We have finally managed to breach the final frontier in the Indian financial market. The ONGC disinvestment drama has been able to raise questions about the integrity of the regulations at the Indian equity markets, that zone of the financial sector whose reputation had been built literally brick by brick since it had blown up in the scam of 2001.

After Thursday, whenever issues of financial regulation in India will be surveyed, the ONGC blowout will crop up. It was possibly coming, ever since in the past few years we managed to disturb the line of command and authority at each key regulator, and kept two of the critical ones headless for over a year and introduced several options in between.

First, let?s recount the developments as this columnist had a chance to do with the key personnel involved. At 2.30 pm on Thursday, March 1, LIC had sent in buy order for the ONGC shares that were sitting unsold with the designated six sellers to whom the department of disinvestment had given responsibility to.

The orders were received by the Stock Holding Corporation of India (SHCIL), the designated custodians for the shares. LIC, in turn, also informed its banker, IDBI Bank, to release the funds to make the purchase.

What happened then was a whodunit. Until about three minutes before the close of the special window opened by the BSE for the ONGC sale, the order book from various financial institutions and the funds committed as pay-in matched, yet fell far short of what the government had put on offer.

This happened because at the Clearing Corporation of India (CCIL), which acts as the market clearing agency, no intimation had come from IDBI Bank that LIC had committed fresh funds to buy the remaining shares. So the orders from SHCIL as the designated broker for LIC were apparently not backed by money on the table and were invalid.

Since the orders were made before the time limit, what followed next was a painstaking paper-based matching of each order, with the funds committed by the buyers, several faxes sent and countless telephone calls made between SHCIL, CCIL and BSE till late into the night. When it was settled, the finance ministry in New Delhi took over. Sebi was tasked to discover if a head can be chopped, but it was clear none of the market participants went beyond the rules.

As Sebi does not have the mandate to check

why the funds flow took time, it will presumably bring RBI into the matter.

While all this happened, flummoxed domestic and foreign financial institutions watched from the sidelines, the financial press searched for answers till late into the night, and then watched further as each market entity furiously disclaimed responsibility, which they were right in doing.

None pointed out the obvious cause of trouble, the finance ministry. It started from the mechanism devised by the ministry at the beginning of this year to make this and other sales sail through.

It is rare to find an equity market in the world that will condone two secondary market mechanisms operating at the same time with independent price discoveries. Still, on Thursday, while sundry traders operated at BSE and NSE to set a price for ONGC shares among themselves, the government commandeered financial institutions to believe there was a simultaneous market operating where another price for the scrip could be discovered. Sebi had been asked to come up with the rules to make this work and, in all fairness, it decided that entities participating in this pseudo market will have to commit their full money before an order can be accepted as valid. If there is no money on the table, buyers can simply renege on their orders if they see they are making too high a loss.

Based on such a support system, the finance ministry had to do only two things. It had to set a price for the scrip, and refrain from forcing public sector banks and other financial institutions to pick up the issue.

The ministry goofed up on both counts. The price issue has been discussed in this newspaper itself, but the way the ministry blatantly asked LIC to pick up all the remaining paper is unprecedented. Finance ministry mandarins from the past will tell you that when markets had tanked in the past, a brief phone call from the North Block was often heard on Mumbai streets. But even at the height of the command control economy, it was never made so blatant.

It was also because of this manoeuvre that the markets were almost made to lose their integrity. Again, in an unprecedented move, both BSE and NSE had to issue a press release allaying rumours (quite valid, it seemed then) that they had allowed trade beyond market hours. They also had to defend themselves against the charge that their systems had not stood up. The charge was being made by the finance ministry?so preposterous. Sebi, on Friday, was at one level hugely relieved that none of the market participants had taken any illegal measure or even winked at any delay. Even when SHCIL and CCIL were busy comparing notes, all the details were kept transparent. But what Sebi cannot do is to suggest that it was brinkmanship at the North Block that almost brought the markets to grief.

For instance, if it was necessary to make LIC backstop the sale, it should have been warned far ahead. The company received no such warning, not even in the morning when it passed a buy order on ONGC along with others. In fact, it is understood since multiple bids were allowed at different price points, it too had bid low. Among the 1,219 bids that were rejected, there were some from this company too.

But those went into oblivion in the tectonic impact created by India?s largest financial institution when it moved close to R12,000 crore from different sources, including markets, to support the ONGC issue. Some of the reasons why the broader markets tanked on that day will remain buried here, along with a big chunk of the reputation of the Indian stock markets.

subhomoy.bhattacharjee@expressindia.com