Reserve Bank's announcement of its choice of satellite dealers has understandably caused a furore. It has systematically avoided the firms that have actively nurtured "" rather, created more or less from scratch "" a market in government securities on the National Stock Exchange. Instead, it has selected 14 firms none of which is outstanding for its financial strength or activity in the debt market.
What strange thought processes might have gone on in Reserve Bank's complex mind before it came to this outlandish decision? Reserve Bank will not tell, and does not have to tell; under our peculiar democracy, the actions of bureaucracy are above public scrutiny. The universal conviction amongst the circles who should know in Mumbai is that Reserve Bank employed a negative criterion "" that it excluded all firms that were involved in the scam of five years ago. It is a commentary on Reserve Bank's public image that this impression has taken such a hold; everyone thinks that Reserve Bank, having been bitten up by political mosquitoes for sleeping while banks and brokers made hay, now spends sleepless nights at the thought that some politico may smell a nexus between it and the unconvicted criminals. They are not even criminals any more. The Supreme Court, in a suitably subtle recent judgement, has ruled that the ready-forward transactions in the scam on which Reserve Bank frowned with such ferocity, are only half illegal: that they stand on two legs, one always ready and the other thrust forward, and that the ready leg is legal and only the forward leg is illegal. Thereby the bottom has been knocked out of the elaborate mechanism the government created to dispossess and harass the brokers and banks involved. It is only a matter of time before someone goes to the Supreme Court and petitions it to force the custodian to return all the securities on which he has gorged himself for five years. If, therefore, Reserve Bank is still punishing firms connected with the scam, it is living in a world that has passed.
However, it is naive and perhaps uncharitable to attribute such simple-minded criteria to Reserve Bank. Even if all scam-connected firms are excluded, there are still a number of active traders and muscular financial firms left on which Reserve Bank did not smile. The allegation that firms connected with nationalised banks have been favoured makes more sense in the context of Reserve Bank's maternal instincts; but it too does not explain everything. For now, Reserve Bank's criterion for choosing satellite dealers must remain an enigma.
What is more disturbing, however, is a pattern of proceeding of which the decision on satellite dealers is only the last step. Reserve Bank's task is to create a market for government securities in which the common investor can confidently participate. Neither the structure it has chosen nor the primary and secondary dealers it has chosen have advanced it towards that goal. In the banking system Reserve Bank already has at its command a network with an immense reach to the smallest saver and the commonest investor. This network should be used first. On this logic, every scheduled commercial bank should have been made a dealer; and there was no need for two tiers. Further, to make the business of investment broking pay, banks should be allowed to buy, hold and sell all securities, private and public, for their clients. But Reserve Bank is set on creating an exclusive, hierarchical network for debt alone. So now it will go about selecting tertiary dealers, then quaternary dealers, and so on till it reaches midget dealers. Then it can make rules for all, inspect them, audit them, and send them notifications. That is the art of remaining the most populous central bank in the world, not the art of selling government securities.
