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Pranjal Sharma

Pranjal Sharma has been analysing, commenting and writing on economic and development policy in India for 25 years. He has worked in print, TV and digital media in leadership positions and guided teams to interpret economic change and India’s engagement with the world

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Politics Of Policy | Default In Markets

The alignment between Finance Ministry, RBI and SEBI on willful default means that crooked brokers in the markets will face tough action by regulators

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It was just a few months ago that India faced the embarrassing sight of its regulators squabbling with each other on jurisdiction issues. The central bank and regulators of stock markets, insurance and commodities were unclear and confused about who was responsible for overlapping issues in banking and financial services sector.

One of the strong achievements of the Narendra Modi government has been the alignment of ideas, policies and action between key regulators and policy makers.

The Finance Ministry, markets regulator SEBI and the Reserve Bank of India have joined common cause on the matter of willful default by corporate borrowers.

The Vijay Mallya case has grabbed attention as he continues to mock the system and lives a lavish lifestyle. Mallya has not paid employees of his Kingfisher Airlines but has enough to party and enjoy his many villas across the world. The 17 banks to whom he owes billions are now standing up for their rights under a supportive government.

There are other bigger defaulters who have escaped attention since they kept a low profile. A combined effort by RBI, banks and Finance Ministry means that other defaulters will soon face a Mallya like situation.

The issue of default is not restricted to banks. In an aggressive move, markets regulator SEBI has begun action on brokers who have tried to defraud exchanges and investors.

Several brokers who are accused of manipulating the National Spot Exchange system are now facing action from SEBI. These brokers ended up aggravating a payment crisis of more than Rs 5500 crore at NSEL.

While NSEL will have to face up to its failures, SEBI action on brokers is a strong message to the community. Most brokers have been able to get away with manipulating the system partly because of jurisdictional issues. The Forward Markets Commission that was responsible for commodities and futures trading did not prosecute brokers.

However its merger with SEBI has stengthened the regulatory ecosystem. The combined weight of SEBI and the merged entity of FMC is now enough to crush misdemeanors.

Prominent broking houses like Anand Rathi Financial Services, Geofin Comtrade and India Infoline are accused of mis-selling to investors and then being unable to close the trades. Senior executives of these brokerages were arrested and are being investigated for misappropriation, fraud, cheating and criminal conspiracy.

NSEL has been representing its case and fraudulent behavior of brokers for many months with SEBI. It has cited instances where brokers made unrealistic promises to the investors on likely returns from trading on NSEL. Some were persuaded with foreign holiday promises.

Once the clients were snared into believing the myths being promoted, the brokers went a step further. The brokers used the unique codes of their clients without their permission for unauthorized trades. When NSEL discovered discrepancies and demanded clarity from the brokers, they refused to comply. Many of these unauthorized trades and manipulative acts contributed to the crisis at NSEL.

As a result, trading was stopped at NSEL and it was forced by the previous government to merge with Financial Technologies. While this is being challenged in courts, the culpability of brokers has not been adequately addressed. Exchanges can't be held solely responsible for misdeeds of brokers. On their part, equity and commodity exchanges must tighten their processes to ensure that manipulation by brokers can be spotted and stopped rapidly.

At a time when Indians are desperately looking for new avenues of investment, it is critical that SEBI ensure that defaulters and crooked brokers are held to the same level of criminal accountability as banks deal with corporate borrowers.

SEBI has to make an example of the brokers at NSEL once their culpability and criminality is established. With RBI and the Finance Ministry take an equally serious view of default, SEBI can ensure a new era of financial accountability in Indian markets.