21 March 2012

Jalan committee - what clarity sirji...

Mobis of Mint has a piece yesterday on bringing the Jalan Committee (easily the most regressive report coming out of India since 1991 - see my previous posts) back and implementing it. Here is a relevant excerpt:

But the report is now gathering dust. Nearly 16 months have passed since the Jalan committee submitted its report to Sebi. True, it contained many contentious recommendations, some of which have been challenged in this column. The Jalan committee, for instance, had prescribed ownership restrictions on exchanges and a cap on profits, besides disallowing listing. With such constraints, there will hardly be any scope for new exchanges to emerge and provide meaningful competition to existing players. The committee’s concerns about an exchange’s regulatory role can also be met by separating the governance role either to Sebi or a non-profit organization. The committee, however, has rejected this model for the time-being, simply saying that it is premature to think of it for the Indian markets.

But despite these faults, it should not be forgotten that one of the main objectives behind the setting up of the committee was to frame clear policy regarding ownership of exchanges. This should be done sooner rather than later, especially given the complications that have arisen because of the lack of clear guidelines. Even so, the regulator has chosen not to frame new rules relating to the ownership and governance of stock exchanges. If the Sebi board had reservations about the recommendations of the Jalan committee, it could adopt the same approach it did with the new takeover code. Last year, it notified the new takeover code, after making significant alterations.

I assume the use of the word governance in the first para is a typo. Governance cannot be outsourced to SEBI or to a not-for profit. It is the regulatory arm which can be.

The second para is even more unclear - after naming 'ownership restriction' as a cause of lack of meaningful competition in the first para, he names lack of 'clear guidelines' 'regarding ownership of exchanges' as being problematic. This appears to contradict the first para. Secondly, it is not clear what is not clear. MIMPS regulations impose a 5% ownership cap on non demutualised exchanges and this has been extended to other exchanges as well. So what is this that Jalan Committee has crystal clear and that is not contained in MIMPS regulations which needs to be implemented?  

Of course, my previous view has been that the 5% cap is itself ultra vires and beyond the parliamentary mandate of trading  member's voting rights (provided by statute in SCR Act).  Besides, it is just wrong - not a single country in the world has an ownership cap on shares of exchanges - see Annexure C of the Jalan Committee - particularly important to read the last column, if don't read the last column you don't get the real picture - which shows that countries impose a fit and proper rule and permissions - not a cap on ownership. No one wants a drug lord to be a substantial owner of an  exchange. 

See also my @SandeepParekh twitter exchanges with Mobis @mobis_philipose


Mobis said...

Thanks for your comments Sandeep. The point being made is that existing regulations are insufficient to process a new exchange application, as the long-drawn MCX-SX case has evidently proved. MIMPS regulations, you might agree, were meant for mutualised exchanges. When the MCX-SX application came in, Sebi had no choice but to ask them to comply with MIMPS because there was no other reg applicable for a new exchange application. Since your question is about clarity, don't you think we require clear rules laid out for the ownership and governance of exchanges? Whether we agree or not with the 5% ownership restriction is besides the point.

Sandeep Parekh said...
This comment has been removed by the author.
Sandeep Parekh said...

My short view is that MIMPS (for all exchanges) is a) illegal b) undesirable c) adversely impacts governance d) should be promptly deleted.
This may sound extreme, buts it's not.

There are extensive governance norms already in place for exchanges - if you doubt that - take a look at the Rules of BSE and NSE - which are primarily governance documents. Jalan Committee didn't invent governance in exchanges. Empowerment, checks and balances and accountability of various persons in the exchange is what would be governance right?

My key issue with your piece is - how are you showing Jalan Committee brings (desirable) clarity and value addition to the governance norms of exchanges. My view has been that the Jalan Committee brings negative value to the table and would destroy competition while degrading governance. I have explained in the past why - so am not repeating myself here.

Saurabh said...

Hello Sandeep Sir,

I have been following your text for a long time and totally agree with your view on Jalan report.

As an Indian its really hard to even believe that a 6 member team with a combined experience of ~150 years in securities law worked for 11 months (Jan 6 2010-22 Nov 2010)and then published a small 85 pages report (out of which most of the text and annexure's are as is copied from 2-3 IOSCO reports) -- Mobis - I am not sure if we can assign this team with the task of framing new laws (going by their current efficiency, we may not see any useful new law during this lifetime..:-)

Now as we go further into their report, we come across some ridiculous idea's and non-sense logic.

The main theme is "exchanges can't get listed because of conflicting interest b/w for-profit entity vs. its role as regulator" (Other logic's related to share price and exchange collapse is beyond limits of common sense)

This point still make sense but unfortunately Jalan forgot to take a deep look at some freely available IOSCO+BIS+ESMA reports. These reports provides details around options available to resolve conflict of interest and have already been successfully adopted in other countries
1. SRO model - as adopted by US where SEC established FINRA.
2. Close supervision model - as adopted in UK where LSE still does its regulatory role but is closely monitored by UKLA (an FSA controlled body). The same is the case in Germany (BAFIN does it)
3. Transferring powers to regulators - This is not tough as now a days governance/surveillance etc is all tech driven and is any way monitored by regulator and only implemented (infrastructure wise) by the exchanges.

Jalan is saying that our market is premature to think about these (has he even compared size of other markets at the time when their exchanges got listed after adopting 1 of the above approaches)

I think, the whole Jalan committee effort doesn't bring any value add to the market. Whatever (somewhat) clarity we are talking about was already there (even in before Jalan era)