The Indian stock market today boasts of world-class technology, marquee global fund managers, more than two crore investors and, above all, a sound regulatory framework. The market has come a long way since the early days when a handful of traders transacted under a banyan tree in erstwhile Bombay.

A large part of this transformation happened after 1992, when the stock market regulator, the Securities and Exchange Board of India, was formed. SEBI has played a major part in sprucing up the Indian market, institutionalising exchanges and hauling up the wrongdoers. But the journey since 1992 has been far from smooth. As the market and the investing culture in the country evolved, new problems cropped up that needed to be addressed. Thankfully, the chiefs of SEBI have proved up to the task, pushing through one reform after another over the last four decades.

GN Bajpai’s account about his stint as SEBI chairman between 2002 and 2005 provides an interesting insider’s view of the institution’s functioning. The book contains many anecdotes; some of which are not publicly known. The manner in which SEBI’s functioning is closely controlled by the Finance Ministry, unlike the RBI which has a greater degree of autonomy, is also brought out clearly in this book.

The book tries to recount most of major reforms done in that period, including crunching settlement cycles, introduction of STT, providing financial autonomy to SEBI and improving market surveillance. The thought process behind these regulatory changes and the manner in which all the stakeholders need to be cajoled to agree make for interesting reading.

But in a bid to simplify the stock market parlance for lay readers, the writer has gone to great lengths to explain various terms, which breaks the narrative. While the portions where a story-telling style is adopted make for a good read, other parts are rather heavy. Also, a less self-laudatory style in some parts would have been more appealing.

Ad hoc choice

At a time when the country has witnessed the dramatic exit of Urjit Patel as RBI governor, and the manner in which a former IAS officer has been brought in to fill his seat, the portion in the book that describes the manner in which Bajpai was made the SEBI chairman highlights the ad hoc manner in which crucial regulatory posts in the country are filled.

Bajpai was abruptly, and quite reluctantly, moved from the post of LIC chairman and thrown into the deep end, during a very turbulent period of the stock market’s history. As he writes in the book, “When I look back, I was not keen on the job. The reasons are two-fold. First, after the major capital market misconduct of Ketan Parekh, many horror stories were being published everyday in the media about the stock market, intermediaries, entrepreneurs and investors, Unfortunately, even the SEBI staff were not spared…Second, I was doing considerably well as the LIC Chairman and was being complimented by all our stakeholders.” But once in the position of the SEBI chairman, Bajpai went about his task of addressing the problems within SEBI as well as in the market with gusto, bringing about some significant reforms.

The 2004 election aftermath

The chapter in the book dealing with Bloody Monday, on May 14, 2004, brings out the drama and action around one of the worst days for the Indian stock market very well. It also makes one almost sympathise with the regulatory heads, who have to make key decisions, which can make or break their careers, on such days.

All political pundits had predicted an NDA victory in that election following the strong ‘India Shining’ campaign and perception in the run-up to the elections. But the Congress emerged as the largest party and Sonia Gandhi was being projected as the Prime Minister of a coalition government that had the Left parties playing a prominent role.

The selling wave that hit the market on May 17, 2004, took the Sensex 17 per cent lower in just three hours. Circuit breaker had to be applied twice, when the Sensex fell 10 per cent and again, when it fell another 5 per cent. The SEBI chairman’s statement was important after the second halt. Bajpai was in Jordan for an IOSCO meeting when this drama was unfolding. When he switched on the television before leaving for the meeting, he says, “I stood there numb, watching the bloodshed in horror.”

It then fell on him to decide if the market should reopen that day and risk another 5 per cent meltdown or to keep trading suspended for rest of the day. “I knew that if markets revived that day… there would be many fathers for my decision and I would never get any credit for it. However, if my decision backfired, then my neck would surely be in line. I took a two-minute breather, drank a glass of water, prayed to gods… decided to follow the rule book. The markets opened. And they say, rest is history.” Markets recovered dramatically from the lows, once trading resumed.

Dabbawallahs

Another interesting chapter in the book deals with ‘ Dabba trading’ or illegal trading in stocks. This chapter begins interestingly. “One morning in July 2003, a group of four or five men struggled their way through Byculla chaos to reach an old, worn-out, shabbily painted medium-sized building. They forced themselves inside and entered the office of Bansal Sharevest Securities Pvt Ltd. Once the men revealed their identities as SEBI officers, there was panic and commotion. The employees were first calmed before search and seizure of the premise began. This was the first ever raid conducted by SEBI and it was against a ‘ dabba trade broker.’”

These offices had mushroomed across the country, especially in areas where regional stock exchanges operated. These allowed investors to execute off-market trades in stocks, without brokerage or any other fee and without margins too. It was, in effect, pure gambling and was taking business away from the regular stock exchanges. The book reveals that at one point in time, dabba trading recorded a daily turnover of ₹2,000 crore while turnover on regular exchanges was ₹4,000-8,000 crore.

SEBI’s crackdown brought these to a halt. But the limited powers of SEBI — it can only issue warning, impose a monetary penalty, cancel their licence or debar them from market — leaves open the risk that they will make an appearance in some other form.

Introduction of STT

The chapter on Securities Transaction Tax that was introduced in Bajpai’s tenure also provides insights into the thought process behind its introduction.

The book reveals that it was due to the representation made by FIIs in overseas forums that the idea of STT came to Bajpai and Chidambaram. FIIs originally were liable to capital gains tax alone. Capital gains are taxed when the gain is known and transaction is complete. But the large gap between the time when FIIs filed their returns and the assessment was finally done, resulted in the liability eventually turning out higher.

Since most FIIs were intermediaries, they were unable to collect the difference in tax liability from their clients. STT was proposed as an alternative so that tax is collected on both buy and sell transaction, while reducing the short-term capital gains tax to 10 per cent and making long term capital gains tax-free. Domestic brokers were clearly unhappy. But adverse market reaction was averted by convincing the brokers’ representatives that the rates will be reviewed at a later date.

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