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The Rediff Business Interview/D R Mehta

'The Indian stock market is more stable than most world markets'

The steady northward migration of the Sensex has brought into sharp focus the crucial role of the Securities and Exchange Board of India. D R Mehta, chief regulator of the Indian stock market, is now ready to take the credit for rewriting the rules of the game. To make the Indian exchanges among the steadiest and most transparent in Asia today. An interview with Pritish Nandy.

Do you think the current buoyant state of the Sensex is a real picture of the health of the Indian stock market?

Yes, it is. A large number of the players, Indian and foreign, are in fact saying the same thing. Recently there was a conference of the foreign players, the FIIs, and they said exactly the same thing. That they feel the Indian market will remain buoyant for quite some time. Unless, of course, something very unusual happens.

Most of them felt the Indian market was the real place to be in. Recently, a colleague of mine went to Seoul and, there, one of the largest investors in the emerging markets, in fact he is the largest investor, Mark Mobius...

Of Templeton?

Yes, that's right. He was all praise for the Indian market. He sees it as one of the strongest, healthiest markets in the entire Asian region.

Why? What is so special about the Indian market?

Well, two things are happening. One, on the economic side. Two, on the regulatory side. On the regulatory side, our systems are geared to meet most of the eventualities. I cannot say all eventualities but I think it is a very clean market today, compared to what it was earlier. There may be a problem with brokers. That happens all over the world. But the market itself is clean and healthy and entirely transparent.

Brokers fail even in the best markets. It has happened in the US. It has happened recently in Hong Kong. They lost about Rs 13 billion! In India, this kind of situation cannot happen. On a smaller scale, however, brokers can fail. That is not so important. What is important is the question: Is the market safe? Today, most people feel that the Indian market is safe. That is crucial.

What has the SEBI actually done towards ensuring this sense of security?

Three or four things.

One is that we have introduced the system of margins, which is very strong. There is a daily margin. There is a mark to market (valuing a position or portfolio at current market prices) margin. The maximum liability could be for the time the margins are collected. Maybe 12 to 24 hours. That is the only risk today. Then, we have controlled volatility in the market. The moment a scrip touches 16 percentage high or low a very high kind of margin is imposed. People are still allowed to trade but at a higher cost.

Today the position is, on certain settlements, the margins collected will be in the region of Rs 12 billion to Rs 15 billion. Five years ago, the total business of India was not more than Rs 7 billion to Rs 8 billion. More than that we are collecting in margins today. The business recently has gone up to Rs 70 billion to Rs 80 billion. These are huge volumes but on the regulatory side there is no problem at all.

Another major thing we have done is introducing the system of circuit breakers. Our system, sir, is superior to that of the US or the Western world. There, the circuit breaker system is related to the stock exchange index. For instance, if in New York the Dow Jones falls by 350 points, the market will close down for half an hour. If it falls by 500 points, it will close by another one hour. The American market closed down four times in the last four years. The Indian market was not closed for even half a minute! That shows the strength of our system. That is what makes our markets safe.

Another major reform we have introduced is the depository. That is shares will be traded in the electronic form. This means no fake shares, no forged shares, no bad deliveries. Transfers will no longer be in the hands of companies. They will automatically take place. This imparts both speed and tremendous safety.

How do you make this effective retrospectively? There are millions of shares already in the market...

In 15 months, what we have achieved on the depository side is being watched by all other companies. By May 31, 1999, almost 90 per cent of our business will be in the depository mode. This would have been unthinkable some years ago. No one believed we could move so fast. All problems emerging from the paper-based system have been now beaten.

Another major success is the fact that today 100 per cent of our business is online. And, believe it or not, the software is entirely ours. Only one exchange made the mistake of buying software from Canada and only that exchange is having problems. So they have now decided to abandon their contract and go to CMC.

In Japan, only 70 per cent of their business is online. We are ahead of them. We are ahead of Hong Kong and several other countries. And computerisation means the introduction of transparency. Absolute transparency. An audit trail is possible. No one can be fleeced.

What about the primary market? Why is that lying in such deep stupor?

Well, we have introduced many things there as well. Particularly in the area of disclosures. We do not believe in a merit system, whether this or that should be allowed or not. We believe in a disclosure system where everything is allowed as long as you clearly disclose all the facts about the company, its promoters, its track record.

The statement of risk factors must be put right at the beginning of every document. So the investor gets it all upfront and then decides whether he wants to invest or not. This is typical of a free market economy. Though we are not half as stringent as the US.

But some people claim you have killed the market in the process? There are barely any new issues coming out.

We are not bothered. The important thing is only good companies are coming out with issues. When I joined the SEBI, I remember we were getting 150 offer documents every month. Today we get only 4 or 5. All the fly-by-night operators are out. There is a direct relationship between the cleanliness of a market and its health. This is true of all the developed markets. If our system was clean earlier, you would not have had cases like MS Shoes. They duped investors by inadequate disclosures, by hiding the facts and advertising huge, exaggerated claims.

Yes, money raised by public issues has come down. I agree with that. But, over time, the cleanliness of the market will ensure growth. It will ensure stability. What is also happening is that people are going to mutual funds. This means that the market has become institutionalised. The risks of individual investors are diminishing.

What about collective investment schemes? The teak schemes that duped thousands and thousands of investors nationwide.

There was a lot of debate in the ministry as to who should handle this. After much thought, the responsibility was given to the SEBI. In 1997.

The first thing we did was stop all new schemes till the new regulations were framed. Then we said that even the existing 680 schemes would also not be allowed to pick up money unless they got themselves credit ratings. About 30 or 40 of them went for it and all of them got negative ratings! We published the ratings and the rot was immediately stemmed. We also filed public interest litigations! What more can the SEBI do?

How do you see the future of the market? Do you see the Sensex continuing to go northward for a while?

Frankly, I cannot, in fact I should not answer that question. It will influence the market forces. But this much I can assure you that the Indian stock market today is in a very strong, very healthy state. It is also clean and transparent. In fact, it is more stable than most markets of the world.

Look at the graphs here and you will see that its volatility is much less than that of any other market. This is a good indicator. It shows that we are capable of sustaining a good run and I see no reason why the future should not be excellent for quality Indian paper.

What does the Infosys listing on Nasdaq bode? More international listings for good Indian stock?

Absolutely. This is just the beginning. You have already seen the response to quality Indian paper in overseas markets, the GDRs and the ADRs. This is a new, healthy trend. I am sure more Indian companies will also go to Nasdaq for listing. Yes, we are in for a great new future for Indian scrips.

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