Some years ago, Satyajit Ray made a film called "Shatranj
Ke Khiladi", which described how, a couple of centuries ago,
Indian noblemen were pre-occupied with a game of chess while
foreign imperial powers took over their palaces and their
kingdoms in the real world. An allegorical commentary on the
attitude of the heads of the several princely states that
constituted India, that film, like other such stories told to us
children of free India, evoked a sense of frustration. Well, in a
sense, a similar scenario prevails today in the Indian economy,
specifically in the financial service industry; though this time,
the threat is not so much that foreigners will come and take over
our republic - or our markets. The Sachs, the Lynches and the
Stanleys are hardly interested in ransacking our coffers or
lynching our izzat. Like all good banias, they are, quite
simply, interested in making more money. Our sovereignty and our
economic strength, whatever we can muster, is under threat from
our own (over)weight, our own selfishness, our own myopia and our
own narrow, parochial instincts - and this refers to more than
the mere community or caste based chauvinism we have practised
over the last few millennia.
There is a new kind of chauvinism emerging among the players in
the emerging Indian market - one born out of institutional
imperialism, and driven by a hunger for power. Replace the two
aristocrats in the Ray film with two career bureaucrats from
contemporary institutional fiefdoms or with merchant bankers or
brokers heading their respective financial empires, and the rest
is obvious. Pre-occupation with short-term victory and gain in
petty games played with one other is disabling market players
from combining their forces into a single power to combat the
evils of - no, not assorted new age avtaars of the East India
Company, but the enemy within - systemic weakness, inefficiency,
lack of adequate operating infrastructure, lack of transparency,
an inadequate regulatory framework and so on.
Ask a regional club of neo-banias who they consider their
competition to be. Delhi will say Bombay, Calcutta will say
Delhi, Madras will say Calcutta, etc. Nobody is going to say that
our (as in India’s) competition is going to come from China
or Argentina. The engineer-MBA-trader (read new-age dalal) will
then return to his committee meetings to evaluate proposals to
implement an automated trading system in his regional exchange.
Confront a bunch of institutional neo-babus over lunch at a
non-hierarchical table in a non-hierarchical mess, and ask them
who they consider their competition to be. Blah-blah of India
will say blah-blah-blah of India, who in turn will say
blah-blah-and-blah-blah of India. Well, they may not say it in so
many words. The engineer-MBA-technocrat (read new-age bureaucrat)
is too smart for that. He (or she) will actually tell you that
India’s competition will come from the rest of the emerging
market in Asia or South America or whatever. He may even pull out
a pie-chart showing how the US dollar was invested in these
markets last year. But when after lunch he returns to his pentium
PC with SVGA monitor and personal laser printer, he will return
to chalk out a plan of how to beat their friendly rivals, the
other institutions down the street, to setup the first automated
Indian trading system or the first depository or the first
derivatives exchange or the first all-singing all-dancing
financial institution of India. This is akin to players of a
cricket team competing among themselves to improve their own
track records, rather than working together to beat the other
contestants for the trophy.
Perhaps we are being too harsh. Perhaps such individuals act out
of a genuine conviction that they and their team in their
institution are better equipped to do the job than the other
guys, and that anyway, the other guys will not co-operate. Let us
ignore their arrogance for the moment (who knows, they may even
be right!). Perhaps they are acting in good faith. However, the
point is, they are not acting in concert - they are not using the
synergies of their different organisations, each with a unique
perspective and a variety of skills and strengths; they are not
dividing tasks among themselves in a manner that complements one
another’s march towards progress. Unfortunately, this can
only produce confusion, duplication, directionlessness and wasted
energies and resources. Even when such projects are successful,
the implementation is likely to be sub-optimal since the agencies
engaged in creating them were racing each other to get there
first, rather than rushing to meet a market need. Unless you are
a demonic character out of Hindu mythology, two (or more) heads
are not necessarily better than one. Not when they are competing
to command the same body to move in (presumably) the same
direction, but via different routes. Not when they are competing
to enable the same soul to seek liberation (or is it
liberalisation?) through different paths.
Then there are those who question the need for foreign
investment. We don’t need foreign investment, hence we
don’t have to compete with other emerging markets to attract
it, and hence we don’t have to bring ourselves up to
international standards. We are a self-reliant economy pursuing
our vision of non-aligned socialism and secularism; have been so
since independence and will continue to be so for ever. Good.
Presumably, in the rapidly shrinking business world of the next
millennium, if other economies or bodies corporate from overseas
insist on doing business with us, we will stone-wall them and
throw them out, just like we did in the past. If that fails, we
will, as good patriots, just pick up our matrubhoomi at its four
corners - as we would the rug in the living room, and move the
whole circus to another planet, together with the bulls and
bears, billionaires and beggars, bullock-carts and BMWs, babus
and banias - all bundled up in the clichéd rhetoric that might
possibly have worked over the first few decades after
independence. Today’s India is not secular; not the way it
was meant to be. It cannot afford to be socialistic - let’s
be real. And non-aligned? Non-aligned with what? Today’s
India has woken up to the fact that a nation does not operate in
a vacuum; that we cannot tell the world to leave us alone till we
find our own home-spun solution to our problems; and that it must
therefore slowly but surely open its doors to global forces and
learn to find its place in the sun. And this means international
trade, business alignments and a free enterprise based economy.
Today’s India is chanting the mantra of liberalisation,
which seems to have worked to some extent and in some areas. So
be it. Together with articles of frivolity and symbols of
decadence like colas and bubble gum, state-of-the-art technology
and technical know-how are now easily available in India at
affordable prices, thanks to liberalisation. The
telecommunications infrastructure, for example, is already
showing signs of improvement. Given that technology and other
facilitators are now within easy reach, what, then, stops us from
mobilising the resources under our command and the talent pool we
proudly export, so as to develop solutions on our own, with or
without a little help from our friends in the Western hemisphere?
Well, various things, all of which boil down to our attitude - a
geocentric (as opposed to heliocentric) world view, a tendency to
put ourselves before our community, a traditional disregard for
the customer, a tendency to confuse service with servility, to
mistake quality with quantity, a Luddite approach to progress (in
certain quarters), and lack of a collective will to win. Above
all, our biggest Critical Failure Factor lies in our inability to
work co-operatively as a team (though we have learnt since our
school days to mouth profundities like "unity in
diversity" at the drop of a pencil). India produces highly
talented individuals but worthless teams. This is why, our
software exports industry exports people and not products - we
may have some of the best brains in the world, but whatever few
products we do offer are far from being market leaders, even at a
national level. This is why we are world champions at chess and
billiards but mediocre (sometimes miserably so) at hockey,
football and cricket.
In general terms, the most fundamental pre-requisite for finding
and implementing a solution (at a community or industry level),
involves having a common understanding of the problem among
members of the community / industry, and assuming collective
ownership of the responsibility to solve it. Let us see how that
might work in the case of India’s capital market players,
seen as a single community or industry.
To begin with, do we all see our market the same way?
We’ve already dealt with how the word competition was
understood, and sadly, how none of the interpretations involved a
perception of the Indian capital market as a single entity, in a
global arena. Let’s take some more terms that are frequently
used these days. Consider fairly simple, commonplace words like
‘liquidity’, ‘transparency’, ‘risk
management’ and ‘speculation’.
First, while brokers see liquidity in terms of the volume of
transactions, liquidity to investors is a measure of the
readiness of exchange-ability of stock for money. Second, by
automating the trading process, stock exchanges believe that
markets are now transparent, while, paradoxically, a member of
two automated exchanges now has a choice of where to route a
client’s order. No rules exist which, transcending the
outdated, exchange-specific rule books, might govern such
decisions and this continues to remain an unchartered territory.
Third, while dealers see risk management in relation to their
open positions, investors’ risks lie in the time periods
between the day of trade, the day of actual physical settlement
and the day shares are actually transferred - because anything
could go wrong in the interim periods. Lastly, while there are
those who are convinced that speculation is a pre-requisite for a
liquid market, it seems to be a dirty word in certain other
quarters - there exists a mindset which differentiates between
speculators and "genuine" investors (thereby implying
that the speculator is a bogus or fraudulent investor).
Institutions, who ostensibly have a social conscience, would have
you believe that they do not speculate, because they buy or sell
with the intention of actual payment or delivery, and that they
step in to stabilise a volatile market and correct unhealthy
trends in market behaviour. Okay. Maybe this is all true.
However, we must first understand where, in reality, that line is
drawn. (See Box - Will
the ‘genuine’ investor please stand up)
If simple terms can be perceived differently and create confusion
and misunderstanding, how do you think people might react to,
say, a proposition that we improve our industry so as to meet
international standards and compete with our peers in a global
market? How do you think the terms ‘improve’, ‘our
industry’, ‘international standards’,
‘compete’, ‘peers’ and ‘global
market’, will be understood by our diverse set of players?
How would they react to a proposition that we initiate a long
term programme aimed at market integration and at achieving the
levels of maturity and sophistication expected from an emerging
market (even better, from an advanced market)? How do you think
terms such as ‘market integration’,
‘maturity’ and ‘sophistication’ will be
understood by a set of varied interest groups? Assuming that the
first hurdle - that of a common language and a common
understanding of terminology - is crossed, would they even agree
that this is desirable? Let us briefly look at the kind of issues
these propositions deal with.
Broadly, the domain for change in the capital market may be
classified into the primary and secondary markets for equity, the
latter in turn consisting of (i) trading and trade-related
processes and (ii) post-trade processes. In the primary market, a
set of standards for IPO management, including prospectus
standards and disclosure guidelines, listing requirements,
allotment norms and advertising norms, needs to be defined
together with a methodology for inducing intermediaries to comply
with these standards, possibly through an effective system of
reward and punishment. Going by various analyses of complaints
received by stock exchanges and regulators, it emerges that
service levels associated with subscription processing need to be
spelt out, checked and maintained within acceptable limits. In a
mature market, intermediaries who bring a new issue into the
market do their ‘due diligence’. We must all understand
clearly what exactly this means, how we will identify those who
don’t, and what we will do to defaulters.
In the secondary market, the quality of basic trading processes
(at the broker level as well as at the exchange level) like order
capture, processing, routing and trade allocation, billing for
transaction fees etc., needs to be upgraded in terms of ease of
access (at least from high investor population areas, if not the
whole country), response time for a transaction (must be uniform
and location independent), an obligation to provide best price
execution in a multi-exchange environment and above all, the
auditability of these processes. Mechanisms must be found that
help reduce transaction costs while also containing the risk of
transaction failure. Exchanges need to upgrade their functions
like market administration, surveillance and audit / control
systems, and improve the integrity / security of their systems,
resources and assets. Likewise, broking functions need to improve
in terms of customer responsiveness and service levels to their
customers. Both exchanges as well as members must enhance their
technology support for multi-locational operations, and
particularly in the case of brokers, for multi-exchange
operations.
The quality of basic post-trade processes like trade confirmation
/ affirmation, clearing / settlement and share transfer, needs to
be upgraded in terms of reduction of paperwork, improving the
quality of deliveries, enforcing the timeliness and discipline of
settlement cycles, checking settlement failure / defaults and the
management of crisis situations. The establishment of a
depository system will help to a great extent. But what happens
to securities which are not depository eligible? In the initial
stage (which, going by the experience of overseas markets, may
last well over a decade), even depository eligible securities
will be only partially dematerialised, since investors will have
a choice of continuing to maintain their paper certificates.
Thus, for quite some time to come, paper-based settlement will
continue to take place even after depositories commence
operations. Even so, the envisaged model must be disseminated
across issuers, clearing agents, R&T agents and proposed
depositories. The success of Indian depositories depends on the
extent to which they benefit investors, by way of reduced cost of
transacting, reduced time lag between transaction date and
transfer of ownership, and reduced risk of failure or loss. If
the agencies driving the initiation of a depository system are
serious about being successful, they must, over and above
expediting project implementation, also "win friends and
influence people". The role and functioning of participants
and other entities and interfaces with clearing houses, banks,
issuers etc. need to be clearly understood by all concerned.
Investors as well as issuers must buy into the proposed system
and must see its benefits accruing to them.
There are 23 stock exchanges scattered over the country, and
the top 10% or so of Indian stocks are traded in almost all of
them, every day. Each exchange has its own clearing and
settlement system. To date, enough has been said about the
problems caused by this situation. The most efficient price
formation mechanism is one where the aggregated demand at a point
in time meets the aggregated supply at that moment. This
translates to a single trading system for a given instrument,
irrespective of where investors are located, and a single system
for clearing and settling the trades arising out of the trading
system and transferring ownership of securities. India must move
towards a single integrated market, since this would be the most
efficient vehicle for issuers to raise capital and for investors
to invest in instruments of their choice. Thus, a series of
changes aimed at resulting in a single country-wide system for
trading, trade comparison, clearing and settlement, and ownership
transfer, must be brought about. This needs to be supported by a
country-wide banking network which provides for same day
clearance of funds irrespective of bank, branch and location. The
technology is available and the communications infrastructure is
already falling into place for this to happen - it only awaits
directed action by the concerned players.
Similarly, the legal and regulatory framework also needs to be
consolidated from the point of view of its currency,
comprehensiveness and uniformity across its representations:
various acts (e.g., SEBI Act, Companies Act, Securities Contracts
Regulation Act, Income Tax Act, Stamp Act, FERA and other laws of
the land), the rules, regulations and bye-laws of 23 stock
exchanges and proposed new institutions such as depositories and
derivatives exchanges. Not only must this framework be uniform
and consistent, but it must reflect current as well as future
trends, such as (to name a few): corporate membership of
exchanges; multi-exchange membership of a single broking firm;
norms / guidelines for a franchise network dealing with order
processing, safe custody and movement of paper; electronic
trading, clearing, settlement and transfer in a paperless
environment; multi-currency transactions; and overseas listings
of Indian stocks. Other than rule making or rule modifying,
regulators must also consider the issue of standardisation.
Standards are needed for securities codification (e.g., the ISIN
numbering convention designed by ISO and recommended by the Group
of 30), interface definition between automated systems of:
exchanges and their members, clearing houses and their clearing
members, depositories and their participants; and between these
institutions themselves (i.e., exchanges, clearing houses /
corporations and depositories). Standards for deliverables as
well as performance, of business processes (such as trading and
post-trade outlined above) must also be promulgated, together
with a methodology for monitoring and enforcing them, and
mechanisms which induce players to comply.
A consciousness needs to be developed among all entities in
the financial service industry - the regulatory authorities,
various intermediaries and service providers, core institutions
and, lastly, the investors. First there must be a common language
that everybody speaks, leading to an agreement on an agenda.
Then, an awareness must be brought about which reflects the
perception of the Indian market as a single marketplace - our own
marketplace - in a rapidly evolving and fiercely competitive
global market. Unfortunately, most of us come from a
"I-have-a-problem-you-find-a-solution" rather than a
"It-is-our-problem-we-will-solve-it" approach. Owning a
problem is the first step towards solving it. This means we must
stop worrying only about our beautiful homes and our beautiful
families and their future, and worry about the larger community,
larger interests and the future of our national economy. We must
stop being so totally absorbed in business manoeuvres aimed at
petty victories for ourselves or our firms, and start applying
our minds to plan for change towards a quality market. Not just
because we want to attract foreign investment, but because a
quality market is a good thing, per se, for all of us. As long as
we don’t have one, we will be the ones to suffer, for which
we will have nobody but ourselves to blame. So, let’s do it,
if not out of a selfless, altruistic motive, then at least out of
purely selfish, profit-oriented one. There is a way. But where is
the will?
Issuers, institutions, intermediaries, and investors of India -
Unite ! You have nothing to lose but your illiquidity.