Carving Up The Broking Cartel

AS the new governing board at Dalal Street's Jeejibhoy Towers gets ready to celebrate BSE's 125th anniversary next year, its mandate is clear: shape up or ship out. With market watchdog SEBI deciding to get the old guard out, BSE president J.C. Parekh has received his marching orders. Observes D. Vakharia, a BOLT (BSE Online Trading) trader: "Sacking Parekh was unfortunate, but the message is clear. For the first time, SEBI has thrown an open challenge to the old boys' network which has been running the premier stock exchanges like its personal fiefdom."

SEBI has gone on the attack mode since March 11—the last day for submitting applications for the election of governing board members—when it intervened by introducing changes in Rule 100 of the bourse's bylaws. This enabled even a fresh corporate member to contest the polls and enter the board. The elections were held to replace the board members retiring on March 31: M.G. Damani, former BSE president, Jayesh Sheth, director of Kantilal Chhaganlal Securities, Padmakant D. Shah of Padmakant Devidas Securities and Rajendra Banthia, former vice-president, who had stepped down from his post for his alleged involvement in price manipulation a few months ago.

The election result, which divided the exchange evenly between the old guard and the new, probably reflects the way SEBI's gauntlet has been accepted by the broking fraternity. The old-timers include Bhagirath Merchant, Madhukar Sheth, Jayesh Sheth and Bhanu Kumar Fozdar, while the Young Turks comprise Himanshu Kaji, Dinesh J. Shah, Cyrus Shroff, Motilal Oswal, Ameet R. Dalal and Rajendra Prasad Jhunjhunwala. Merchant, a former president, polled the maximum votes (251), followed by Oswal (248), Jayesh Sheth (211) and Kaji (210). Says a broker: "Unlike the traditional Gujarati-Marwari contest so far, this time we saw a fight between professionalism and patronage." And then on April 1, when Anand Rathi, the ex-Birla man who played a key role in introducing and implementing BOLT, pipped Merchant and Dina Mehta for the presidentship, the old boys must have let out a collective sigh.

Admits a SEBI official: "Our intention is clear. SEBI just wants to ensure that in future, elected directors on stock exchange boards refrain from influencing the executive director while taking decisions on surveillance and margins." The message appears to have hit home. Says newly-elected director Oswal: "Our top priority should be to catch up with global trends and strengthen our relationship with the market regulator, investors and the media." Jayesh Sheth, another BSE veteran, feels that the stock exchange should be allowed to operate as a self-regulatory orga-nisation and that its office-bearers should be vested with executive powers to take prompt decisions at crucial times. "My first priority is to improve relations with SEBI so that we understand each other better," he said soon after winning his second consecutive term.

Improving relations with SEBI may be an exercise in protocol, but the exchange itself will have to overhaul the way it views things if it has to survive in the next century. Says G.S. Patel, former chairman of the Unit Trust of India: "In the chequered history of the stock exchanges, the governing boards have time and again failed the nation and have not acted in a responsible and constructive manner or with any foresight to prevent crises or to tackle such situations promptly. Some members of the board themselves play the market and are caught in critical situations."

Patel quite sums up the situation that led to Parekh's dismissal. Last June, excessive speculations in three scrips—Videocon, BPL and Sterlite—led to a massive payment crisis of about Rs 1,000 crore. Parekh traces the story back to a depressed stockmarket last year which started rising on the change of government at the Centre. From February to April, 1998, the Sensex rose 1,041 points. Along with several other scrips, volumes and prices of Videocon, BPL and Sterlite started zooming. On April 22, the margin money for these scrips were doubled to 20 per cent to rein in excessive speculation. Following protests from brokers that the stiff margins were sending business away to other exchanges, says Parekh, "I suggested to the then executive director, R.C. Mathur, to reduce the margin". After five weeks, the margin was cut back to 10 per cent. According to Parekh, an ad-hoc margin was levied on bulk operators in these scrips proportionate to their outstandings.

But the good days didn't last. India's nuclear test in May followed by the downgrading of India's rating by credit rating agencies and the lacklustre budget in June combined to trigger a slide. Explains Parekh: "The market started dropping so much that those who wanted to exit from many scrips could not do so because of circuit filters, resultant freezing of the prices at a low level and buyers becoming rare." The problem was worse in BPL, Videocon and Sterlite scrips because of the large outstanding long positions. Several brokers were unable to pay the ad-hoc margins. Says Parekh: "It was at this stage that a big crisis was felt to be looming. So when the desperate brokers who were unable to pay the ad-hoc margins approached me, I asked them to provide sufficient security in the form of shares. Unusual circumstances call for unusual decisions."

PAREKH convinced Mat-hur to accept the shares as security at 30 per cent discount in lieu of the ad-hoc margins. A day before the settlement, some large brokers managed to find clients who would buy their shares at a negotiated price. The buyers would not part with the money unless they got the delivery of shares. The brokers needed the money before the next day's settlement when they would have to square up or be declared defaulters. But they couldn't deliver the shares unless the trade was entered in the computer system.

At which point, about 15 brokers approached the president to start the BOLT system so that they could enter the trade on that day. Explains Parekh: "I was keen that the money flowed into the clearing house and in time before the settlement day. Hence the urgent need to enter the mutually agreed transactions in the computer system. After the transactions were entered into the system, payments were made to the clearing house and deliveries of shares given to the buyers. A major crisis was averted. Had it not been allowed, several large brokers would have been declared defaulters, confidence in the market would have been lost, and the bourses would have hurtled towards disaster."

While Parekh would not disclose the names of these brokers, SEBI investigations reveal that the BSE opened its trading system not once but four times to allow affected brokers to insert trades late into the night. The report says that during the settlement of June 8-12, 1998, several brokers operating for a common set of financially unsound and not genuine clients (allegedly Harshad Mehta) were unable to discharge their pay-in liabilities. The president and vice-president of the exchange then approached Sevantilal Kantilal Securities India (SSKI) and Khandwala Securities (for BPL); Madhukar Seth & Co., Jaysukhlal Jagjivan and Ventura Securities (for Video-con) and Eldorado Guarantee Ltd (for Ster-lite) to buy up the "receivable positions" of brokers who faced payment difficulties.

The SEBI report quotes officials of CMC, which maintains the BSE trading system, as saying that these brokers were allowed to enter trades through the "contingency pool" by synchronising the timing of logging-in of trades by buyers and sellers to effect the bailout. The system was opened on June 17 and June 19 as late as 9 pm to enter 'bulk deals' for BPL and on June 12 and June 13 at midnight to enter 'all or none' deals. SEBI has also alleged that the deals inserted for Shrikant Mantri (with respect to Eldorado Guarantee for trades in Sterlite shares), a broker associate of former vice-president Banthia, were never disclosed. Banthia and Parekh were at the forefront of negotiating the murky bailout. Admits Parekh: "Traditionally, this stock exchange has operated like a fraternity of brokers where one always comes to the rescue of others. However, with electronic trading, such symbiotic broking operations are now on the decline."

Unfortunately, the same fraternity among brokers and bankers had also led to the securities scam. Concludes former UTI chairman Patel: "The crux of the problem was vividly highlighted by the report of PriceWaterhouse prepared under the USAID and submitted to SEBI last year. It clearly says the regulatory focus of SEBI has sidestepped the retail investors to become entirely institution-oriented. It has gone on to say that India does not have a delivery market. Other than a few institutional trades, volume of business belongs to speculators and arbitragers." It is now left to the newly-elected president, Anand Rathi, to put an end to the patronage system and bring about much-needed professionalism on Dalal Street. Clearly, he faces a long night.