Business Today: Editorial

Wanted: Market-Savvy Watchdogs

It's a classic example of slamming the barn door after the horse has bolted. Last fortnight, the Securities and Exchange Board of India (SEBI) told the Joint Parliamentary Committee (JPC) investigating the stockmarket scam that it suspects price manipulation and possible insider trading in 60 of the 200 stocks that the JPC had asked it to probe. Two things are important to note here. First, it was only at the prompting of the JPC that SEBI investigated trades in these stocks. And, second, the manipulation it now alleges relates to trades spread over the last two years. Which leads us to an obvious question: why did SEBI not act earlier when the suspected manipulation was happening? Because the capital market's watchdog simply does not have the will or the wherewithal to act in real time. Although modelled after regulators like the powerful Securities and Exchange Commission (sec) in the US and the Securities and Investment Board (sib) in the UK, nine years after its inception, SEBI resembles a weak-kneed shadow of that worthier institutions, and is often a hapless bystander when things go amiss in the markets. In the past six years that SEBI's current chairman D.R. Mehta has been in charge, the Indian stockmarket has been rocked by at least two shocking mega scams, both of which could have arguably been averted if the regulator had acted with more will.

If SEBI has repeatedly demonstrated its ineffectiveness in regulating the capital markets, the track record of regulators elsewhere has not been any better. Take the telecoms regulator, TRAI. Although the new TRAI chairman, M.S. Verma, took charge last February, it has taken him eight months to hold the first round of meetings with prospective foreign investors in the sector. It isn't private sector players alone who are unhappy with TRAI. The regulatory body has also dragged its feet on outlining the role of the state-owned VSNL after it loses its monopoly next year. And this could have an adverse impact on the programme to privatise VSNL. Without a clearly spelt out role for VSNL's future, the government could find it difficult to get a good price for the shares it holds in the company.

The problem is not with the regulatory bodies themselves or even the degree of empowerment they enjoy. SEBI, for instance, is vested with a gamut of powers to bring to book insider traders and other violators, yet six months after the second scam, the regulator has not done any more than to come out with a preliminary investigation report. Apart from suspending some entities from trading, SEBI has done little else. No charges have been framed or cases filed.

The real problem is with people who head regulatory bodies. At SEBI, Mehta, who has been chairman since 1995, is a former bureaucrat who has done stints with the RBI and the commerce and finance ministries. True he has also been Controller of Capital Issues (CCI), an office that would issue permission for IPOs in the permit raj. But as most market watchers will agree, Mehta is no expert on the capital market. Contrast that with the profile of the sec's current boss, Harvey Pitt. An accomplished lawyer, Pitt has been a practitioner of securities law and, therefore, is better suited to run the securities market regulator. Despite reforms and modernisation of trading norms, the Indian stockmarket is much less transparent than many of its counterparts elsewhere in the world. Thus, the need for effective regulation is greater. Many participants in India's financial markets have suggested that SEBI should be headed by financial market professionals who have impeccable credentials and integrity. They could bring with them a wealth of knowledge about the markets-a prerequisite for making any kind of regulation worthwhile. Instead, we invariably turn to our retired bureaucrats, bankers, or judges to head our regulatory bodies. The current chairman of TRAI is a retired career banker. And bureaucrat Mehta's predecessors at SEBI have all been development bankers. In an era where licensing is fast being replaced by regulation, instead of settling for superannuated administrators, we need to get market-savvy regulators. To do that we need to look within the markets, not outside them.

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