Shaping Up The Bourses And Letting Loose The Bulls

SLOWLY but surely, the Securities and Exchange Board of India (SEBI) appears to be shedding its milk teeth. In the last few weeks, its claws have appeared razorsharp, and its canines much keener. Close on the heels of issuing primary market guidelines which aim to nip the new issues racket right in the bud (Cleaning Up the Market, Outlook, May 29), SEBI has effectively trained its artillery on several issues that have been troubling investors for years.

SEBI began by penalising Shriram Mutual Fund for failing to provide its half-yearly results in accordance with mutual fund regulations. It has begun investigations into Dhanalakshmi Bank's request to reject 33 bulk applications of Rs 1 lakh each in the bank's recent Rs 8-crore public issue on the ground of a takeover threat. It also forced the Bombay Stock Exchange (BSE) to suspend the Bombay-based broking firm SSKI, for manipulating the market.

Says SEBI Chairman D.R. Mehta: "For the first time, SEBI has used the powers delegated to it under Section 15(A) of the SEBI Act to impose a penalty of Rs 1 lakh against the Shriram Mutual Fund's Tax Guardian Scheme 1995-96." The regulations state that every fund will have to publish a half-yearly statement of accounts within two months from the end of each half-year. Shriram Mutual had not published its half-yearly statement for the six months ending 30 September, 1995, by the end of November.

"Three other cases of mutual fund violations are presently under adjudication and are expected to be penalised shortly," says Mehta. These three could be JM Mutual Fund, LIC Mutual Fund and SBI Mutual Fund. While JM Mutual is alleged to have routed most of its transactions through the promoter's broking concern, LIC Mutual and SEBI Mutual are alleged to have violated prudential investment limits placed by the regulations.

Simultaneously, SEBI has completed investigations against three companies accused of price rigging, and plans to initiate a series of actions against brokers involved. The Board has also decided to impound the difference in amount between the closing-out price and the purchase price of the speculators. Since all the three companies involved in the rigging are listed on the BSE, this amount of Rs 12 crore will be transferred to its investor protection fund.

The Board has also come out strongly against the delay in the share transfer process. It will shortly launch a thorough probe into the records of registrars and in-house share transfer cells of corporate houses which have been inordinately delaying the share transfer process. The inspection will cover about 300 companies where transfer delays have taken more than nine months—a delay that is totally unacceptable. "We'll first pick the worst cases and action will be taken against the registrars after inquiry is completed," says a SEBI executive.

Having come in for severe criticism for its ambivalent stand on defaulters, SEBI started rattling its sabre right after the Reliance duplicate and switched shares controversy. In a move that is being seen as a frontrunner of the watchdog's newly discovered clout, it has issued a showcause notice to Reliance Consultancy Services (RCS) as to why its registration should not be suspended or even cancelled for various contraventions as well as procedural lapses in the issue of duplicate shares. And since it does not have the power to prosecute a company on this issue, SEBI has managed to prod the Department of Company Affairs (DCA) into serving a showcause notice to RCS on the same matter. In fact, the DCA which had earlier given a clean chit to RCS, has now done a complete volte-face, apparently at SEBI's bidding.

The DCA has now sought to prosecute RCS under Section 108 of the Indian Contract Act 1872, which states that a company cannot register a transfer of shares unless a proper instrument of transfer, duly stamped and executed by the transferee, has been delivered to the company. Though, if found guilty, Reliance will have to pay a fine of a measly Rs 1.25 crore. "The amount is not important here. The fact that SEBI is responsible for punishing a conglomerate like Reliance will speak for itself. The message is loud and clear: shape up or ship out," says George Thomas,director, Fiduciary Capital Services.

In tandem with SEBI, the BSE too has tightened the screws on suspected price manipulators and other such shady operators. Soon after the primary market listing guidelines issued by SEBI, the BSE initiated an exhaustive study of 6,400-odd listed scrips to see whether or not they conform to the norms. The BSE is expected to shoot down listing applications of about 200 companies for not fulfilling the minimum shareholding criterion stipulated by SEBI. It has already rejected over 15 applications for listing, six of whom have complained to SEBI.

With this newfound zeal both at SEBI and the BSE to rid the stockmarket of bad apples and opaque operations, there is suddenly hope for the genuine—and global—investor. Maybe the Augean stables will become a cleaner place. At last. 

SOME are calling it herd mentality, others are likening it to the blind stampede in the Indian bourses seen in 1993-94. Suddenly, despite a fractious new coalition Government at the helm, a still-distant Union Budget, and a booming equity market in the US, investment from foreign institutional investors (FIIs) has started pouring into the Indian bourses.

Even as habitual punters at Delhi's Palika Bazaar were placing bets on how long before a mid-term LokSabha poll is called, FII investment in the country crossed the $6 billion (over Rs 20,000 crore) mark this fortnight. For the first five-and-a-half months of 1996, net FII investment stands at $2 billion, close to the $2.14 billion that came in 1994, and far surpassing the $1.19 billion that had poured in during 1995. If the trend continues, as certain FIIs appear to think it will, net FII investment in 1996 may far exceed the $4 billion that Barings had predicted last year. The BSE Sensex which also crossed the psychological barrier of 4,000 last week, may well touch the 5,000 mark before the end of the year.

At first sight, this appears to defy all logic and reason. Says Vijay Advani, country head of Templeton Asset Management Company. "There has been no buying for a long time. Otherwise, there is no specific reason for the market to be particularly bullish now."

But there may be a combination of factors at work. The appointment of the supposedly progressive P. Chidambaram as finance minister, and the announcement of the United Front Government's common minimum programme have definitely allayed FII fears to some extent as to the future direction of Indian economic policy. Add to that a dose of herd mentality. But those in the know are confident that FII investment this time is not just based on hype; market realities have also left them with little option butto shovel in money here.

First, among the emerging markets worldwide, Indian bourses are performing the best. Says an FII equity analyst. "There are over 300 stocks listed on the BSE which are still underpriced." The $1.8 billion metal trading loss at Japanese giant Sumitomo has already had its impact on metal prices, with gold, silver and copper crashing on the London Metal Exchange. The Asian stockmarkets too will not remain unaffected. The United FrontGovernment has already committed itself to reforms. Besides, the ninth consecutive year of good and timely monsoon augurs well enough for the country to discount political uncertainties, as far as many FIIs are concerned.

But most of all, it is the sudden commitment to a stricter vigil by the Securities and Exchange Board of India (SEBI)—see previous page—that has turned the tide in favour of India. Global investors are beginning to realise that the old boys' network that ran the country's premier bourse is on its way out. Computerisation and the BSE Online Trading (BOLT) with stringent listing norms and stricter deliveries have opened out a whole new transparent trading system. Says Sanjay Jha, vice-president, ITC Thread needle Asset Management: "The fact that SEBI has started punitive action against defaulters and launched tighter norms for trading activities has sent its message loud and clear: that trading on Indian bourses will henceforth be as professional as anywhere."

SEBI's intention to have an informal tie-up with the Securities and Exchange Commission of the US has added to the glamour of the Indian bourses. The watchdog has incorporated a number of tough features to ensure the sanctity of the depository rules that will ease and professionalise the backroom operations of the market. The reforms at the BSE (The Damani Ultimatum, Outlook, June 5) have further strengthened the commitment of FIIs to the Indian stocks. BSE's decision to set up a Special Investors Services Committee to independently handle touchy investor grievance issues, especially where large sums of money are involved, has added to the attraction.

SEBI has also directed all local stock exchanges to adopt an international coding system for securities. Based on International Securities Identification Numbering (ISIN) set out by the Belgium-based Association of National Numbering Agency of which India became a member last year, this coding is another attempt to globalise the Indian capital markets. All these, added to the fact that foreign broking firms—with nearly limitless resources in comparison to the Indian broking houses—have been let loose on the bourses, have also added to the FII rush. Laments a relatively small BSE broker: "The big Indian broking outfits like DSP and Kotak Mahindra, to name a few, have all tied up with foreign broking firms who are just steamrolling our business with their sheer financial muscle. If we are not provided with some working capital incentives by banks, it will be sooner rather than later that most of us will be wiped out."

Pessimistic sentiments, but then the fortunes of the stockmarket gamble could go either way. For the present, it's bingo time for the FIIs and for the country.