SEBI’s rejection of MCX-SX’s application to start equity trading, not only stifles much-needed fresh thinking, competition and innovation, but draws attention to SEBI’s own sordid ethical standards
That the Securities and Exchange Board of India (SEBI) rejected MCX Stock Exchange's (MCX-SX) application to launch the equity segment was no surprise. Nor is the MCX-SX's decision to fight back. The regulation of demutualised bourses remains a contentious issue, despite being referred to several committees. But it is obvious that the narrow and illiquid Indian capital market urgently needs to get rid of a score of defunct, parasitic, regional bourses and permit fresh thinking, competition and innovation which MCX-SX can inject. Whether this happens or not will be decided by the courts, but there are some intriguing angles to the entire controversy.
For starters, does India, whose economic growth is attracting so much foreign attention, support entrepreneurship, or do we secretly revel in discrediting our own success stories? Will we ever support open competition or cripple businesses on the whims of self-serving netas and babus?
On 31st August, MCX launched the Singapore Mercantile Exchange (SMX). It should have been a proud moment, but the domestic war with SEBI cast a dark shadow. On 23rd September, SEBI rejected MCX-SX's application to launch equity trading saying it was 'not fit and proper' and 'dishonest' to boot. Isn't it ironical that India, which ranks a low 84th on Transparency International's corruption perception index, took the high moral ground, to discredit a management that Singapore, which ranks No 3 in terms of transparency, found fit enough to launch its first international, pan-Asian derivatives exchange? Singapore is not alone. MCX runs the multi-asset, multi-access Bahrain Financial Exchange. It is in the process of setting up multi-asset exchanges in Mauritius and Botswana (called Bourse Africa). It also successfully launched, and handed over, the Dubai Gold and Commodity Exchange.
There are domestic successes as well. The flagship Multi Commodity Exchange (MCX) is by far the market leader in commodity derivatives; MCX-SX was a leader in currency derivatives (jointly regulated by SEBI); it runs the National Spot Exchange Ltd which trades agricultural commodities; the Indian Energy Exchange which trades electricity and IBS Forex, is its inter-bank forex exchange platform. No other exchange group has achieved so much so fast in a competitive environment. And there are no reports of other regulators having problems with MCX either.
None of this mattered to the SEBI's whole-time member, while rejecting the case of MCX-SX with 68 pages of hair-splitting.
He found that MCX and Financial Technologies were 'acting in concert'. He discovered that the warrants issued to promoters (for the value they sacrificed by shrinking promoters' capital to meet SEBI's norms) had economic value even though such warrants earned no dividends, have no voting rights and cannot be converted into shares unless SEBI rules change. It is almost as if SEBI knows that its ridiculously low 5% cap on individual shareholding will have to be increased to the 15% or 26% that is permitted in the commodity and currency derivatives markets. Were that to happen, MCX's promoters would legitimately want to convert warrants and enhance their holding. SEBI wants to kill any such possibility.
Interestingly, the National Stock Exchange (NSE), an opaque and secretive, virtual monopoly basked in high valuations that were possible because the regulator gave it plenty of time for equity dilution without imposing the restriction it did on MCX-SX. But MCX-SX was systematically cornered.
First, SEBI allowed NSE to subsidise currency derivatives through the high fees charged in the equity segment. MCX-SX suffered huge losses, while the Bombay Stock Exchange (BSE) simply shut its currency derivatives segment within two months. The newly launched USE (United Stock Exchange) is also boasting market leadership without a revenue model. Neither the Reserve Bank of India (RBI) nor SEBI bothered to explain how they permitted a fourth currency derivatives exchange whose high trading volumes translate into direct losses since, like the NSE, it does not collect transaction charges. What happens when its net worth slips below Rs150 crore? USE must be hoping the Competition Commission will rescue it by ruling in favour of MCX-SX on NSE's predatory pricing.
When the loss-making MCX-SX was denied permission to launch new segments, it couldn't possibly find new investors and was forced to reduce capital to meet SEBI norms. Stunningly, the idea allegedly came from JN Gupta, SEBI's executive director in charge of secondary markets, who used to be a commodity trader in Kazakhstan before returning to SEBI. The SEBI order simply ignores Mr Gupta's role in 'misleading' MCX-SX into opting for capital reduction.
If SEBI had higher regulatory standards than Bahrain, Singapore and Dubai, its action against MCX-SX would have somehow seemed plausible. SEBI's actions appear malicious when we see how the same regulator buried the cases against the National Securities Depository Ltd (NSDL) in the IPO (initial public offering) scam of 2006, in order to absolve chairman CB Bhave of taint or even constructive liability in that scam (he was chairman of NSDL then). The SEBI board went so far as to discredit a two-member committee of its own board directors and declared their orders 'void'. In the process, it also ignored a legal opinion by Justice JS Verma, one of India's most respected Chief Justices of the Supreme Court.
In throwing the rulebook at MCX-SX, SEBI is essentially saying, "show me the person and I will show you the rule."
Why would SEBI be so determined to finish off MCX-SX? MCX has openly accused it of favouring NSE whose high valuation is at a serious risk (not to mention the stunning salaries of its top three executives) when up against a serious competitor. Remember, MCX has beaten NSE in every segment where they have been in direct competition: commodities, currency and energy.
Then there are the personal relationships. When CB Bhave was desperate to leave SEBI in the early 1990s, under chairman DR Mehta, NSE gave him a berth at NSDL. Mr Bhave was thus in the happy position of writing the statute that ensured that the depository was not entirely under SEBI regulation; he used it to his advantage to expand into other areas without seeking SEBI approval.
It may be clever to ensure that rules and ethical standards are flexible enough to be twisted at convenience. But sadly, it makes for very dubious regulation.
Call it corporate muscle power or lure of future business, insurers still bend over backwards to take care of group insurance policies
Most group insurance policies enjoy numerous perks like maternity, post-natal care, pre-existing ailments, dental and ophthalmic care. The icing on the cake is continuous coverage of cashless facility even at high-end hospitals in metro cities. The new concept of cashless facility restricted only at preferred provider network (PPN) hospitals by PSU (public sector undertaking) insurers is only for individual policyholders.
This is unbelievable considering that group insurance losses have been more than individual insurance losses. According to a report by the Comptroller and Auditor General (CAG), between 2006 and 2009 four PSU insurers suffered a loss of Rs417 crore on individual mediclaim policies and Rs622.49 crore on group mediclaim policies.
Segar Sampathkumar, deputy general manager, New India Assurance, said, "In the past, there used to be cross-subsidy given to corporates because of high value business from property insurance. With de-tariffing, the premiums have fallen and hence it is impossible to underwrite group health insurance at low premiums. They are now increasing at 30% to 40% this year. We are adding caps to specific coverage, co-payments and the coverage itself is now shrinking. Corporates are realising the reasoning behind the changes."
According to industry sources, despite the recent hike in premiums, group insurance polices continue to bleed insurers. It is easier to put loading on group insurance rather than individual policies. If PSU insurers made arbitrary increases to individual premiums, they could afford the cashless facility at high-end hospitals, but it will not solve the source of problem which is inflated charges by some high-end hospitals. "We are trying to correct the system that is in the interest of the policyholder. If there is a high charge from hospitals, it will reduce the sum assured for the policyholder and may not cover another illness in the same year," Mr Sampathkumar added.
Sudhir Sarnobat, co-founder and director of Medimanage Insurance Brokers, said, "If the claims ratio is adverse, insurers hike group insurance premiums at renewals. However, PSU insurers will offer some discount if the group insurance contract agrees to restrict cashless to hospitals that are part of their PPN.
Currently, the insured group has a choice of going either for PPN or other hospitals. The existing group insurance policies are not touched by insurers for restricting cashless at PPN hospitals, probably because it is the corporate sector where the premium can be hiked if the claims ratio is adverse."
"One way to curb the losses for the insurer is to have a 'Gate-keeping' model. A policyholder wanting to go to a big hospital without real requirement is a misuse of insurance. The need to go to a big hospital only arises because of ailment that cannot be treated at a smaller hospital. The tendency to go for the best hospital without a real need, just because the insurance company is paying for it, is a misuse of insurance," he pointed out.
Talking to the media at a CII insurance summit earlier this week, Dr Ravindra K Kaul, chairman and managing director of Oriental Insurance Co Ltd, said that the cashless facility is still allowed by PSU insurers at non-PPN hospitals for emergency and accident cases.
The four PSUs chose to control the losses ahead of other insurance companies; otherwise, the claims trend would put the fate of the entire health insurance industry at peril. PPN network will save at least 20%-25% on their losses, which will help the customers in the long run in terms of premiums not shooting through the roof.
Mr Sarnobat said, "Current churning in the market will make life very difficult in the short term for all the parties involved, but once this phase passes, we are sure that the changes would have a long-term effect and would help the consumer." He explained that the focused network with negotiated rates would improve the commercial feasibility of insurance and improve the quality and service delivery of hospitals. "Once the losses are tamed, the journey is always upward in value and what is currently happening with the health insurance industry in India marks the beginning of this," he said.
Another point that needs to be considered is that premiums of most health insurance companies have not risen at the pace of medical inflation. Medical inflation is one of the reasons for creation of the divide between claims and premiums earned, so health insurance essentially remains quite affordable and inexpensive. Thus buying a health insurance policy for yourself and your family even now seems a very good idea.
Kottayam: The Rubber Board today said it will provide financial assistance for formation of rubber producers' societies (RPSs) and self help groups (SHGs), reports PTI.
The scheme is intended to develop the small holding sector, which is responsible for the lion's share of natural rubber production in the country. The scheme will enable the socio-economic development of poor farmers and their families, an official spokesman said.
It is aimed at promoting a group approach for effective modernisation and improvement of the natural rubber sector, as an individual approach is not practical due to the large number of such holdings, he said.
The rate of assistance offered under the scheme is Rs6,000 for new RPSs and Rs3,000 for SHGs.
Such SPSs/SHGs would be provided 150 budded stumps and 200 metres of budwood at either 50%% of the cost finalised by the board, or Rs2,500 per RPS/SHG, whichever is less, to raise nurseries.
Fifty per cent of the actual expenditure, or Rs5,000, whichever is less, would also be granted to these RPSs/SHGs for conducting medical camps, he said.