It has been a rollercoaster ride for India’s markets regulator the Securities and Exchange Board of India, which completed 25 eventful years of existence on Friday.
If India today ranks among the handful of countries considered as having a mature and modern securities market, the credit for this goes in large measure to SEBI.
CCI era
The picture was very different a quarter of a century ago. On the one hand, there was an all-powerful and overarching Government bureaucracy, which simply could not deal with concepts such as ‘independence’. The all powerful Controller of Capital Issues decided when companies could raise capital from the market, how much they could raise and at what price.
On the other, there were the stock exchanges, run as virtually closed shops by powerful cartels of brokers. Information systems were primitive, disclosures to investors minimal or non-existent, and price and market manipulation rampant. In addition, there was a powerful unofficial market, funded largely by India’s booming economy.
In fact, the very year that the SEBI Act was passed, arming it with statutory powers — 1992 — the newborn regulator was put to severe test, when the Rs 5,000-crore Harshad Mehta securities scam broke. While the root of the scam lay in the treasury bills market, under banking regulator RBI’s purview, the money generated was funnelled through the stock markets, powering one of the biggest bull runs in Indian stock market history and earning Mehta the nickname ‘Big Bull’.
SEBI has come a long way since then. The stock exchanges were cleaned up, professionalised and then corporatised. The creation of the National Stock Exchange — not coincidentally, headed since inception by two SEBI alumni (Ravi Narain, then Chitra Ramakrishna) introduced a new era of nationwide electronic trading, vastly increased the number of participants in the equity market and boosted the equity culture.
SEBI’s unrelenting efforts on corporate governance and disclosures helped. Its two committees on the issue — one under Kumar Mangalam Birla, and later, another headed by N.R. Narayana Murthy — introduced hitherto foreign concepts such as disclosure of board discussions, quarterly reporting of results, induction and strengthening of independent directors on boards of companies and tougher measures on insider trading and disclosures.
The primary market was also transformed, with power shifting to SEBI on IPOs. Over the years, measures like a mandatory red-herring prospectus, book building and auction methods to sell shares, the creation of an electronic depository system, independent clearing house corporations, etc., changed the primary market, while introduction of derivatives created the futures market. Like every regulator, SEBI, too, has been put to test by those trying to beat the regulations. Perhaps the boldest challenge came from Ketan Parekh, who managed to manipulate the prices of certain favourite stocks — the notorious ‘K10’ scrips — with impunity.
SEBI finally barred him from the markets, but it was not a decisive win. His name continues to crop up even today, as the shadowy figure behind many market chimeras.
Then there was the infamous IPO scam of 2005, when Roopal Nareshbai Panchal and her associates managed to make tens of thousands of applications and cornered shares in many sought-after IPOs, making a mockery of SEBI-regulated depository systems and ‘know your customer’ processes.
It has also had its share of spats with other regulators such as the fight over Unit-linked Insurance Products with insurance regulator, or more recently, over deposit taking entities in the wake of the Sarada Group scam.
But for every such scam which hits the headlines, dozens of others are quietly nipped in the bud.
The saga of the scams that never happened is the ultimate tribute to SEBI.