With a Sahara and a Saradha looming large in the public conscience, it is easy to see the stock market regulator as one who is unable to cope with rising scams. The reality, as
Securities and Exchange Board of India (Sebi) celebrates its silver jubilee later this week, is quite different. Sebi, it is true, hasn’t really been able to make a significant impact in insider trading cases in anywhere near the manner the SEC in the US has in high profile cases like Raj Rajaratnam and Rajat Gupta. Sebi’s approval process for clearing IPOs remains time-consuming and the rigid methods prescribed for achieving minimum public shareholding made little sense. In the Saradha case, Sebi knew about what was going on in 2010 but was able to take action only in 2013; similarly, in the Sahara case, it got to know of the over R24,000 crore raised only by chance.
None of this, however, should obscure the tremendous progress of the last 25 years. Sebi’s biggest achievement was the introduction of screen-based trading with computerised match-making, which meant brokers could no longer rip-off clients by reporting incorrect prices of trades carried out by them. Introduction of a T+2 settlement mechanism meant sellers could get their cash within just two days of a trade as opposed to the 3-6 weeks it took prior to this. The even bigger change was that of dematerialisation of shares. While fake/lost shares were a regular feature of the 1980s and even the 1990s, introduction of demat put an end to all of this—when is the last time you heard of a problem of fake shares? Demat, along with tough regulation of depositories, also lowered transaction costs to amongst the lowest in the world. Derivatives and options were brought on to a transparent screen-based trading platform, and disclosure norms have been increased significantly. To be sure, many problems remain—small investors still shun the markets which remain too dependent on FIIs, and instead of attracting retail clients, mutual funds largely function as extended arms of corporate treasuries. If Sebi is not able to fix this, some part of the blame has to rest with other regulators who need to rationalise incentives across different investment products—in the absence of this, lowering mutual fund commissions as Sebi did was probably a bad idea. On the larger issue of insider trading and other fraud, Sebi can do little till the government dramatically increases its staffing and funding—SEC has around 4,000 employees versus Sebi’s less than 600. Sebi also needs to be given the power to tap phones and sophisticated computer systems to match trades with other sensitive information. Given its limitations, though, there is little doubt Sebi has done very well and stock markets today look nothing like the broker-run cabals they were 25 years ago.