Daily Editorial Update with Vocabulary - Sebi reforms: It is time for a Swachh Market Abhiyan

Hello and welcome to exampundit. So, from now onwards, we will be highlighting the important words and phrases and list them down below with their meaning. The editorials are usually from The Hindu, Economic Times and other major newspapers.

Today's topic is Sebi reforms: It is time for a Swachh Market Abhiyan.

Sebi reforms: It is time for a Swachh Market Abhiyan

Securities and Exchange Board of India (Sebi) chairman Ajay Tyagi has a clean-up on his mind. In the two months since he took over, he has tightened norms and decried crony independent directors at listed companies.

To cauterise this market though, he must start by pruning promoter holdings to 50% and searing shell companies that are used for manipulating stock prices. It will be a bloody clean-up, but a necessary one to boost investor confidence and limit market rigging in a highly manipulated market.
India’s publicly listed companies are seeped in a promoter culture that overshadows their public obligations. This means two things. If the promoters are ethical, transparent and take their responsibilities seriously, the company behaviour reflects that.

On the other hand, when promoters see a stock market listing as cheap big bucks, the dirty games begin. It makes their firms schizophrenic, a twin personality, if you like — public for tapping money, but less transparent on just about all else from governance to accounting.

In this highly muddled environment, chicanery rules. So-called independent directors are typically friends or retired bureaucrats with experience of navigating complex government red tape. In public sector firms, gatekeepers are often picked from a cabal of known associates — folks who can hardly be expected to raise a red flag. Team this with a mandated free float of just 25% and it’s easy to see how the market lends itself to malfeasance. This is true especially for small to mid-sized companies.
Often, the public shareholding is held by institutional investors or big traders with an arrangement with promoters, and get early tip-offs for their cooperation. Much worse, the free float itself is cornered by promoters through an excruciating web of shell companies. Recently, the ministry of corporate affairs stated that 9,00,000 registered companies in India don’t file tax returns and are possibly used for illegal activity.

The market is further distorted by traders and corrupt business journalists who collude with promoters to spread misleading stories to push prices up, or sometimes even short stock.
For all this to fade, the free float has to be large enough to make it hard to corner, and attractive enough for activist hedge funds, to play.

Everywhere in developed markets, activist investors have held companies accountable for their actions, especially to shareholders. In many cases, their activism has dethroned errant executives found guilty of wrongdoing or careless in managing company funds.

Several investors, even conservative Blackrock, are increasingly questioning ineffective value creation for shareholders, something regulators often fail to do.

By insisting that companies free up 50% of their stock for investors, Sebi will open up the market to large institutional investors who can hold promoters accountable. A higher free float will also automatically curb promoter ability to put vast sums of money into the market to manipulate stock price.

Sebi’s other challenge will come in clamping down on trading using shell companies. The government plan to digitise databases should help the regulator keep better track. It shouldn’t stop there though. Sebi will need to invest in automated surveillance that some in Silicon Valley are already developing. Using automation to weed through and marry big data from banks, Aadhaar, tax offices and the MCA can reveal manipulative trading and promoter linkages.

Traders are already ahead of the game by using algorithms for high frequency trading (HFT), often also used to spoof the market and distort trade. And the only way to sift through legitimate trading from spoofing is through the use of artificial intelligence and machine learning that mimics trader behaviour to spot lawless trades.

This is not to say it will end manipulation overnight. But at least the chance of getting caught will act as a deterrent to many.

The regulator’s real grit, however, will come from heavy punitive action against errant traders and promoters. For too long, India has tolerated a culture where traders and promoters caught red-handed get away with limp fines and continue to be active in the market even when they are barred from it. It’s a VIP culture that money and connections buy, and only one that the regulator can end. Tyagi must chart a plan to level the playing field and bring relief to small retail investors. It’s the only way to embark on Narendra Modi’s idea of ending the VIP culture and replacing it with an EPI — Every Person is Important — one.


Important Vocabulary

 publicly denounce.
 A Close friend. Here it is: close relationships between business people and government officials.
 Severly critical
 To pass slowly through
 the use of deception or subterfuge to achieve one's purpose.
red tape
 excessive bureaucracy or adherence to official rules and formalities.
 wrong doing (Especially by a public official)
 unbearably distressing
 moving in an aimless or lightly changing manner
 come to a secret understanding; conspire.
clamping down
 suppress or prevent something in an oppressive or harsh manner.
 a thing that discourages or is intended to discourage someone from doing something.
 inflicting or intended as punishment.
 courage and resolve; strength of character.
 to proceed in a lame, faltering, or labored manner.

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