Sebi Pleases All Players

The rising volumes at the NSE owe a great deal to the speed, smoothness and reliability with which deals are struck and completed there. With periodic payments crises still refusing to go away, the mere ability to attract customers from all over the country need not translate into very much larger volumes. The NSEs edge will be even greater as soon as its depository gets going. So while Sebi has met a longstanding demand of BSE halfway (it still has to take the permission of the local exchange wherever one exists), how much good this will do to BSE or to the market in general remains to be seen.

 

The next important decision of Sebi is to entirely stop the vetting of prospectuses altogether. This is a logical culmination of the process started earlier but prospectuses will still have to be filed with Sebi which will have the right to make observations and raise objections within a stipulated period of time. Thus Sebis workload is not likely to go down as it would still be held liable for allowing a flawed prospectus to go through. What it will do is reduce the hassle of issuers and merchant bankers who go about their job with due diligence.

For the market to pick up, investors will have to feel that doubtful issues are unable to come to the market and, more importantly, on the basis of incorrect information and untenable claims. This needs a regular routine of supervision of merchant bankers by Sebi, in conjunction with their self-regulatory organisation. Over time, this will create a hierarchy of good, bad and indifferent merchant bankers as a prelude to the exit of those who cannot deliver.

In the context of the need to prevent investors from being deceived, a particular non-decision is the one to allow corporate advertisements prior to issues, provided they carry the risk factors. This move which will only help the print medium to earn more advertising revenue. It is sound in principle to stop companies from advertising themselves just before an issue but that does not include issue ads. And issue ads on TV are unbelievable. They begin with the most direct hype of the corporate entity, go onto dazzle the viewer with just a few selected highlights and then display a whole screen of closely printed matter under the heading of risk factors for just as long as it takes to blink. This is a travesty of investor protection and if this can go then anything can, with or without the risk factors.

The key really lies in formulating the risk factors in a way that ordinary people can understand and not in a way in which issuers would love to so as to meet the requirements of the law while being as opaque as possible. The highlighting of risk factors today is done mostly mechanistically, in convoluted jargon, leaving none the wiser. Logically, Sebi should redraft them simply and clearly so that at least those seeing only mass circulating material can benefit from them. But if Sebi officials could write that well then they would be earning vastly higher sums writing advertisement copy.

More serious is the decision to allow bookbuilding for issues of all sizes. Book building has been seen as a panacea for the major ill of the Indian system under which issue prices have to be fixed so long before an issue opens that the pricing easily goes haywire, thus leading to not just failed issues but a bad tradition of underwriters trying to wriggle out of their commitments. But after book building was allowed for large issues, it was not readily resorted to. With hindsight, this seems quite natural. Large issues need wide public support whereas book building is conducted at the wholesale or the high net worth level. Wholesalers need a supporting retail tier. Todays problem is that the retail investor has run away. So book building for smaller issues will facilitate their placement but that is not the real problem.

The serious problem is that the mutual funds cannot attract ordinary investors anymore. This is because they made too many promises, serviced their investors poorly and on top of that the bottom fell out of the market. It helps funds to be able to borrow for whatever reason to tide over a temporary cash crunch. It also helps if they can be in a range of allied activities, as has now been allowed. Since sound professionals are in short supply, it helps good governance to even let them straddle the boards of entities which are to be separated by Chinese walls. But if the market is flat on its face and NAVs are struggling at the bottom, then how will new investors be enthused to respond to the calls of mutual funds?

Sebi is slowly tackling some of the nitty gritty which has made for an uneven or unhealthy growth of the capital market in the past. As time passes, it becomes less and less possible to blame Sebi for the markets travails. The micro reforms of the sort that we are looking at are invaluable in laying the foundations of a healthy market. But this is unlikely to revive the market right away.

Sound organisation and correct regulation are necessary but not sufficient conditions for a healthy market. You also need good companies which do not exist to benefit their promoting families and take ordinary shareholders for a ride. To promote good corporate governance we have to ultimately look towards the department of company affairs. Had it had its way, Sebi and investor protection would still have been a long way off. All hope now rests on the new companies bill being drafted which will hopefully usher in an era when company affairs does more than indulge in tokenism in aid of the consumer.