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Politics Of Policy | Saving Markets From Marketmen
Indian markets remain stunted because some players are exploiting exchanges for money laundering and tax evasion
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An important feature of mature economies is the diversity and vibrancy of its markets. Professionally run exchanges that operate on fundamental rules of transparency deliver tremendous value to economic development.
India has been fortunate to have been among the first in the world to encourage and develop exchanges. In the last 25 years of reforms, the financial markets have evolved and the regulation is rapidly becoming world class.
Stock and commodity exchanges in India have consolidated to offer real value to investors. There was a time when exchanges were run by closed club of brokers who profited at the cost on retail investors. The opacity in the exchanges led to frequent scandals that finally forced the regulators to introduce professionalism and transparency.
However, some brokers in the market still continue to maintain un-professional mindsets. This attitude has time and again undermined the concept of exchanges in the minds of civil society and policy makers.
Take the continuing saga of the brokers who are accused of serious fraud in National Spot Exchange Limited (NSEL). A committee set up by the High Court of Bombay on NSEL default has now asked for audit of broking firms accused of misusing clients for questionable trades. These brokers are accused of using client identity to conduct trades without the knowledge of the client. Investigators feel that illicit funds may have been used for such trades to launder money. The committee has also asked market regulator Securities and Exchange Board of India (SEBI) to investigate the sources of funds used for these trades. The accounts of these brokers could well reveal links to dodgy off-shore accounts. Effectively, the brokers seem to have been investing their own funds under the name of ignorant clients.
Coming in times of Panama leaks, the government has rightly decided to take a strong view. Finance Minister Arun Jaitley has made a statement in the Parliament about the same issue indicating that investigative bodies are looking at foreign exchange violations and related economic offences.
The Finance Minister will have to keep in mind the importance of strong exchanges and ethical broking houses. The regulators and government have to be unforgiving to those who are using exchanges for illegal activities. Indian exchanges – stocks and commodities -- have to grow stronger, bigger and be more diversified.
Across the world there are an estimated 60 major stock exchanges with a value of $69 trillion. Of these 16 have market cap of $1 trillion each. India’s National Stock Exchange and Bombay Stock Exchange are towards the bottom of this trillion dollar club. Among commodity exchanges, India has the potential of being an important player. Higher market cap and trading in commodities and securities will happen only when the investors have more faith in the system. Government will gain since it will create deeper markets and allow better revenues.
As the NSEL case develops, the government, regulators and exchange managers much keep the larger picture in mind. And brokers should also realise that short term chicanery is undermining long term bonanza of bigger markets in India. Market players would do well to introspect and ensure that Indian markets remain healthy and transparent.