As the National Spot Exchange crisis shows, even two decades after Harshad Mehta, parts of the financial system are still the wild west
21-Aug-2013 •Dhirendra Kumar
Depending on who one listens to and how things turn out, the word ‘scam’ may or may not be appropriate for the fiasco that is currently in progress at the National Spot Exchange Ltd (NSEL). The exchange says that the entire crisis was caused by the authorities blocking a certain type of transaction from being carried, which disrupted the trading activity. However, those to whom the exchange owes money are sure that the disruption in trading has actually brought to the surface a deep scam. The exchange just doesn’t have the physical goods to back up its liabilities.
However, this argument is a completely spurious one. Neither the exchange nor the brokers are innocent here. It must be noted that the big name brokers who are so successfully playing victims in the media are the ones whose salesmen lured investors to this exchange with all kinds of inflated promises. It’s the investors who are at the bottom of this pyramid. And at the apex is the regulatory system which failed utterly. Of course, it’s hard not to blame the investors either. They don’t have the excuse of being poor peasants like Saradha’s victims or the erstwhile emu farmers.
All kinds of authorities can wring their hands at not being able to chase down ponzi schemes in the small towns of Bengal, but even the NSEL is for all intents and purposes, unregulated. Or rather, here’s a patently financial market, run by a for-profit entity, which has somehow managed to ensure that it is regulated by the Ministry of Consumer Affairs! We’ve had a lot of heat and light for some years now about how financial regulation has come a long way, but for those who know how to, it’s easy to create holes in it. Even holes large enough to slip an entire exchange through!
A couple of days ago, the Finance Secretary of the country, while speaking at a big insurance industry conference was reported to have spoken at length about how the insurance industry and insurance grievance redressal was still loaded against the common man. Coming from the Finance Secretary himself, I don’t know whether this counts as an accusation or a confession, specially because it was accompanied by an entertaining story of how he was fooled by an LIC agent into buying a most unsuitable policy! But the real irony in the story that Mr. Takru narrated was that the policy he was sold was abusive by design--this wasn’t the agent’s crime but the LIC’s. In his speech, he displayed a complete awareness of the huge range of malpractices that go on as well as a lot of empathy for the victims. And yet he seemed inclined to the belief that somehow, at least part of the improvement could come voluntarily from the industry by basically just exhorting it to be nice.
Unfortunately, by now we have a great deal of evidence that this isn’t going to happen. Whether it’s running exchanges or insurance the real problem is not the principles or rules, but the people and their intentions. Regarding NSEL, in the matter of financial exchanges, it is the received wisdom is that these should be demutualised, for profit, entities regardless of the fact that the exchange is also a regulator. This is the way the modern, globalised exchange is supposed to be structured and anyone who speaks up against this modernity does so at the risk of being branded a dinosaur. However, this is not working in India. At every stage where there is a conflict between the profit motive and the regulatory duty, the profit motive seems to win out. In fact, more than the regulatory duty, it is the development agenda of the exchange that loses out. Sure, we’ve all heard that a day will come, a bright future when these will all develop deep ‘institutional capabilities’ but till that dawn arrives, real investors should perhaps focus on bank deposits.