Among the different economic regulators, the job of the chairman of the Securities and Exchange Board of India (Sebi) is of more than ordinary importance. The roughly 3,000 firms that are traded have a market value of Rs 57 lakh crore: more than twice the non-food credit of the entire banking system. Taking corporate bonds into account, the market has a value of roughly Rs 65 lakh crore, and the total turnover exceeds Rs.1 lakh crore per day on most days. This market has become the foundation of financing for India's corporations and is thus central to India's growth prospect.
The first task for the new chairman, when he assumes office next week, will be to focus on improving the processes of investigation and enforcement. Sebi's staff needs to be trained on understanding terms like `manipulation' and `disgorgement'. Good-quality investigations should be followed by drafting sound legal documents. An internal quasi-judicial proceeding needs to take place, where some Sebi staff argues the case of the prosecution, the accused are given the opportunity to defend themselves, and an internal bench awards a penalty if it is proved that there is guilt. Such discipline will greatly improve Sebi's quasi-judicial functions.
Recent stock market volatility has brought a fresh focus on the issue of stock market liquidity, which can appear to abruptly vanish. The new Sebi chairman needs to examine the issues of price limits and circuit breakers, the role for a pre-opening call auction, the rules about margins, short-selling based on borrowed shares, derivatives, and algorithmic trading, so as to identify aspects of the market design in India which need to be improved in order to obtain a more resilient market.
Strengthening these processes will have deeper implications for Indias GDP growth. A better-functioning system of financial markets will induce liquidity, not just in the big products like Nifty or Infosys but in smaller products, such as corporate bonds and small companies. Even if a market design is fairly bad, it is not hard to make Nifty futures liquid. But a great deal of sophistication is required in order to make a liquid market in a product with a market capitalisation of Rs 100 crore.
The new Sebi chairman will have to work hard in institution building. This involves attracting high-quality people (who might often be young by government standards), putting them in a meritocratic workplace with open discussion, and establishing transparency and accountability structures so that Sebi becomes not a one-man shop but a genuine institution that will be a key player in India's GDP growth. Committees have recommended merging the Forward Markets Commission into Sebi, for instance. The new chairman needs to build Sebi with an eye to this future.
As was emphasised by the committee that prepared the report on Mumbai as an International Financial Centre, a key story that is now unfolding is India's integration into the world of global finance. The looming challenge for Sebi consists of the global options to Indian financial markets. Many Indian firms are listing offshore; a Nifty futures market at Singapore is gaining ground compared with the National Stock Exchange, and so on. Such competition is, of course, good for improving quality and reducing cost in India exactly as has been seen with Indian manufacturing. Sebi needs to be very mindful of this dimension. It is not enough for Indian markets to look good by domestic or self-set standards; they have to become competitive by global standards.