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SEBI's whims

WHIMSICAL IS THE term that springs to the mind when one considers SEBI's recent decisions. The market has seen a spate of decisions by the regulator which have little by way of a rationale, and the latest is the one where a committee appointed by it has suggested that the carry-forward mechanisms in place at the Bombay Stock Exchange and the National Stock Exchange be replaced by new ones by July.

As of now, the stock market has no idea if SEBI will accept the committee's suggestion, but the regulator's puzzling silence is causing concern. Tried and tested products cannot be done away by a regulatory fiat without causing damage. And when the stock market is left to wonder for over a fortnight about the fate of the existing mechanisms to defer payment obligations, uncertainty is the only certain outcome. Surely, the market participants, including retail investors, have the right to know how the co mmittee reached the conclusion that the existing deferral mechanisms need to be done away with. While they may or may not be the most efficient of mechanisms available for hedging, the market participants are used to them and will find it difficult to ch ange at short notice. These mechanisms do perform such key functions as providing liquidity and allowing investors with varying appetite for risk to participate in the market. BLESS and ALBM have been calibrated to incorporate the safety dimensions that protect the market integrity. And, finally, they exist on SEBI's approval. Yet, the market participants have no idea why they are no longer considered good enough to exist along side other `deferral' mechanisms.

That raises another question: How far can SEBI go in dictating the instruments the market should use. Certainly if an instrument or system threatens the integrity of the market, the regulator must take it out. But in this case it would appear that SEBI w as satisfied with the safety mechanisms incorporated in ALBM and BLESS. This makes the committee's decision and SEBI's subsequent silence all the more puzzling. Often in the past, the cry had gone out that BLESS' earlier avatar -- badla -- was a threat t o the integrity of market. With the benefit of hindsight it can be safely said that the concept was not to blame as much as lax regulation. Every time the regulator has stepped in to tighten the badla trading system, the integrity of the market has been strengthened. More sophisticated `deferral' products are unlikely to guarantee the safety of the market. Spectacular disasters in derivatives abroad suggest that misuse or recklessness is not country-specific. The critical thing is to ensure that the sys tem is resilient enough to absorb blows. In that context, the recent sharp fall in equities did show that the BSE and the NSE have the depth to absorb big blows.

All this leads, once again, to the question of the role played by SEBI in the recent past. It has been marked by conflicting opinions, knee-jerk activism and a disquieting trend of making important announcements without an explanation. When the regulator is seen to be whimsical, the market participants are unlikely to have confidence in the enforcement. The lack of confidence quickly turns into a crisis of confidence even when the problems are manageable. Replacing deferral products at short notice is, thus, no real solution.