Sunil Jain: Forget CBI, try NYT

RATIONAL EXPECTATIONS

Given the emphatic denial by the Prime Minister's Office (PMO) about its role in keeping tabs on the stock market, we'll never get to know if, along with the taxman, CBI, IB and DRI sleuths were actually asked to get in the act and figure out just where the money in the market was coming from.

What's more important, however, is that much of the solution lies with the stock market regulator, Sebi, which continues to drag its feet on major structural changes.

A good way to examine things is to look at what the major concerns/rumours doing the rounds are. For several months now, there's been a rumour that of the 450-plus depository participants (DPs) in the country, some were trading using securities owned by you and me, having previously marked out depository accounts in which there are hardly any trades for months at a time, if not years""while all our share records are maintained in either the NSDL or CDSL. These depositories function on the basis on instructions from the DPs.

Another concern is that there's a lot of insider trading, and that mutual funds owned by big companies are trading in the parent company's shares""even more important when you consider that, in value terms, much of the bull run really boils down to the prices of a handful of shares skyrocketing.

A simple solution to the first problem is to increase the net worth requirement for DPs, which will reduce their number, and mandating that broker-promoted DPs will not be allowed since there is a clear conflict of interest here.

Another solution, suggested years ago but turned down each time, is that the NSDL/CDSL be asked to email investors the changes in their depository accounts as soon as they occur""even SMS alerts of the type Citibank sends to users on credit card purchases is something worth toying with.

Once this is done, and investors begin coming back to report discrepancies in their account statements, a large part of the problem/rumour will disappear as it will become obvious that misusing the shares in dormant depository accounts will no longer be so easy. To cite a parallel instance, it was only when Harshad Mehta knew that the SGL accounts were not regularly scrutinised that he was able to figure out a way to use this to finance his purchases.

As for the issue of company mutual funds trading heavily in group company shares (is Reliance's mutual fund buying a disproportionate amount of Reliance shares, or is the Tata one doing the same with Tata firms, for instance?), it should be made mandatory to disclose the end-of-day position of each scheme of each mutual fund""this, by the way, is the international best practice, but is not followed here.

The NSDL/CDSL have this data anyway, and while this has been opposed for years, arguing that generating such voluminous data is a costly and time-consuming process, a reasonable cut-off could be set for reporting.

Today, when such data are declared on a quarterly basis, it gives operators more than ample time to square off transactions, leaving no one any the wiser.

Insider trading is another issue on which Sebi has simply not acted appropriately, and this has assumed serious proportions, especially in what are known as "penny stocks".

Today, the biggest problem is that we just do not know whether and when company promoters are trading in their own stocks. Sure, you get the odd statement saying that Azim Premji has sold so much of his stock at a certain price, but this is just one of hundreds of notices flashed on the NSE site every day, and there is no one database where this can be accessed if, for instance, you want to know what "insiders" in Wipro traded in the company's shares, for instance.

Contrast this with the New York Times (NYT) site, which I visited. Once I put in a query on IBM, one of the crossheads I got was called "insider trading". I then got the details of all the last 10 trades done by IBM insiders, and once you click on each, you get the full picture of how their holdings have changed historically""after all, since an insider has the best knowledge of a company, his/her sales/purchases of company stock are something everyone should know about.

Indeed, the NYT site has a lovely graphic on IBM's stock price over the past few months, with arrows showing when insiders bought and sold the stock, with details of how much stock was bought/sold.

In India, however, there is no such database since companies are not required to file information in such a manner. Indeed, over two years ago, there was a proposal to define who company insiders were""promoters, their families, suppliers, and so on""and this was finally accepted by Sebi's secondary market's committee but has been lying with the legal department for almost 18 months now.

Until such time as the regulator starts getting more proactive in bringing in more and more transparency into the system, we're going to have to fall back on asking the DRI, the IB and the CBI to probe the market each time there's a sharp rise or fall.