SEBI’s decision on Jalan Committee: Neither socialist nor capitalist and therefore unworkable

SEBI tweaks Bimal Jalan Committee Report and makes a mess of it. The new rules may favour NSE management but the investors of NSE, BSE and aspirant MCX-SX feel let down

The Securities and Exchange Board of India (SEBI) has virtually junked the Bimal Jalan Committee report on key issues, without saying so. In the process, it has pushed the exchanges into a scenario where they are neither in a socialist regime (they were not-for-profit, members-only associations before demutualisation) nor fully capitalist institutions chasing profits and innovation. The hybrid model will be unworkable and like SEBI's other measures, will have the unintended consequence of slowing down change.

Ironically, while SEBI has scrapped the Jalan Committee's recommendation not to permit listing for five years, it has, in fact, ensured that the bourses are no longer attractive investments either to retail investor or institutions. Under the new rules, the stock exchanges will be mandated to transfer 25% of their profits to the Settlement Guarantee Fund (SGF) of the clearing corporation to meet contingencies and 'black swan' events. How will investors react to this? Investors invest in companies on the assumption that its management and employees will strive to maximise profits for shareholders and that their effort will be fully reflected in the stock price discovered through fair trading on the bourses. But with 25% of the profits forced to be stashed away in a SGF, would investors still be interested in exchanges and listed entities? The answer lies in the fact that the Bombay Stock Exchange (BSE) has not issued any press release expressing delight at SEBI's recommendations. The idea exposes how bureaucrats and bankers sitting on the SEBI board are clueless about the basic philosophy and mechanics of a joint stock company.

Even if the BSE and its members manage to get it listed under the new rules, valuation is hardly likely to be attractive since it will only be based on 75% of the earning potential. This will also mean that if the BSE is listed at all, it will be fully focussed on maximising revenues by working in the interest of pattern traders, speculators, algorithm traders and other high volume operators. This is already distorting price discovery, affecting retail investor who hopes for short term gains and even mutual funds in getting the best price.

Most importantly, SGF is a critical part of maintaining stability of exchange operations. Why should it be funded out profits which will fluctuate from year to year? And if MCX-SX is allowed to launch its equities segment, it may not even be profitable. Will it then not need to contribute to a Settlement Guarantee Fund? Clearly, SEBI has not thought of the implications. What is also not clear is what happens to the current mechanism of SGF, where clearing members contribute. Will this be disbanded?

As for the NSE (National Stock Exchange), it has always been reluctant to get listed even though it has accepted large institutional investors and even individuals as shareholders. With the NSE's 'professional' top management already having wangled salaries that are among the highest in the corporate world, it would hardly want to be in a situation where this pay is directly linked to performance. The near monopoly bourse is now in a happy position-even if its lists its shares, in order to provide a "market determined" exit route to investors, it can always blame the SEBI for undermining its valuation.

The irony is that SEBI has taken the bourses, which are essentially market utilities providing an efficient trading platform, and left them in a vague space that is neither a capitalist venture, focused on the bottomline, nor a not-for-profit association that bourses were in the past. NSE chairman Dr Vijay Kelkar repeatedly refers to the bourses as utilities, although the NSE itself is a hugely profitable monopoly paying top salaries to its senior management.

SEBI's attitude is probably the outcome of blindly aping the failed American model and not having the vision and depth of understanding to work on a model that suits the Indian market. The SEBI board has retained the Bimal Jalan Committee's recommendation to cap variable pay, make it payable after three years and bar stock options. But we understand that this too will only affect the BSE, not the NSE.

As for future competition, SEBI rules as cleared on Monday (2 April 2012) make the business unattractive for MCX-SX, which was seen as a potential threat to NSE's monopoly. We also learn that the battle over the permission to permit it to start equity trading is far from over. SEBI, says sources, seems all set to appeal to the Supreme Court against the Bombay High Court verdict, essentially to avoid controversy or allegations that it is favouring MCX-SX.

The upshot is that neither brokers (stakeholders in the BSE which has got de-mutualised) nor bourses are happy with SEBI's new set of rules for stock exchanges. Another expert source told us, "The new rules spelt out by SEBI will make exchanges more bureaucratic and mechanical. They will go back to being a utility without room for innovation or competition".  The consequence, he says, will be the inability to attract management talent.

A leading broker could not hide his disappointment. He says, "Demutualisation of bourses was the first mistake. But we are now hoping that the exchange can get listed and we can extract some value out of our membership at a time when investors seem enthusiastic about bourses after MCX's successful listing".

He is also angry at the decision to keep brokers out of the governing board.  He says, "We are tired of being treated as non-trustworthy". However, this decision is prompted by the need to avoid conflict of interest issues that could arise if brokers were on the board and exerted influence over office bearers.

SEBI's policy on Market Infrastructure Institutions (MIIs) released on Monday says, "The stock exchanges will have diversified ownership and no single investor will be allowed to hold more than 5% except the Stock Exchange, Depository, Insurance Company, Banking Company or public financial institution which may hold up to 15%". But it will be interesting to see who lines up to acquire the shareholding and at what valuation given, the peculiar hybrid SEBI has created.

(Additional reporting by Aditya Govindaraj)



sunil hemnani

5 years ago

Well the SEBI ,which has made a mess of the whole thing has done so at the insistance of the Mof .So lets not give the SEBI so much credit for the pile of mess generated.Its obvious things are being done at Dilli which are conveniant for certain people.

Sankar Ray

5 years ago

Moneylife is arguably one of the very best mags in India

Nagesh Kini FCA

5 years ago

Dr. Jalan may have been a good government babu, followed on to being a RBI Governor and ultimately kicked up to be nominated to the House of Elders as an MP. Pray what is his track record and his hands on knowledge of the working of stock markets?

p v maiya

5 years ago

Bimal Lalan Committee submitted its report in 9 months after it was set up in February 2010. SEBI took 18 months to pronounce its confused verdict. Thus in 27 months of labour, SEBI has managed to do more harm than good for the development of eqity market and to further the cause of retailers.

Mutual funds lose Rs36,000 crore of assets in FY12

Among the top-five fund houses, HDFC MF, Birla Sunlife MF and UTI MF managed to improve their average AUMs in the last quarter

Hit by a downtrend for the third consecutive quarter, the mutual fund industry saw its total asset base shrink by about 5% or Rs36,000 crore in the just-ended fiscal year 2011-12.

Reaching its lowest level in more than two years, the average asset under management (AUM) of the entire Indian mutual fund industry dipped to Rs6,64,824 crore at the close of the last fiscal, ended 31 March 2012.

The decline of 5% in the last fiscal followed a decline of 11% in the previous fiscal 2010-11, when the total average AUM had dipped to near Rs7 lakh crore.

As per the data compiled by the industry body, the Association of Mutual Funds in India (AMFI), HDFC Mutual Fund retained its pole position as the country's biggest MF with an average AUM of Rs89,879 crore, followed by Reliance MF (Rs78,112 crore), ICICI Prudential MF (Rs68,718 crore), Birla Sunlife MF (Rs61,143 crore) and UTI MF (Rs58,922 crore).

While HDFC MF is the country's biggest mutual fund, Reliance Capital Asset Management Co (RCAM) is the largest and most profitable AMC in India, with total AUM of  Rs1,40,000 crore after taking into account MFs, government-sponsored public funds, managed accounts and hedge funds.

During the fiscal year 2011-12, the total number of retail folios or the number of investor accounts across all the 44 fund houses also declined by around 15 lakh.
Their total asset size has declined to a level last seen in July 2010, while it has dropped nearly 17% from the all-time record high of Rs8 lakh crore in May 2010.

Out of this, the total size of the industry has declined by around 11% in the past three quarters alone, while the dip during the last quarter (January-March 2012) was about 2.5% or Rs16,884 crore.

Among the top-five fund houses, HDFC MF, Birla Sunlife MF and UTI MF managed to improve their average AUMs in the last quarter, while that of Reliance MF and ICICI Pru MF declined.

Others whose average AUM declined during the last quarter included Franklin Templeton, DSP BlackRock, Kotak Mahindra, IDFC, Tata, Sundaram, Deutsche, Religare, Fidelity, JP Morgan, LIC, IDBI, HSBC, BNP Paribas, Goldman Sachs, Baroda Pioneer, L&T, Peerless, Taurus, Morgan Stanley, Pramerica, ING Vysya, Daiwa, AIG Global, Edelweiss and Bharti AXA Mutual Funds.

A total of 30 fund houses witnessed a decline in their average AUMs during the last quarter, while it increased for 14 others, which included SBI, Axis, Canara Robecco, Principal, Indiabulls, Union KBC, Sahara, Mirae Asset, Motilal Oswal, Escorts, Quantum and IIFL Mutual Funds.


Renault launches diesel Fluence priced at Rs15.2 lakh

The new Fluence will be powered by 1.5 litre diesel engine, which will give a mileage of 20.4 kilometre per litre

Car maker Renault India launched a new diesel variant of its premium sedan 'Fluence' in the country, priced at Rs15.2 lakh (ex-showroom, Delhi).

"Fluence was the first offering from Renault in India. The new upgraded variant is about our commitment to the Indian market and is a result of the feedback we received from our customers," Renault India managing director Marc Nassif said.

The new Fluence will be powered by 1.5 litre diesel engine, which will give a mileage of 20.4 kilometre per litre, he added.

It will compete with the likes of Volkswagen Jetta, Skoda Laura and Toyota Corolla Diesel, which are priced between Rs15.22 lakh and Rs16.41 lakh.

The company had launched the Fluence in May 2011 and it was followed by two more cars -- sports utility vehicle Koleos and premium compact car Pulse.

"We had announced plans to roll out five products by the end of 2012. The next in line is our crossover Duster, which will be launched before Diwali, and it will be followed by one more product," Nassif said, adding all the products will be assembled at its facility in Chennai.

He said the company is targeting to sell a total of 30,000 cars in India this year compared to about 1,500 units in 2011.

To push up its sales, the company is also expanding its dealership network to 100 by 2012 from 43 at present.

When asked about reports that Renault India is looking to set up a new facility in Gujarat, Nassif said: "When we will saturate the 4 lakh annual capacity at the current facility, we will look at expansion. We are open to choosing any location, but when and where, only time will tell."

Talking about Renault-Nissan's ultra-low-cost car project with Bajaj Auto, he said Renault India's hands are full with its existing priorities in the country.

"This project is being taken care of by the alliance at the global level and we (Renault India) are not at all concerned about it. Any decision will be announced by the alliance," he added.


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)