Affairs of a public limited company should be debated openly

Ray · Jun 26, 2012

A CASE OF INCONSISTENCY

- Affairs of a public limited company should be debated openly

When I joined the finance ministry in 1991, government financial institutions were powerful, because they had powerful patrons in the ministry. They had some problem with the Bombay Stock Exchange, and wanted to start their own exchange. I was against it, since it would divide the turnover and reduce liquidity. But I also felt that the BSE should computerize, not only to cope with increasing turnover, but also to eliminate improprieties that the BSE was notorious for. Whenever the people who ran the BSE came to see us, they showed great enthusiasm for computerization. But once they went back to Bombay, nothing happened. Meanwhile, a decision on the National Stock Exchange, which government institutions wanted to set up, could not be put off forever.

So I went to Bombay and visited the BSE. Its board declared its intention to computerize shortly. Then I asked to visit its computer room, looked at the equipment, and talked to the staff. I could not avoid the conclusion that the BSE management had no intention of computerizing; the computer room was a joke, and the staff had nothing to do. The face- to-face transactions between traders, the little chits on which they were recorded, and the backroom paperwork which finalized the deals, gave enormous scope for manipulation which the members valued; computerization would destroy those opportunities. Once I was convinced of their attachment to verbal technology, I went back to Delhi, and approved the NSE.

Unbeknownst to me, a 25-year-old electronic engineer was in the team working then in the BSEâ€™s computer room. The BSE sent him abroad with others to learn how electronic stock exchanges operated. But it would not computerize its own operations. Finally, he left the BSE with three other friends and started a company. By that time, I had left the finance ministry and joined Business Standard.

I continued to be interested in stock markets. Once I was in Mumbai to meet R.H. Patil, the chief of NSE, who had been my colleague in the National Council of Applied Economic Research; then I walked into the office of a stockbroker. In the afternoon, four men walked in, took over computers and started playing. The broker told me they were speculators. They dropped in in the afternoon and made deals â€” generally bought shares. There was a pattern: share prices tended to go down in the last hour and rise in the first hour. So they bought in the afternoon and sold in the morning. Unbeknownst to me, the trading software of the NSE, including the tail end in the brokerâ€™s computer, came from the company started by the four friends.

However, product software is a one-time business. You sell it to a broker, and that is the end; a long-term business cannot be built on it. So the engineer decided to start a business that would bring continuing returns. It could be a stock exchange. We ended the licence permit raj in industry, but I was thrown out of the ministry before I could do more damage. The finance ministry continues its licence permit raj in exchanges to this day. The NSE rules the roost, the BSE barely survives, and no new exchanges are allowed. However, the Congress raj ended temporarily in 1996. The Bharatiya Janata Party, which came to power, was less parochial, and less protective of vested interests. It called for bids to set up a commodity exchange, and gave a licence in 2003 to the young manâ€™s company. The exchange has been up and running for almost nine years.

This young man reminds me of my friend, Narottam Shah. He was an exceptional Gujarati; he used his brain to think and write, and not to make money. He was working in the Times of India in the early 1960s, when I taught in Bombay University. We both used to meet in the house of Sachin Chaudhuri, and write for his Economic Weekly. In the 1970s, he saw a market opportunity: while there were many like us who could supply words by the thousands, no one could deliver statistics on demand. The government was the dominant statistics producer, but it was utterly disorganized. So Narottam started collecting statistics, organizing them and selling them. Once in a while, he would ask me to look at the statistics in a certain field â€” say, energy â€” and write an introduction or a guide. Sadly, he died in the 1980s. I still miss him.

His son, Ajay, is having an unusual problem. Like me, he writes newspaper columns. In one he wrote in Financial Express of February 4, 2009, he said that originally, exchanges (that is, markets in financial products) used to be places where traders got together and made deals (as under a tree, where the BSE started). A new development was exchanges that were companies intended to make profits. A companyâ€™s owners would naturally want to maximize its value, which depends on current and prospective profits. Their profit incentive can conflict with the needs of a market, which should be run in a way that is fair to traders and investors who trade through them. So exchanges run by companies need strong regulation.

He also said that the Forward Markets Commission, the regulator, asked National Commodity and Derivatives Exchange Limited to reverse a price cut. The NCDEX was smaller than the Multi Commodity Exchange of India Limited; it was not as if its price cut would threaten the MCXâ€™s survival. But the MCX was about to make an initial public offering; the NCDEXâ€™s price cut would have adversely affected the IPOâ€™s attractiveness. He said that the FMC was a weak regulator operating on weak legal foundations, unlike the Securities and Exchange Board of India, and that the FMCâ€™s weakness might have had something to do with the rise of the MCX.

On the basis of this and a similar article in Business Standard, the MCX Stock Exchange, owned by MCX and Financial Technologies, is suing Ajay Shah for defamation, not just in Mumbai, which is the home of both the Shahs, but in Surat and Kolhapur. I disagree with Ajay Shah, and even if I agreed, I would have phrased my arguments differently. But the MCX is a public limited company, not an individual. People invest in its shares; they use it to trade. Hence its affairs need to be as fully ventilated as possible in the media. The comments may be fair or unfair, right or wrong; all of them are a necessary part of the debate that forms public opinion. To accuse Ajay Shah of defamation for contributing to the debate has the effect, intentional or not, of discouraging people from engaging in such debate. Suits in out-of-the-way places like Kolhapur and Surat where neither Ajay nor his adversary lives are designed to cause Ajay extreme inconvenience, and to make it clear to potential critics that they could face similar consequences if they dared criticize the plaintiff. I find it unbelievable that the man I described at the outset, an admirable man in many ways, is the man behind the MCX Stock Exchange, the instrument of Ajayâ€™s harassment. I believe the NSE unfairly made things difficult for the BSE, and I was glad that Jignesh Shah started the MCX. I would wish him success, but not against Ajay. Jignesh is a rich and resourceful man; such men should use their power judiciously.

A case of inconsistency
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An interesting take on how finances operated and how it operates.

There is no doubt that the affairs should be debate.

Or have I missed something?

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Affairs of a public limited company should be debated openly

Ray The Chairman Defence Professionals Moderator

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Affairs of a public limited company should be debated openly

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