30 November 2010

Jalan committee - J R Varma speaks

Prof. Jayanth Varma of IIM, Ahmedabad has an excellent piece in the financial express cutting to shreds the backdoor nationalisation of stock exchanges proposed by the Jalan committee report:

The Jalan Committee appointed by Sebi has effectively recommended the back-door nationalisation of stock exchanges, clearing corporations and depositories (market infrastructure institutions or MIIs). If these recommendations are accepted, we will extinguish the essential spark of dynamism that has given India a world class equity market. The Jalan report is permeated from beginning to end with the ideology of socialism and the command economy, but instead of overt nationalisation, it seeks to destroy private sector exchanges and other MIIs through a thousand small cuts. Let me list out just a few key elements of this strategy:
The Jalan report also takes an essentially anti-competitive position in the field of exchanges and MIIs. The view taken is that there is sufficient competition already and that it would be undesirable to have more competition: “Sebi should have the discretion to limit the number of MIIs operating in the market, in the interest of the market and in public interest.”
Historical experience tells us that we have got far better and cheaper telecommunications from competitive profit-seeking companies than from a monopoly state-run public utility. Competitive private players have given us cheaper and more convenient air travel than monopoly state players. It is the same story in industry after industry. The Jalan report is ignoring this overwhelming evidence from India and elsewhere, and propounding the belief that a cosy government-controlled monopoly or oligopoly would serve the market and the public interest better than a competitive industry structure.
The Jalan report seeks to limit competition by several means quite apart from the explicit limit on the number of exchanges and depositories. The regulated public utility model ensures that it is very unattractive for new entrants. Anybody seeking to challenge an entrenched incumbent faces a high chance of failure and the only incentive for entry is the prospect of large profit in case of success. The ceiling on profitability rules this out. Moreover, the new entrant would not be able to attract talented managers because of the inability to offer performance-based compensation.
At this critical juncture, when each exchange in Asia is deciding whether to be predator or prey in the emerging pan-Asian competition, the Jalan Committee is pushing India in the wrong direction. The recommendations, if implemented, would ensure that Indian exchanges never become pan-Asian institutions. Worse, Indian exchanges could even become completely unviable, if the business moves to exchanges outside India that may offer better service at more competitive prices.

Note: The HT reports that the government is iffy about the recommendations because: "The Committee has proposed to put a cap on the profits of MIIs that could make the incoming investments null and void." :)

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