Damodaran's agenda

Meleveetil Damodaran takes charge of the Securities and Exchange Board of India at a time when the stockmarkets are in excellent health, with the Sensex reaching new highs and with new issues being snapped up by investors.

Thanks to a series of initiatives launched by his predecessors, market infrastructure has never been better, disclosures and transparency are of international standards, and settlement systems have reduced risks dramatically.

The stockmarket now has a T+2 settlement system, its value-at-risk margining system has worked fine, the derivatives market is notching up ever-increasing volumes and much progress has been achieved in reforming the primary markets.

In short, not only is the Indian market a safer place now than ever before, but transaction costs are lower than in some of the most developed markets, indicating a high level of efficiency. In short, Damodaran is in the happy position of being able to reap the fruits of the good work done by his predecessors.

That doesn't mean there is nothing left for him to do. As a matter of fact, it is the relatively easy improvements that have been done first, and Damodaran's brief will be to implement the more difficult things.

At his first press conference as Sebi chief, he said he had plans to get tough on "mischief-makers." And that's his most difficult challenge. While rules and regulations are in place, the big hole is in the area of execution--market supervision and surveillance.

This is obvious from the routine manner in which stocks are ramped up prior to major news being released into the public domain. Curbing insider trading and price rigging must be one of his top priorities.

In the past, whenever Sebi has tried to get tough, it got nowhere with wrongdoers. Most of its decisions were almost invariably overturned by the Securities Appellate Tribunal.

This points to two things""either Sebi's investigation process is slipshod, or the market regulator is trigger-happy and misuses its powers, or both.

Damodaran's main challenge will be to overhaul Sebi's investigative machinery to make it both more efficient and more market-friendly--admittedly a tough contradiction to manage.

The answer lies in introducing new blood into Sebi. Currently, its key officials are drawn from other government departments, when what it actually needs are people who are market-savvy.

It is people with practical experience of working in the markets who can be both sympathetic to the needs of the market and smart enough to catch illegal practices by operators. Sniffing out market crimes is as much art as science, and it would do Damodaran no harm to make lateral inductions in positions that require such skills.

The new Sebi chief also needs to speed up the implementation of an integrated market surveillance system. He will have to continue improvements in market microstructure, such as transiting to a T+1 system.

The irony is that all these changes have not been sufficient to lure the small investor back into the market, and the proportion of financial assets held by households in stocks and bonds was lower in 2004 than before liberalisation.

He will, therefore, have to carry forward the task of investor education. It is ultimately the retail investor who can counter the market's overdependence on FII flows and the attendant volatility.

Damodaran brings to the table proven administrative skills and an ability to get the backing of the political establishment for his efforts.

These are important strengths to have, but success in this job requires sound judgment and the ability to strike the right balance between no-nonsense regulation and sensitivity to the concerns of market participants.