalan to head a committee to give its report on all aspects of stock exchange governance in India, including that of entry norms.
So, one way of evaluating the MCX-SX position is that they have been left out. Entry of more stock exchanges will certainly create competition, especially for NSE. The latter has yet to really get the corporate bond platform working while the licence for an equity platform for small and medium enterprises is a dead letter in its office. Obviously, the very pace that Bhave has set up to push competition in several placid backwaters creates expectations of a similar waves here, too.
The perceived pressure on Sebi could compromise its freedom of operation. There are enough inter-regulatory issues between it and others, notably RBI, which will need to be sorted out soon and these difficulties do nothing to ease those. The continuing differences over the structure of the corporate bond market is a classic example of that, and even the interest rate futures market has major question marks about which instruments to use and whether it should be delivery-based.
To cap the trouble there is confusion in the finance ministry, with the capital markets division, headless at present, as the previous joint secretary has moved on and there is no word on his replacement. It is also not known if the ministry would like to club the division within the department of financial services, to bring all the financial sector regulators under a single administrative control.
While MCX-SX top brass are clear they had planned the writ independent of the current turmoil, the picture for the capital market is that of a regulator caught in a bind. This is an impression that needs to be cleared up fast and, if necessary, with the government playing a far more visible supporting role than seen so far.
subhomoy.bhattacharjee@expressindia.com