Business Standard: You have seen the market evolve over the past four decades. What is your assessment about the current state of affairs in the capital market?
G S Patel: The market today is fragmented. We need to integrate our entire capital market system. It is indeed an irony that the technical upgradation in the market, shorter settlement cycles, mark-to-market system, introduced all in the name of protection of investors, are increasingly preempted by speculative punters, and genuine investors have deserted the market. We have developed a 'casino' kind of a trading culture. We have a sentiment-driven market today. While bigger institutions are dabbling in the market through programme trading and portfolio insurance, such facilities are not available for small investors. The market cannot be complete without the participation of small investors. Small investors catch fancy newspaper headlines and trade in the market while FIIs and speculators make money. We can see our regulators talking about introducing derivatives trade. I do not think that we are ready yet.
BS: Why do you say we are not ready for derivatives trading?
GSP: To have a proper derivatives trading mechanism, there is a need for the underlying market to be efficient, safe for the investors and possess the necessary depth. The basic problem is that there is hardly any awareness about derivatives. When your underlying market is volatile, illiquid and exceedingly speculative, equity-linked derivative trading in any form can create more problems than it can resolve.
BS: What are your views about the L C Gupta panel report?
GSP: I do not think the L C Gupta panel has met its purpose. The idea was to develop an appropriate regulatory framework for derivative trading in India. The committee report is a textbook version of derivatives in India without highlighting the dangers and problems which such trading can pose. If the purpose was to educate an investor, he can better be educated by reading a textbook on the subject. Why so much time was wasted to explain only benefits is a mystery wrapped in an enigma which only Sebi or the ministry of finance can unravel.
For example, the committee conducted a survey and interviewed 118 persons of whom 67 were brokers. Many are said to have preferred equity-linked derivatives. There was a preference for equity link derivatives too. This is a very one-sided view on the basis of a small sample.
BS: But only institutions like mutual funds will be the key players in derivatives...
GSP: Yes, but can anyone guarantee that mutual funds in India are well equipped to trade in derivative instruments. Do they possess the necessary expertise? Has the committee highlighted dangers involved in derivatives trade? Have they talked about the anxiety expressed by regulators world over on the fallout effects of such trading on economies? On what basis can the committee say that stock index futures will ease regulatory complexities and curb tendencies of excessive short-term speculation?
BS: You have been the chairman of UTI. What is your assessment about the capability of mutual funds to use the facility of derivatives trading?
GSP:MFs are finding it difficult in India to pay dividends and the market prices of the units of various schemes are much below their net asset values. Their performance has always been a worrisome factor for the investors. LIC MF and Canbank MF had to be bailed out by their sponsors. Millions of investors entrust responsibility of managing their funds to them. Only when the working improves can they prepare for undertaking derivatives trading.
BS: Poor performance of mutual funds was perhaps because of non-availability of adequate risk-assessing capability. How can they perform if they do not get opportunities for risk diversification?
GSP: Most of the mutual funds are yet to put their working on sound lines. They have to understand the risks, and learn the techniques of risk-management.
Can every mutual fund guarantee that they have an expertise to use derivatives and that the investors money will be safe. Is the staff competent enough to take up derivatives trading? There is a lot of groundwork that needs to be done. An intensive training programme needs to be worked out for the staff, supervisory personnel and even the board of trustees should have adequate knowledge of derivative trading. Another area that has not been taken care of is the accounting treatment of derivative trading and the audit part. Do all auditors in India understand mechanics of derivative trading and the risk involved therein.
