The Hindu Business Line : SMILE, major changes ahead

FAR-REACHING CHANGES in the primary market procedures are likely if the first report of the Securities Market Infrastructure Leveraging Expert Task Force (SMILE) finds even partial acceptance. The report, now put on the SEBI Web site for a wider discussion, is expected to be considered for adoption by the Securities and Exchange Board of India board next month. The SMILE Task Force was asked to study the capital market infrastructure and make recommendations for substantially upgrading the procedures followed by intermediaries — merchant bankers, brokers, underwriters, registrars, share transfer agents and others. None of these intermediaries was subject to any kind of regulation until SEBI came on the scene in the late 1980s. Even then, the regulatory jurisdiction over them was extended tentatively and in stages: Merchant bankers were licensed first, followed by other intermediaries. By the early 1990s the capital market came into its own and the vastly increased business had to be handled by the intermediaries, with help from the regulator. Most had to augment their capital and adopt new technology. Consolidation was inevitable.

There can be no question that the market edifice, covering both primary and secondary segments, is today vastly superior to the one that obtained until the early 1990s. Yet, as the SMILE report notes, the progress has been uneven: The secondary market has shown greater resilience and absorbed technology to the extent that it can now be compared to the best stock exchange systems in the world. The new issues market, on the other hand, has languished partly because the flow of business — the number of quality offerings — has not been steady. Primary market intermediaries probably found no reason to upgrade in the absence of steady business. Moreover, though all of them are now under the umbrella of regulation, there is still a problem of fixing inter se responsibilities. Managing a share issue is a team effort and certain co-ordinating intermediaries such as merchant bankers have complained that they have no `contractual control' over the other participants. Investors have found the grievance redress procedure unsatisfactory, with most complaints addressed to the corporate issuer rather than to an identified capital market intermediary. Also, since post-issue work is done almost exclusively by the registrars, they get a disproportionately large portion of the flak when things go wrong, as they did spectacularly in the ONGC issue of April.

Among the major recommendations in SMILE's first report, two stand out. The first suggests an adaptation of the secondary market procedures to the primary segment. Many advantages are seen: The elaborate application procedure can be simplified; the existing database connecting brokers, bankers and registrars can be further exploited and used as a messaging system. Second, as part of an exercise to redefine the accountability of the market intermediaries to the investors, the lead merchant bankers should be asked to assume fiduciary responsibility for the funds paid out by investors. The corporate issuer will also have a joint responsibility. These and other recommendations are controversial but worthy of serious examination.

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