(This was the gist of a dialogue with SEBI at an event held by Chennai International Centre. I wrote this for a magazine named Industrial Economist)
SEBI- Gaps in Oversight
At the outset, let me say that 1992 marked a turning point in our capital markets. For the better. The Securities & Exchange Board of India was set up to regulate the lawless capital markets, which were mostly governed by the stock brokers and we had nearly twenty regional self-regulated stock exchanges. It is thanks to SEBI that there is now some order in the market and there is confidence in the systems.
However, there are some gaps, which SEBI needs to address. Expanding the market is not its primary role. The important things that SEBI has to do is in the areas of ‘disclosure’ and ‘enforcement’ of the letter of the law in the capital markets.
In the battle between the companies and the regulators, the regulator has lost. Since SEBI came in, I am seeing disclosure of company accounts getting LESSER rather than more. While the text part where companies talk about themselves have gone up and schedules are added about steps taken to bring gender equivalent, schedules that used to show production, sales of different things the companies made, have gone missing. Now we have ‘consolidation’ of accounts (a summary of the company plus ALL the subsidiaries and associates) as a rule, but detailed accounts of the subsidiaries and associates have gone missing. Even the web sites of the companies do not carry it. Some do, but it is not a legal compulsion yet. Thus, financial disclosures have become opaque. The balance sheets have become high on pages and low on content.
Similarly, take the case of “IPO”s. There are ‘offer documents’ that run in to a few hundred pages. However, no investor sees this as these are only uploaded online. There is a ‘statutory’ advertisement in the newspapers which give so many details. However, the details miss out on simple and very important things- What does the company do to make money? What is its business? How long has it been around? What is the valuation of the company going to be after the issue is over? What were the sales and profits numbers in the last couple of years? Who are the individuals behind the holding companies that are shown as ‘promoters’?
The regulator has focused so much on details, but missed out the obvious ones. This makes me wonder as to who does the regulator work for? Is it for the companies? I clearly see that the investor has more hurdles to face when it comes to relevant information.
Similarly, SEBI is over active when it comes to things like ‘independent’ directors, ‘women’ directors etc.. However, these are good sounding things rather than being actually useful. Firstly, no promoter will ever appoint anyone who is not known to him/her on the board. And unless one is a full time director, the person’s knowledge would be limited to what he or she is told by the CEO/promoter. And if for instance a company pays an ‘independent’ director, who is a professional, a crore of rupees plus five star perquisites, is the person ‘independent’? Governance is something that law cannot bring about. Transparency is limited by the intent of the promoters.
SEBI can help governance by a deterrent punishment system rather than ask someone to follow a set of rules that are riddled with ‘escape’ clauses or loopholes. It is unfortunate that the legal help of SEBI when it comes to prosecution. They are unable to pay for the best available legal counsel. And the private sector legal counsels do not seem interested because of fear of losing commercial business. So we see less than ideal prosecution, lot of overturning of decisions by the SAT (Securities Appellate Tribunal) which can be demoralizing. Will SEBI get smart talent by paying market related fees?
When it comes to regulating orderly market where price discovery is free, there are obstacles. Instead of narrowing the options (like limiting the number of stocks in the F&O to a handful) the regulator has thrown open the door for a free-for-all. Of the 2000 listed companies, not even 200 are ‘liquid’ in terms of tradability at low impact cost. The exchanges want volumes. SEBI should be blind to that and enforce what is good rather than focus on expanding the market.
Today, our markets have come a long way. We are able to attract marquee investors to our trading floors. This has been possible only to the framework created by SEBI. I wish some of the gaps in disclosure and enforcement are also filled up. Otherwise, SEBI will be like the cops in the Indian movies. Showing up after the story is over.