The USAID-funded Financial Institution Reforms and Expansion (FIRE) project has became the first casualty of the post-Pokharan sanctions when it closed its three-year old project on August 14. During its tenure, the project's principle areas of involvement have been: assisting the establishment of the National Securities Depository, assisting the Securities & Exchange Board of India (Sebi) to provide a transparent and well-regulated market, assisting stock exchanges with clearing and settlement activity and promoting mutual funds and debt-market environment. Denny Thomas and Pradipta Bagchi spoke to Dennis Grubb, principal consultant capital markets, Price Waterhouse Fire project to take stock of how the capital markets have developed and matured in the last four years. Excerpts from the interview:
How has the capital market changed during your stay in India?
Prior to 1992, only listed companies that were approved by the erstwhile Controller of Capital Issues could raise money. Then there was liberalisation. That opened the market to a flood of new issues.
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What happened next is an entire restructuring of the marketplace. It is due to the creation of Sebi that you had the establishment of a regulator. Sebi is not run by the government. It is a semi-autonomous agency with its own rule-making procedures and with its own statutes and it is run by bureaucrats. Most people make the association because most of these people have come from government.
Is Sebi being manned by bureaucrats a problem?
The Securities Exchange Commission of the US is also run by bureaucrats. But in the US, there is a professional cadre that recruit and train these new entrants. There is this emphasis on training and constant retraining.
The type of people who man the regulator in very important. The people in the market had experience in trading stock but they have not had experience in being regulators. Trading stocks and regulating the trading stocks are two different things. You need information for trading stock. That is different from than looking at rules and regulation of the industry. People expect, which is an unfair expectation, that the regulator be a trader.
So the positive thing is that India today has regulation which puts in on par with other markets. Then what happened during the past five years that there has been tweaking and fiddling with the process like issuing of stock, trading of stocks and clearance and settlement practices and protecting the investor. And Sebi's task has been to look at all these things.
Where has there been the least amount of progress?
On the investor side. The industry still does not service the investors. In the three years that we have been in India, we have realised that what is different in India is the distribution system. And that distribution system does not serve the customers. The distribution system in aimed at servicing the investors. Unless that changes, this market will remain like this for the rest of your life.
Sebi can do every thing it wants to do, but you have to change the distribution system. The broker and the sub-broker is the interface with the investors in the securities business in the primary and secondary market. They are the most significant intermediaries there is. The level of confidence in the securities markets depends largely on the quality of service provided by them. And we all know that it is pretty bad. What moves markets is not the FIIs, not Sebi, not margin calls, not demat securities but confidence alone.
Is it also a problem that all types of firms have tried to raise capital?
There are hundreds of bad companies that try to raise money in the US markets. In roaring bull markets every company tries to raise money. But if the fundamentals of the company are weak then the future is very predictable.
But the point is that investors have no confidence. Investors vote their confidence with their feet, with their money. And money flows with his confidence. Right now the Indian market is very fluid in retail financial intermediation. There are all kinds of people in this business, including the brokers, sub-brokers, the insurance agents, the NBFCs and also the banks that take deposits.
The role of intermediaries have to be clearly defined and responsibilities have to demarcated. The most surprising fact is that a majority of these intermediaries are unknown, unregistered, and therefore, outside the regulatory authority. The market regulator has to have details of every of these intermediary, and that too in minute details. Only 38 per cent of these intermediaries are registered, which means 62 per cent of the people selling financial products are not registered. Intermediaries must understand the process of business in which they work. Everybody who sells financial products in US must undergo this training. Only a small portion of the intermediaries _ brokers, sub-broker_ canvas for new business. And a substantial portion deals with clients only when they contact them.
What can Sebi do?
Sebi needs to say that only those who meet these criteria _ licensing, registration and testing supervision _ will be allowed to set up shops. Then change the distribution system. Without this there no growing market. It is a sales business and Indians are not prone to selling. But that is what is this business is all about. That is what it is in the rest of the world and so that is the standard now. So if India says that it is going to be different then they can do it but they everybody leaves. The FIIs have no interest in the value of the Indian investment unless they can distribute stocks.
What has been the biggest achievement since liberalisation?
The establishment of a depository. It is serves everybody, the investor, the regulator and the company. The objective of the depository is to have a 100 per cent demat environment. As and when this happens investors will be able to transfer of ownership immediately, and receive payment immediately.