More regulation of the markets welcome

Written by Farrokh Tarapore | Updated: Sep 30 2008, 04:06am hrs
The formation of the Securities and Exchange Board of India (Sebi) and its issuance of regulations in the early 1990s saw the birth of the Indian capital market as we know it today. Over the years, we have seen regulations for investor protection, introduction of new infrastructure (eg depositories), development of various stock market intermediaries, instruments and channels. Corporate governance standards for companies and norms for market players have improved the behaviour and disclosure levels in the market.

While such measures have enhanced the reach of capital raising and investment confidence, it is a moot point that most people are still not confident about the overall credibility and integrity of the market and its participants. Is it a lack of investor education Or is it some generally prevalent malaise that must be faulted With global events having taken the centre stage in moving markets and market sentiments, there could well be a view that more regulation is perhaps not an immediate need. But it is to be argued that it is in precisely such times that more regulation becomes necessary. I would consider this need across three areas of market activity, regulatory machinery, and channels and instruments.

Markets move in strange ways: The average investor knows this like no one else. What shakes him periodically are the scams and insider trading reports, which suggest that there is more to market movements than events in the real world. The regulator has his task cut out to bring more strength and visibility to the impact he has on reducing market aberrations. Does that mean more regulating of price bands and trading levels That would be retrograde, indeed. Consideration should be given to sharper surveillance, quick and, in extraordinary instances, harsh action on involved parties. A lot of this responsibility is currently with stock exchanges; Sebi could integrate its teams closely with their surveillance and risk management departments, so that it has the right level of access to information, across stock exchanges and in real time.

Recent guidelines requiring stronger internal controls and audits at exchanges and broking houses are welcome. But qualitative enhancement of these is required for more effective audits. It is often discussed, amongst those it supervises, that its capital market inspections do not focus enough on the risks that matter. But more importantly, like listed companies that are required to comply with corporate governance standards (per Clause 49 of their listing agreements), Sebi must strengthen the codes for all market participants, whereby the board and the CEO would be made individually responsible for the quality of risk management and internal control.

Comparing our regulatory infrastructure with that of other developed markets, there is room for improving the talent pool (to include new skills, particularly in the areas of new instruments, fraud detection/prevention and technology), productivity of the departments, and market infrastructure. With a new leader at the helm, the regulator must now have the will to show some concrete action on these fronts. Our markets are not the most complex in the world, but the investors therein are no different from those having access to stock markets around the globe, be it institutional & retail fund managers, corporates, or individuals managing their own proprietary portfolios. They expect our regulation and regulatory machinery to be in line with the best-in-class.

The last one-and-a-half decades have seen the introduction of many new capital instruments, investment products, and market infrastructure. Sebi would do well to look into how it can enhance the quality of brokers, fund managers and channels that are available to investors. Setting information security standards, data privacy requirements, robust AML norms, more transparency and better service standards are some suggestions for improvement.

The Indian stock market is at a critical juncture. While price volatility and risk taking will continue, it is for the regulator to take stock of where we are and rationalise regulations that have passed their use by date, consolidate circulars & notifications to ease compliance, eliminate regulatory arbitrage, and take actions that are required to be taken now to develop & regulate the market in the next decades. After all, stock markets have stood the test of time because they provide access to risk capital, opportunity to individuals for saving & investment and the country for spurring economic growth. Regulations that further facilitate these objectives will always be welcomed by all.

The author is partner, financial services, Ernst & Young Pvt Ltd