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Former RBI Deputy Governor's appointment as NSE director raises too many questions
Reserve bank of India's (RBI) former deputy governor, Shyamala Gopinath taking over as director of the extremely profitable, near-monopoly National Stock Exchange (NSE) has raised serious issues of conflict of interest.
The issue in a nutshell is this: Will the prospective of lucrative directorships make regulators go soft towards regulated entities? The clear answer is yes. While NSE appears and is a first-level regulator itself, the problem in this case arises out of its own stated position.
The NSE insists it is a private company and has even been fighting the applicability of the Right to Information (RTI) Act in every forum. It appealed a ruling of the Chief Information Commissioner (CIC) before the Delhi High Court and after losing there, has appealed to a divisional bench. If NSE is right, the same scruples that ought to prevent Ms Gopinath from joining the board of say other private sector entities ought to apply to her directorship at the NSE as well.
However, there is another even more controversial issue. While the NSE is not under RBI regulation, the currency derivatives segment is under the dual regulation of SEBI and RBI. This was directly under Ms Gopinath's regulatory purview and she inaugurated all four currency bourses - that of the NSE, the Bombay Stock Exchange (BSE), MCX-SX and the United Stock Exchange. The regulator's role in this segment is nothing short of controversial with both RBI and SEBI choosing to maintain a studied silence on two major issues - first, the fact that the NSE used its profits in running a near-monopoly stock market to fight competition in forex market by not charging a fee for currency trades. In other words, the NSE operated the currency market without a source of revenue, forcing all three competitors to do the same inflicting huge losses on them.
Interestingly, both SEBI under CB Bhave and the RBI where Ms Gopinath was a Deputy Governor, maintained complete silence about this anti-competitive stance of NSE. After unsuccessfully appealing to the regulators, MCX-SX which was NSE's main rival approached the Competition Commission of India (CCI) and won a pathbreaking order.
The CCI not only ruled against the NSE, but also slapped a fat fine on it. While NSE has appealed the fine, it has corrected itself and begun to charge a fee.
What is more important in the regulatory context is that RBI and SEBI were not only guilty of not acting against this obvious anti-competitive action despite a wide debate in the media, but their silence encouraged other malpractices as well.
For instance, the big mystery in the battle over anti-competitive practices is the fact that both BSE and USE did not protest. The BSE's currency derivatives segment quickly folded up and it later invested in the USE and offered its trading platform to the fourth bourse. The USE was the only standalone exchange of the four without income from a commodity or equity bourse to subsidize losses in the currency segment. The USE refused to answer Moneylife's repeated queries about its long-term business model, since its currency derivatives trades collected no fees. The USE also outrageously announced a first day trading volume which was more than that of the NSE and MCX-SX combined with one firm, Jaypee Capital, accounting for 80% of the trading volume. Again, the watchdogs did not bark - in fact they didn't so much as whimper. As Sherlock Holmes would say, therein lies the mystery about the regulator's influence.
The USE's operations, as it turns out are riddled by dubious practices that were steadfastly ignored by the two regulators and this when Moneylife had raised questions about its long term survival on the very first day - It is only after a regime change at SEBI and at the RBI that the USE's operations are being investigated. Last week, a report in The Economic Times says that SEBI has found abnormal trading patterns. In fact, this abnormality was evident on the very first day, when USE boldly issued a press release to celebrate its turnover bubble.
SEBI, which has used potential conflict at the reason for denying permission to MCX to launch an equity segment, is strangely silent about the clear conflict in case of Jaypee Capital and USE. In fact, the promoter's son Gaurav Arora was even been appointed President of the bourse.
Six days ago, The Economic Times in a report about SEBI's board meeting said, "There have been reports about a conflict of interest and a possible breach of fair-trade practices at the USE due to one of its largest shareholders, Jaypee Capital, also being a major trader on the exchange.
There have also been reports that the trade volumes might have declined after Jaypee capital started limiting its exposure due to the SEBI probe".
Under the RBI and SEBI's benign watch two out of the four currency derivatives bourses, which were launched in quick succession are in the doldrums. Can we then believe that there is no conflict of interest in regulators being too entwined with regulated entities or seeking post-retirement sinecures with them?
Launches NSE currency exchange:
1. NSE - http://www.bis.org/review/r080903e.pdf
2. BSE: http://www.bseindia.com/cdx/photo.asp?pic=3 and http://blogs.thehindu.com/delhi/?p=3430
3. USE: 21st September 2010
4. MCX-SX: October 2008