Shooting the messenger

A stock exchange should instill confidence in companies to list and investors
to trade

To enjoy the freedom of pricing issues, it is clearly understood that issuers have to be upfront about their track record. What if the Securities and Exchange of Board rejects the offer document on the grounds that disclosures are “dishonest”? The issuer has the option to contest the dismissal with the Securities and Appellate Tribunal. Irrespective of the outcome, there will be an intangible consequence: loss of investor confidence. This would be particularly worrisome if the applicant is a stock exchange, where investors expect transparency not only from listed companies but also in trading. One of the reasons for the decline of the Bombay Stock Exchange was interference by promoters, who also happened to be trading members, in its functioning. Subsequently the exchange restructured ownership in the process of becoming a company. The bone of contention now is the indirect shareholding of a stock exchange proposed by MCX, a commodity exchange, and Financial Technologies, a tech firm. Apart from each owning 5% equity as per regulation, promoters hold warrants convertible into equity amounting to 60% of the capital. These shares would carry no voting rights but rank on par with ordinary shares. It is possible that those in possession of the remaining equity could take control or even obstruct management if even half of them vote as a bloc. This would happen if the remaining shares are not allotted to associates and those favorably disposed to the promoters. In fact, Sebi feels all friendly shareholders together should not hold more than 5% equity and has accused the exchange promoters of “withholding material information on arrangements regarding the ownership of shares of its shareholders”.

Very few companies listed on Indian stock exchanges have two classes of shareholders as the market strongly disapproves of promoters’ sly attempts to keep control of their company and at the same time invite investors to share the risk without any say in its affairs. Foreign investors have shown reluctance for this sort of dual structure proposed by the government in the banking sector. In this case, promoters have controlling economic interest rather than voting power. This appears to be an attempt to occupy a seat at the table to enjoy listing gains rather than a safety net to thwart hostile bids. Instead of acting to comply with Sebi’s demands, the promoters have chosen the scorch-earth policy followed by retreating armies. They hint at conflict of interest: C.B. Bhave,the Sebi boss, was earlier the managing director and CEO of National Securities Depository, promoted by rival NSE. This sort of character assassination is a typical strategy employed in corporate warfare. Witness the muck being thrown around in the SSK Microfinance power struggle. It was even insinuated that Henry M Paulson, the US treasury secretary during the financial meltdown, influenced the decision to allow Lehman Brothers to collapse, put pressure on Bank of America to bail out bankrupt Merrill Lynch at a very high price, and assisted J P Morgan Chase to buy Bears Stearns at bargain price due to this ties with Goldman Sachs.

By extension of this logic, all decisions on banks and mutual funds taken by previous Sebi chairman M Damodaran should be reviewed because of his stints with IDBI Bank and UTI. If O P Bhatt, the current chairman of SBI, is selected to succeed Bhave, should he recuse himself from rulings that may impact, say, ICICI Bank? Or, going forward, can a software company allege foul play against disciplinary action for violating the listing agreement with the new exchange whose promoter is in the IT space? In the appointment of Damodaran and Bhave, the government had made a cautious beginning of inducting IAS officers with some market experience to head Sebi. After this episode, do not be surprised if a vanilla bureaucrat is once again selected to head the watchdog. Another crucial question is: do we need a third stock exchange? Competition brings down trading costs and throws up arbitrage opportunities. At the same time, investors prefer a platform that has the weight of volume. For this reason, there has been a wave of consolidation between bourses in Europe and in the US. Online trading has made niche presence to attract regional investors redundant. NSE’s success also hinges on its ability to flag off derivatives trading before BSE could get its act together. This does not mean there is no place for another efficient and transparent bourse that will appeal to foreign investors. To succeed, the exchange should set an example by adhering to not only the letter but also the spirit of the law.
MOHAN SULE