The Hindu Business Line : <I>Keeping the market regulated and ticking </I>

Securities markets have been around four centuries though in a formal structure for just about 70 years. A key to the growth of the market is regulation that has kept pace with the rapidly changing times. Indeed, regulation has emerged a key driver and definer of the market, directing its functioning and sustaining the growth.

Great Crash expose

In the dynamic world of finance and securities, as one set of problems get sorted out, another emerges. Continuous monitoring is thus a sine qua non of securities market regulation. Regulation assumed a place of importance, from the time Ferdinand Pecora, the New York City Attorney-General, exposed the dark side of the Great Crash of 1929; that led to a slew of reforms. In 1929 the US had no Securities and Exchange Commission (it was set up in 1934).

Though even in the 13th century King Edward of England had decreed that brokers should be registered, it was only in 1911 that the first comprehensive law requiring registration of both securities and their salesmen was enacted in Kansas, from where the Blue Sky Laws also originated. The original federal regulation in the US (the Securities Act of 1933) was based on the `Sunlight Theory of Regulation', which assumes that if investors are given all the necessary information they will make wise investment decisions.

Submitting the Securities Bill to the US Congress in 1933, President Roosevelt had said, "The Federal Government cannot and should not take any action which might be construed as approving or guaranteeing that newly issued securities are sound, in the sense that their value will be maintained or that the properties which they represent will earn profit. There is, however, an obligation upon us to insist that every issue to be sold in interstate commerce shall be accompanied by full publicity and information." To this his critics had quickly quipped, "Congress did not take away from the citizen his inalienable right to make a fool of himself. It simply attempted to prevent others from making a fool of him." Today, despite extensive disclosures and elaborate data dissemination, investors quite often get taken for a ride by the numerous ingenious ideas thought up by finance wizards-turned buzzards.

Exotic Products

As regulation tried to come to grips with human ingenuity, the globalising markets began thinking up exotic products with global reach thanks to the communication/IT revolution. Hedge funds that move rapidly, the complex derivatives and OTC markets reaching gigantic size are the current causes of concern. Though strained, regulation has managed to keep pace with the developments. Indeed, in India the phenomenal success of the dematerialisation, electronic trading, technological advancement, and instant processing and settlement are some of the triumphs of regulation, which has made markets more transparent and thus attracting large investments from institutions and individuals.

Costs of regulation

Some aspects of regulation became so stringent that issues of their cost and impact have become subjects of extensive debate, the most recent being the report to the US Congress on the competitiveness of the US markets post the Sarbanes Oxley legislation. Much of the success of quality regulation can be attributed to the coordination and cooperation among the regulatory authorities and the sharing of expertise and experience among them.

(The author is a consultant at Dun and Bradstreet India, Mumbai. The views are personal.)

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