Stumbling again

The Securities and Exchange Board of India (Sebi) has done itself no credit this past week, and certainly not improved its reputation for effective investigation of scams followed by appropriate penal action. To pass three separate, contradictory orders within the space of 24 hours speaks of ham-handedness, action before thought, and even bias. That the market was thrown into a tizzy, and that many investors lost a lot of money, only adds to the general mess. Some of the obvious questions: Why does Sebi repeatedly take action against market intermediaries in such a manner as to hurt investors who are innocent of all wrongdoing""only to say "oops" and then retrace its steps? Why does it follow the strange procedure of combining a charge sheet with interim action, without giving the accused a chance to explain first (after all, market reputation is involved), and leaving behind uncertainty about the final decision? And why does it give a special hearing to one affected market participant, and not others who might have equal claim to urgent redress?

Punishing erring players is central to the functioning of a well-regulated market, but that is different from looking for systemic correctives by changing the structure of incentives. However well or badly (and only time will tell on some issues), Sebi has done the first, not the second. Is Sebi asking for the impossible in prevention of multiple accounts, in an Indian context, where there is no citizen identity numbering system? If Sebi will penalise more than 20 accounts, people will create 19 accounts to obtain undue gains. The only way to block multiple accounts is by using the MAPIN database, where fingerprints are used to ensure no more than one account per person. Will Sebi review its position on MAPIN?

The deeper problem, of course, is the very notion of a retail quota when shares are offered to the public. More than a decade ago, Manmohan Singh tried to get the government out of prices and quantities on the IPO (initial public offer) market. But the government is back to mandating that a certain fraction of the IPO should be reserved for "small investors". This is the root cause of the problem. Share issues should take place with a simple auction""and shares should be allocated to the highest bidders. Then there will be no incentive to place multiple bids. That would be genuine reform, as the market shifts from a quota raj to auction through genuine price discovery.

Sebi comes down hard on the depositories, and targets the top management team of NSDL. This may reflect prosecutorial zeal, but it looks like extreme punishment for problems that are one step removed from the depository business. Sacking the top management of NSDL because there were multiple accounts at banks and depository participants, suggests a loss of perspective. The NSDL mandate""first and foremost""is to be the Fort Knox of the country where Rs 25 lakh crore of financial assets are stored. The top management team of NSDL should wake up in the morning worrying about whether this Rs 25 lakh crore of assets is safe. It is worth recalling how, a decade ago, there was scepticism about whether such a system could work in India. NSDL now has a 10-year track record for flawless handling of this data. The small investor in Kashmir and Kanyakumari trusts in a faraway database to do safe keeping of his wealth: the management team of NSDL has delivered on its core mandate.