By Roshni Jayakar

Securities and Exchange Board of India (SEBI) Chief D.R. Mehta isn't exactly in a good mood these days. You wouldn't be too, if you are told, time and time again, that both, the organisation you head, and, by association, you as its public-face, are in need of dentures. You wouldn't be too, if the harshest action you've taken in decades is dismissed variously as ''too little too late'' and ''fire-fighting'' by critics. That last refers to SEBI's March 12, 2001, decision to dismiss all broker directors on the board of the Bombay Stock Exchange (BSE). The move came in the wake of allegations that some office-bearers, including the Exchange's President Anand Rathi, used their position to access privileged information on broker positions, and traded on the basis of this information, ultimately leading to the market's crash on March 2, 2001.

Mehta isn't amused by market-buzz that the regulator reacts to crises instead of trying to put in place systems to prevent them from happening in the first place. His first reaction is to side-step the accusation altogether. ''We obtained prima facie evidence about manipulation on the BSE on March 2, and we acted immediately,'' he says. He also reels off a list of actions SEBI has taken against erring brokers: memberships of 11 BSE and seven NSE brokers suspended in 1998; the BSE's then President, J.C. Parekh, asked to quit following his role in the summer-1998 payment crisis; 31 brokers suspended in 1999-2000....

Remind him that he still hasn't explained why SEBI fights fires instead of ensuring they don't happen-why for instance, the regulator put the issue of demutualisation of exchanges (member brokers become shareholders and the exchange functions like a corporate) on hold for two years-and he has a ready defence. ''Demutualisation has been on our agenda,'' purrs Mehta. ''It was even mentioned in our 2000 annual report; but it requires changes in tax laws.'' Budget: 2001 didn't contain these changes, but with the GOI having announced the corporatisation of all exchanges now that should happen soon.

Even if one were to accept what Mehta has to say, there's a lingering doubt on why the regulator steps in only when there is a crash. Surely, it must have observed bulls building up positions in a few scrips and taking the market to new highs. So, why wasn't anything done? ''The market goes up and down,'' says Mehta with the stoicism of Pontius Pilate. ''It's not SEBI's job to control the rise and fall of the market. We intervene only when we believe there's been some manipulation.'' And so Mehta and SEBI are content to let the exchanges do it all: make their own rules, investigate customer complaints, and watch for manipulation. As L.C. Gupta, the Director of the Delhi-based Society for Capital Market Research and Development, puts it: ''SEBI has tended to err in favour of traders and market operators.''

SEBI's attitude, then, begs the original question: shouldn't there be a system in place to prevent such aberrations? On American exchanges, for instance, there is a system of monitoring trades every hour and publishing information of who's buying what and who's selling what on bulletin boards. There's a system on Indian exchanges too. It even has a name, Stock Watch, but not all exchanges have implemented it. The NSE has the system, but there's no practice of making the information public.

SEBI's chairman insists that the regulator did, from time to time, take steps to control upward volatility. Like the Rs 4 crore limit for a broker's positions; an overall broker-limit of Rs 40 crore; higher special ad hoc margins on scrips with low floating stock; the identification of 10 high volatility scrips with outstanding positions and imposing additional margins of 5 per cent on them; an increase of 5 per cent in daily- and carry forward margins; and the like. Mehta also doesn't like the insinuation that SEBI didn't warn investors adequately during the recent bull run: ''We asked exchanges to give us reports on their top 20 brokers on parameters like concentrated positions (several brokers having long positions in a particular stock), circular trading (a group of brokers buy and sell shares in concert to generate volumes in a particular stock, basically to lure other investors), and margins paid. The exchanges gave us four such reports and then, we did caution investors.''

To be fair to SEBI, the real problem lies in the fact that broker-run exchanges haven't exactly been models of self-regulation. Exchanges do have market-surveillance departments, and it was SEBI that insisted that these be clearly demarcated from the rest of the exchange. Still, the very fact that BSE President Anand Rathi allegedly obtained information from the surveillance department, indicates that all is not well in broker-managed exchanges.

Few Results To Show

SEBI is quick to initiate action, but it hasn't been able to punish the culprits. That's a common refrain in market circles. And it is based on hard facts. It is a year-and-half since SEBI completed its investigation into Harshad Mehta's 1998 rigging of the Videocon, BPL, and Sterlite shares but the regulator is yet to initiate action against the offenders. Make that the main offenders: some brokers on BSE and NSE were suspended, but there has been no action against the main offenders, including the companies involved and Harshad Mehta. SEBI's D.R. Mehta says, ''The companies involved and Harshad Mehta asked for the cross-examination of witnesses.'' The regulator, he adds, has sought legal counsel and is now ready to act.

SEBI has also not acted quickly enough to prevent inter-exchange arbitrage. It happened in 1995-96, and the regulator did investigate it (the result was the superseding of the board of the Pune Stock Exchange); but it happened again in 1998, and more recently, leading up to the March 2, 2001, crash. But the issue of adopting a uniform settlement cycle has been hanging fire for the last five years.

SEBI's track record in initiating action has caused the perception that it is sympathetic to brokers. For instance, after the 1998, payments crisis, even while SEBI's enforcement department was investigating lapses on the part of BSE administration, another department went ahead and gave the exchange the permission to start a depository.

It wasn't just ineffective regulation that caused the recent mess on BSE; it was multiplicity of regulators. The RBI allows brokers to borrow money from banks against shares; these borrowings may have been used to ramp up prices. There seems to be little exchange of information between SEBI and the RBI on the magnitude of borrowings. Ideally, the former should track trading patterns, the latter, bank lending, and the two should share information to prevent excesses like GTB's loans to Ketan Parekh.

Then of course, there is a familiar grouse. Every bull-run is accompanied by initial public offerings of companies whose name would seem to suggest that they are in the software business. Like Express Financial, which changed its name to Helios & Matheson Information Technology. Months later, in October 1999 the promoters came out with a public offering in October 1999 to raise Rs 1,081 crore at a premium of Rs 40. The share is currently quoting at Rs 6. Or the case of Aftek Business Machines, which changed its name to Aftek Infosys. At its peak, it was quoting at Rs 4,600, but is down to Rs 147 now. SEBI did transfer some of these scrips to rolling settlement, but that hasn't helped the small investors who got taken in.

Putting some teeth into the law

The explanation you'll hear often from SEBI's functionaries, that they do not have enough powers, actually has something to it. All the regulator's directives are issued under section 11B of the SEBI Act. Its diktats get challenged in court (Anand Rathi has moved the Mumbai High Court on the regulator's decision to bar his brokerages from trading). The Justice Dhanuka report, which recommends the strengthening of SEBI's powers, has been waiting to see the light of day at the Ministry of Finance since November, 1998. If its suggestions are adopted, SEBI will have powers to 'investigate and enforce'. Right now, these powers are vested with the DCA (Department of Company Affairs). But with the finance minister now keen to be seen as a market reformer, the GOI has promised more powers to SEBI.

But merely empowering the regulator, says Gupta, won't help: ''The real fault lies in the regulatory framework.'' Or the absence of one: SEBI has no long-term policy on short selling; and it has made no moves to introduce a uniform settlement cycle, or to implement rolling settlement in all stocks. It is only nine years after its creation that the SEBI has seen fit to rule that its officers shouldn't trade since they were privy to market sensitive information. Hopefully, it won't take long to reform the markets.

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