When I wrote some weeks ago extolling Sebis decisions, I had no idea I would have to eat my words so soon. I was wrong: the zebra had only received a coat of paint.
Of all Sebis ill-conceived acts, its campaign against short selling has been the most ridiculous. Last year it hauled up directors of the Pune stock exchange for short sales, renamed illegal badla, and forced them to resign. In recent weeks it carried its crusade further. It appointed a committee of like-minded persons, and got the verdict it wanted. Then it went on to instruct all stock exchanges to make brokers declare all short sales at the end of the day. Manas Charkravarty pointed out in this paper that knowledge of brokers short positions would enable competitors to either bid up prices or organise shortages of particular scrips and force the short sellers into auctions. He meant to point to the increase in market risk engendered by Sebis move. But Sebi actually saw an advantage in it: that short sales would be discouraged, and price declines which made short sales profitable would be prevented. Inspired by the finance minister, Sebi was on a single-minded crusade to bid up stock prices, and was not
going to be deterred by long-term considerations of market depth and liquidity.
In the hope of making Sebi see its folly, we asked in this paper whether Sebi was going to start asking buyers if they had money to buy. Surprisingly, Sebi took this joke seriously, and asked buyers to declare their positions as well.
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Seeing how far Sebi would go, this paper did not dare point out that the brokers had a simple way around Sebis instructions: they could declare all sales as short sales and all purchases as long purchases. They could then square up within the settlement; if, at the end of the settlement, they actually decided to give delivery or pay for shares, Sebi could hardly prevent that.
Unsurprisingly, that is what has happened; the major stock exchanges report a rise in the proportion of short sales and long purchases. The day cannot be far when all transactions will be declared as short sales and all purchases as long purchases.
I think I know the mindset of Sebi well enough by now, and should be able to predict what it will do next. But for once, my imagination fails me. I think the prize for the best idea must go to my colleague Tony Joseph, who has advised Sebi to ban all sales. Then price declines will be finally scotched in the bud India will be the first country in the world to have tamed the scourge of stock market slumps. Unfortunately, it would also have pioneered a ban on price rises and if prices never rise, what would Sebis favourite small investor do? Or for that matter, the finance ministers favourite foreign investor? That would be goodbye to the dream of $10 billion a year. Admittedly, like all finance ministers good resolutions this $10 billion is meant to materialise in 2001. But the demise of the dream would be immediate. So I do not think that Sebi will take Tonys excellent advice.
The next best step would be to ban short sales and long purchases. Thereby Sebi would achieve the ideal frequently preached by the present finance minister, and earlier by luminaries of Sebi such as Messrs G V Ramakrishna and C B Bhave. Then the volumes on the stock exchanges will decline to about a quarter of what they are now; it will become even more difficult to buy and sell large volumes of shares, and large investors such as the FIIs will be even more reluctant to invest in India.
That is where my brilliant idea comes in. I had held it back all these days because I still had some hope for the capital market. But now I have come to the conclusion that Sebi will ruin the market with my help or without. All my dreams of making millions on the stock market have already turned into ashes. If I do not get the millions, I might at least get the fame or notoriety for giving Sebi the one idea that stands between it and final success.
I would suggest that Sebi should place punitive margins on short sales and long purchases. Its best course would be to place margins of 100 per cent; that way, every short seller will have to put up money immediately to buy the shares he would need to deliver, and every buyer will have to put up the money that, as a long buyer, he was not supposed to have. In this way Sebi will have banned short sales and long purchases without actually doing so.
This, I would submit, is as brilliant an invention as the automatic approval to foreign investment being given by the RBI. The government really wanted to free certain investments from licensing requirements, but it did not want to be seen throwing open the gates to the hated foreigners, so it said that they could write to the RBI, and the letter by itself would signify automatic approval. But the reformers had underestimated the bureaucrats. The RBI has now introduced a form, to be submitted in multiplicate, accompanied by various documents such as the joint venture agreement. Recently a German company applied, together with the agreement signed in Frankfurt. It was told to bring an authorised translation in English. So its representative flew to Delhi, had the agreement translated into English, and had it attested by the German embassy in Delhi. Back in Bombay, he was told that was no good: it had to be attested by the Indian embassy in Bonn. He flew back to Germany, never to return.
Sebi was supposed to be part of the reforms: we abolished the Controller of Capital Issues (CCI) and transferred his functions to Sebi in the hope that a regulator sitting in the financial capital and in touch with the players would be more intelligent and sensitive. Actually, Sebi has achieved a quantum jump in regulation. The CCI had two IAS officers and two flunkeys; Sebi has two IAS officers and 200 flunkeys. The CCI, whenever he came across a problem, would cyclostyle 26 illegible copies of a notification and send them off to the stock exchange chairmen; the chairman of Sebi makes beautiful laserprinted copies and faxes them to the chairmen. The director in CCIs office travelled 100,000 miles a year attending meetings of stock exchange boards as ex-officio director, and came back none the wiser; Sebi employs so many wise men and women that lack of information is the least of its problems. In fact, with computerisation it receives so much detailed information that it has no time to take a strategic view. Brokers hardly ever came to know what the CCI ordained, and so broke rules unwittingly; if now, they break rules, they get a kick in the pants so fast that they do not know whether they are brokers or hardbottoms. If the CCI was a slow-action farce, Sebi is an animated cartoon.