The Joint Parliamentary Committee (JPC) probing the stock market scam has rejected the Securities and Exchange Board of India's demand for a separate authority to monitor flow of funds into the securities market.
In its draft report, the committee said monitoring fund flows was a vital task in the surveillance activity and ought to be performed by Sebi.
"Establishment of yet another agency might further compound the problem of lack of coordination. Sebi should be vested with all necessary powers to undertake this task effectively and efficiently," the committee recommended.
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Calling for a surveillance set up which should be futuristic, the committee suggested that compulsory listing of a company in a regional stock exchange should be done away with.
All exchanges should put a standard stock watch system in place, it said, asking Sebi to show urgency in ensuring this. It also said the regulators, Sebi, Reserve Bank of India, Enforcement Directorate, I-T Department, department of company affairs, should evolve a formal information sharing arrangement.
Coming down heavily on the capital market regulator, the committee said it was distressed to note that Sebi had failed to investigate the fund flows and the extent of involvement of corporate houses even though NSE had emphasised in its reports to Sebi on August 18, 2000 the need to study the extent of involvement of the group companies and fund flows that supported the volumes of certain ICE scrips.
Terming Sebi's neglect as inexplicable, the committee said the regulator did not undertake any investigation to ascertain abnormality in the institutional interest on a similar NSE report in August 2000. The JPC draft report said that had Sebi undertaken speedy investigation on two BSE reports in December 1999 and February 2000 dwelving on the scrips of two corporate bodies, the price manipulation in these scrips could have been detected and subsequent crisis prevented.
Taking a dig at the functioning of stock exchanges, the committee has recommended suitable action be taken against the executive director of Calcutta Stock Exchange after a thorough investigation to determine his criminal negligence and dereliction of duty that led to a payment crises in CSE.
It also said that appropriate criminal penal action be taken against the broker-directors of CSE who exposed the investors and the exchange to grave risks by their deliberate failure to initiate steps for rectification after determining the extent of their culpability.
It did not spare the then Sebi chairman and officials of the regulator who served as nominee directors in CSE in the relevant period and said they failed to take effective corrective steps to curb unofficial badla and remove other deficiencies prior to the payment crisis.
With respect to Bombay Stock Exchange, the JPC said seeking trade related information from the surveillance department by a broker-director was "price sensitive" and erode the confidence of investors. "It is shocking to note that the executive director of BSE, A N Joshi, did not consider the instances of Anand Rathi seeking information from the surveillance department objectionable," the JPC's draft report said.
The JPC also noted that the automated lending and borrowing mechanism of National Securities Clearing Corporation Ltd introduced in February 1999 was modified within 10 months in December without proper approval of Sebi. The modified ALBM incorporated features of the deferral product and it did not have risk containment measures which are normally required in this regard.
"The committee does not think that NSE was so naive as not to know that the revised ALBM was beyond the scope of the securities lending scheme. The committee expects NSE to exercise due care and caution and observe due process before introduction of a scheme keeping in view the larger interests of investors," the draft report said.