INSIDERS do more than TRADE in INDIA'S BULL MARKET.
To keep the bull run going, India has to work
harder to protect outsiders—or, to put it another way, it will have to work
harder to disempower insiders, by streamlining laws if necessary.
The WhatsApp
story seems to confirm something of an open secret in Mumbai stock market
circles: There are closed networks that tend to get information about companies
well before the general public.
In India, you don’t really exist till you’re on the
right WhatsApp groups. It’s on those private chat rooms that political
campaigns are sharpest; where India’s sprawling extended families quarrel and
make decisions; and, according to a recent Reuters investigation,
where company quarterly results are predicted with surprising prescience.
There’s no proof of insider trading yet, but officials from the Securities and
Exchange Board of India, or Sebi—India’s market regulator—told the Economic
Times that they were looking into the reports.
This is just another reminder of the fact that,
while nominally India’s financial markets are set up to protect ordinary
investors and market participants, in actual fact they work to protect
insiders. This isn’t generally understood, given that India’s laws against
insider trading and protecting minority shareholders are strict on paper. In
the World Bank’s ease of doing business indicators, for example, one of the few
domains in which India has consistently done well is in the protection of
minority shareholders.
But here, as elsewhere in India, there’s a vast
difference between what the laws say and how they’re implemented. Indeed,
India’s Supreme Court recently chastised regulators, saying that their rules on
insider trading simply weren’t clear enough.
The WhatsApp story seems to confirm something of an
open secret in Mumbai stock market circles: There are closed networks that tend
to get information about companies well before the general public. Sebi
struggles to get insider-trading prosecutions off the ground. Meanwhile, foreign
investors operating in India are being forced to run investigations of their
own local employees and contractors.
Even if Sebi’s regulations were up-to-date and
detailed, enforcement would be hampered by staffing problems. The agency has
only 780 employees, one for every six companies listed on an Indian stock
exchange. (Fifteen times as many people work at the US Securities and Exchange
Commission, one for every company listed on an American exchange.) Nor does the
training or background of Sebi’s employees necessarily inspire confidence.
Add to that a culture that has long normalized
trading on insider information. I remember sitting, a few years ago, with an
acquaintance of mine from one of Mumbai’s old stock-broking families, a man
then in his late 50s. We were talking of the prosecution in New York for
insider trading of Raj Rajaratnam of Galleon Group LLC, and of Rajat Gupta,
once a managing director at McKinsey & Co. Inc. After I carefully explained
what Gupta and Rajaratnam had done, my acquaintance shook his head, bemused.
How, he asked me, are traders expected to make money except by using their
networks to unearth information nobody else has? It’s no surprise, perhaps,
that many ordinary Indians don’t entirely trust the stock market, assuming it’s
loaded against them in some way.
A similar insider-first entitlement has led to an
even larger corporate governance problem. What in India are called
“promoters”—those who control companies, frequently the firm’s founding
family—have power far beyond what their actual ownership share warrants. They
pay themselves exorbitant salaries, strip the publicly-held companies they
control of assets, and have their decisions rubber-stamped by boards and
sometimes even by shareholder meetings that don’t have all the information.
After a couple of corporate scandals recently, Sebi
set up a committee led by the well-respected banker Uday Kotak to investigate
how governance could be improved. Kotak explicitly said that he saw his job as
ensuring “fairness for the entire body of shareholders” and not just a select
subset. The committee’s report called for multiple changes to how companies
were regulated and how boards were constituted.
But it isn’t that easy to make changes in India. At
least one government minister said that the report was “completely off the
mark.” And preventing insiders from taking control of companies would require
Sebi to investigate the privately-held, or unlisted, subsidiaries of
publicly-traded companies. Sebi doesn’t have that power and it isn’t certain
that the Delhi ministry that does will give it up easily.
Kotak pointed out another open secret about the
Indian private sector, too: Most activity at many publicly-traded companies was
nominally carried out by unlisted subsidiaries—and so wasn’t audited, or
transparent enough for the average shareholder to figure out. He could easily
have added that some promoters tend to use unlisted subsidiaries to hide their
control and to move money around in ways that shareholders or the government
can’t see.
India’s government is hoping that more and more of
its citizens will turn to the financial markets and shares as a vehicle for
their savings, giving up on gold and on real estate. And, certainly, the
markets’ bull run has been one of the few good news stories in the Indian
economy at the moment. But to keep that run going, India has to work harder to
protect outsiders—or, to put it another way, it will have to work harder to
disempower insiders, by streamlining laws if necessary. Bureaucratic wrangling
between regulators and the government shouldn’t stand in the way.
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