Sunil Jain: This is the first of many such roundtables on the Jalan Committee Report to be held across the country?various media companies and chambers of commerce are holding similar events. Hopefully, it?ll also be the best. This roundtable has been sponsored by MCX-SX. In order to ensure we got all sides of the debate on the Jalan report, FE invited the National Stock Exchange, Sebi and members of the Jalan Committee?while some refused, others cited operational problems. So, I?m going to ask some of the questions these worthies would have posed!

The main questions: 1) Is it possible to start off an exchange, or any business, with a 5% cap on equity for individual shareholders (this is relaxed to 24% in the case of banks and FIs);

2) How does this gel with the fact that other financial sector regulators, such as RBI, allow even a 50% individual shareholding; 3) Should exchanges be allowed to list; 4) Should profits be capped; and 5) Should compensation structures be fixed by Sebi?

We have a great panel. Rajesh Chakrabarti is Assistant Professor of finance in the Indian School of Business; Surjit Bhalla runs Oxus Investments and is the author of a paper on the issues before the Jalan committee; Sandeep Parekh runs a financial sector law firm, but he?s here as a former executive director of Sebi, in charge of enforcement (by way of disclosure, Sandeep gave advice to MCX-SX in its standoff with Sebi); KV Thomas is a director of the Inter-Connected Stock Exchange and U Venkataraman is the Executive Director of MCX-SX.

Let?s begin with you Rajesh.

Chakrabarti: The report is timely, well-argued and makes sense. It is based on some amount of data, provides a structure and an evolution from the existing MIMPS system, and, on the whole, errs on the side of caution. Competition is a great idea in itself but what about stability? Competition in the financial markets hasn?t done that much good on Wall Street! Stock exchanges are the first-level of regulators and allowing them to list can lead to the race to the bottom.

Jain: You?re saying NSE has given us reasonably good service, so why try to fix things (like getting in more competition) if they ain?t broke. Surjit?

Chakrabarti: And 30% of the market is outside NSE.

Bhalla: I am afraid Rajesh hasn?t looked at the numbers?to cite just one, NSE has 96% of the market, so we do need competition. The other interesting statistic is that the NSE volume is half of India?s GDP and 96% of half of India?s GDP is traded on one exchange. The report has only conclusions, no analysis. Bimal Jalan is the best central bank governor India has ever had, so it?s a good idea to compare this report with an RBI report on the same issue of ownership, of banks in this case. That report had all the facts, not just assertions like this one has; it left it to readers to decide.

Jain: Sandeep, the 5% cap is to prevent promoters from doing unethical things. They can download sensitive data, on who?s buying for instance, and front-run; they can allow circular trading ? Are the fears exaggerated? Can we still have the kind of problems we saw in BSE several years ago or are the audit trails now good enough to prevent this?

Parekh: If there is the slightest hint of any wrong-doing at an exchange, the exchange will collapse in one day. If I am an owner of an exchange, I am not going to like that. So it is in my economic interest not to allow any kind of wrong-doing.

Jain: I don?t get it. If there are a bunch of brokers in cahoots with the exchange?s management, why will the exchange collapse? The brokers will keep trading on it.

Parekh: The brokers don?t provide volumes, it is the clients who do and they are mainly institutional clients. 500 people account for 50% of all equity trades, 100 people account for all derivatives trade. Coming to the bigger picture, the 5% cap is not universal. Look at Annexure C of the Jalan report and you?ll see the report has misquoted its own Annexure. Not a single country in the Annexure has a 5% cap, not a single country has a 5% voting cap either?they have disclosure and permission, to prevent a Dawood from running an exchange. That makes sense since you cannot have 20 people enter into a room at the same time and all 20 of them simultaneously think of starting an exchange?that?s what the 5% rule says!

It?s also bizarre that the report wants to allow banks to hold 24% of an exchange. We?ve had four JPC reports so far, two have pertained to stock market scams and both of them go hammer and tongs at the role of banks and financial institutions! There are seven chapters in the 2002 JPC report that talk of financial institutions being a part of the scam and one entire chapter on banks.

Curtailing profitability means people will not invest?I don?t think we can get more competition with restrictions on ownerships, on profitability etc. Sebi deciding on how many stock exchanges we should have is a bit like what A Raja was doing in the case of spectrum/licences.

Jain: Mr Thomas, is it possible to set up a new stock exchange with the 5%rule ?by the way, this is not a Jalanrecommendation but was always there; Jalan has just stuck to it. Do you agree that if an exchange gives good profits, you can get people to buy shares even without listing? So investors have an exit route.

Thomas: We have to create the competition, only then can we achieve better things tomorrow. When we talk about the competition, capping off the profit may not be the best idea, similarly we should have a wider participation from as many people as possible. Esops allow the management to get better performance. The other thing is listing, which I think gives you more transparency.

Stock exchanges may be the first-level regulator but those regulatory functions are based on Sebi rules that they just implement. They don?t make rules. So it?s ok to list them; many stock exchanges around the world are also listed.

Jain: The report is saying that if you manipulate a stock exchange, you can get a huge surge in trade volumes? so it is more vital to regulate an exchange than a bank, isn?t it?

Bhalla: So you can manipulate a bank also.

Jain: Banks don?t have members who trade with themselves.

Bhalla: Banks have defaults, banks have fraud? The mistake you are making, which the report makes in abundance, is to say we don?t want any accidents, so we won?t build. You cannot eliminate fraud. You cannot eliminate murder. Therefore, the policy should not be that I want to eliminate murder.

Jain: Ok, we?ll get back to Sandeep since this is his area but first, your comments Mr Venkataraman.

Venkataraman: The report begins with Growth and Governance but ends with Perpetuation and Protection.

In 1990, the Pherwani committee was formed. It said the leading equity cash exchange had a 75% market share?the new stock exchange comes into being in 1995 and today has more than 80% market share! Observation 2: 80% trading is concentrated in A category scrips. Today, over 85% concentration is in A scrips! Observation 3: We need an SME exchange?in 2010, there is a pressing need for an SME exchange! Observation 4: There is minimal participation in the capital market. Today, Rs 93,000 crore of the Rs 100,000 crore trading is in derivatives?is this the capital market we are talking about? Last observation in the Pherwani committee report: the number of products is very small and we need to develop the debt market?in 2010, we don?t have a debt market!

Banks are a 3-6-3 activity?take money at 3%, lend it to a needy person at 6% and go to play golf at 3pm. The sub-prime crisis concerns only banks and financial institutions and you want to bring them into stock exchanges. Look at the global markets. In global markets, 13% of trades are in equity, 80% in derivatives and 7% in other asset classes. In India, we don?t have any other asset class. The currency futures market was allowed only in 2008 after much discussion, and there is predatory pricing here. So what is the growth that we are talking about?

On the specific issues of listing, the report says if the stock price fluctuates, the credibility of the institution will be questioned. The leading public sector bank has got a Rs 10 lakh crore balance sheet, the share was quoted Rs 3,300 just 10 days back, yesterday it fell below Rs 2,700?has anyone withdrawn money from the public sector bank?

It is a folly to say that market integrity and confidentiality will be lost if more stock exchanges come in. Banks have got a lot of information. Can I write to SBI and ask it to disclose Sunil Jain?s assets and liabilities?

Jain: Sandeep, you say FIIs who provide volumes will move away if you run a rigged stock exchange. But can we have the kind of fake trades being inserted into the exchange?s computer like we saw in BSE many years ago? Can a stock exchange management know who is buying what share?can it know Blackstone is buying SBI shares and pass this on to others?

Parekh: That?s a great example. Between 1995 and 2000, both NSE and BSE competed and BSE managed to hang on to around a 50% market share. It was after that famous scam, which you spoke of, that the slide began and BSE is down to 4%?in this case, the information was breached but it was not misused, but BSE?s collapse began then.

Jain: Answer my specific question. Can I find out what Blackstone is doing and then tell Surjit Bhalla about it?

Parekh: Physically you can, go into the surveillance department, which is what happened in 2000.

Jain: But that?s precisely why Jalan doesn?t want owners to control the management.

Parekh: I go back to my original point about the exchange collapsing once rigging happens.

Jain: You lose business only if people get to know you?re rigging.

Parekh: Sebi can track you if you buy 100 shares of any company, your PAN number is in the Sebi system. If Blackstone is going to buy something and you front-run, it is very easy to track you because you are not going to buy 5,000 shares of that company, you are probably going to buy Rs 50 crore worth of that. Sebi has the best surveillance system in the entire world. On a real-time basis, it knows even if you are buying Rs 100 worth of shares.

Bhalla: The rules and the regulations are being made with a mindset of the 1970s. No one is recognising that the technology has changed immensely. I can buy data by the tick from NSE and find out if there?s circular trading. Everybody has the data. The view that I can get away with even the slightest misbehaviour is just outdated.

Venkataraman: But if there is no competition, I can do whatever I want!

Jain: Rajesh, before you respond to what?s been said, just one question. The US and others are able to separate the regulatory part of the stock exchange from the trading part. Why can?t that happen here?

Parekh: It?s pretty easy. The exchanges are just enforcing Sebi?s rules and this just needs to be outsourced.

Jain: Rajesh, you have 2 minutes to defend yourself! Just the main points.

Chakrabarti: Mr Bhalla says the report does not make any arguments, it just makes conclusions. Well, much of the argument comes from the 500 page document produced by the Oxford Finance Group. The study was sponsored by a variety of international organisations and the report was prepared by 28 contributors. To Sandeep?s point, I didn?t say the 5% rule was universal, I said it is widespread and I still hold to that.

Parekh: Not a single country has 5%.

Jain: You?ve had your say, Sandeep.

Chakrabarti: If a bank can list, why can?t a stock exchange list? Well, the bank lists but it cannot do anything about the stock prices?so the parallel between the bank listing and the stock exchange listing just does not hold.

How is the stock exchange a utility?

It is one because, in this business, benefits come from size. It is sub-optimal to have 25 exchanges. The more exchanges you have, the more fragmentation you get; the benefits of size disappear.

Jain: Well, thank you very much for your comments. I?m not even going to try to summarise since the views remain as polarised as they were at the beginning, but I think the audience has got a good sense of the issues, of the rationale behind the Jalan report and how our panellists feel about it.