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Not just a stock response

SEBI's crackdown on market manipulators involved in cornering of shares in the initial public offering (IPO) market is a welcome move.

india Updated: Apr 28, 2006 23:59 IST

The Securities and Exchange Board of India’s (Sebi) crackdown on market manipulators involved in cornering of shares in the initial public offering (IPO) market is a welcome move on more than one front. It sends out a clear signal to all market participants -- including, most importantly, investors -- that a strong regulatory system is actively supervising a surging stock market. This is a primary requirement in a market that has rapidly grown to global scale in size and scope of operations. With the bulk of India’s foreign exchange reserves coming from foreign institutional investors pumping in money into the stock markets, a scandal that exposes the ease with which the entire system could be manipulated by a handful could have potentially disastrous consequences, not only on stock prices, but on the entire economy.

Sebi has set another welcome precedent by meting out punishment based on the crime rather than the criminal. Although its order issued on Thursday is an interim one, and the severity of strictures placed on different parties varies widely, the fact that even very large players were ‘named and shamed’ in its order is a reassuring sign of an identity-neutral regulatory mechanism. Such actions should go a long way in assuring the world that India has both the expertise and the strength of will to ensure disciplined market functioning.

That said, Sebi’s investigations have exposed fundamental systemic flaws, which are more disturbing. In the instant cases, there has been a breakdown in the system of checks and balances that should have been exercised by market intermediaries, including depositories, depository participants and banks. This points at active connivance on a larger scale than one would have thought and cannot be dismissed as negligence. Closer interaction is required between Sebi and the RBI, the banking regulator. Sebi also needs teeth that bite, including powers of summary punishment. The fact that the Sensex bounced back from a 490-point plunge on Friday, as soon as Sebi held its order on one of the parties in abeyance, only confirms the view in market circles that in-built system of appeals and adjudication provides sufficient time for guilty parties to wriggle off the hook. The government needs to take urgent corrective action at the policy level and back its regulators in word and deed.