Sebi is under attack from malicious actors looking to weaken India

SEBI should keep one eye firmly on efficient price discovery, which is the core staple of a well-regulated capital market.

We live in an era characterized by rapid dissemination of information through digital channels. It is also an era of reducing attention span of information consumers, who move from one headline to another.

It is hence unsurprising that institutions like the Securities and Exchange Board of India (SEBI) are under attack from malicious actors, who seek to hollow out Indian governance strength.

This “throw muck for something will stick” approach, which sanctifies allegations as eternal truth is visible again in the recent Hindenburg report, which accuses SEBI chief Madhavi Puri Buch of wrongdoing and impropriety. This report also sought to link the SEBI chief to Adani, subject of an ongoing SEBI investigation.

When the report came out in the public domain, financial services professionals who analysed the contents, unequivocally labelled it shoddy and mischievous.

In fact, there would be many international and domestic interest groups who would be interested in a pliant, convivial regulator. It is quite likely that some of these vested interests may have come together to conjure up such a chimeric report. Unlike past attempts, this time the conspirators decided to directly target the person at the helm of the affairs.

Madhavi Puri Buch: An accomplished professional

Let us start with the chief protagonist herself. Madhavi Puri Buch is an alumna of India’s leading educational institutions St. Stephen’s New Delhi and Indian Institute of Management Ahmedabad. She had a stellar corporate career, mainly with the ICICI Group.

She was at the forefront of online retail trading revolution in India. Buch has been a celebrated and accomplished banker much before she started her SEBI stint.

One can argue that education and professional pedigree does not automatically mean propriety. But this context is important because the frivolity of the Hindenburg allegations gets magnified manifold given the stature of the person they are aimed at.

Who likes a successful precedent?

Madhavi Puri Buch is the first private sector person to head SEBI. This role has traditionally been reserved for retired bureaucrats. While SEBI has been home to several accomplished bureaucrats too in the past, Buch’s appointment was meant to bring in the right balance of market discipline, market innovation and bureaucratic overhang to India’s securities markets.

No lobby will like to see a plum posting being given away to those outside the system. This could have been a precedent, should an “outsider” perform the job well.

Taming the Market Froth

Buch had sought to dissipate the froth in the market, where retail speculatory activity had built up, especially after the Covid-19 pandemic. India’s futures and options (F&O) market has been exploding, with a recent Moneycontrol report suggesting that Indian markets had cornered 81 percent of all global F&O volume.

While the Indian markets are strong and growing on the back of a Viksit Bharat dream, the Indian equity market is still much smaller than those in the US and China – two economies which will be ahead of the Indian economy for the foreseeable future.

Buch had sought to bring responsible investment practices, where gullible investors who did not understand the downside of F&O activity should not have their lifetime savings wiped out.

While she made suitable regulatory interventions, this would not be music to the ears of brokerage houses, new age digital trading platforms and market infrastructure participants, who rely on increasing derivatives contract volumes for their own profitability and future growth projections.

The reason digital brokerage platforms could levy no or low fee for equity trade was because they benefited from the derivatives volumes. While the exchange fee structure for derivatives incentivizes size of the order over the number of orders, brokers charged their customers highest slab rates, essentially charging the small investor more.

SEBI had asked market participants to stop using turnover-linked slab-wise fee and instead go for uniform transaction charges. This would have meant fundamental changes to the business models of various brokers and market participants. Clearly, this was not a stakeholder segment happy with Buch.

Bank Deposits Vanish

India’s F&O turnover has gone up from Rs. 2.1 lakh crore in financial year 2017-18 to Rs. 500 lakh crore in financial year 2023-24. This 250x turnover increase in six years is among other things, now squeezing deposit liquidity for the commercial banks, who are unable to lend. Their ability to attract deposits has gone down significantly, with the liquidity instead being routed to unproductive market speculation.

Contending with a Rising India

While there are a bunch of “impacted parties” who would not like Madhavi Puri Buch succeeding in her role and in her mission, this sentiment is in fact much broader.

India is today steaming towards becoming the third largest economy in the world. India’s rise has been confident, firm and most importantly deliberate – with the leadership of Prime Minister Modi exhorting Indians to dream big and achieve bigger.

This is not a situation for incumbent global powers, who would like to see India grow but only as much as they can control or deal with. Attacking a seminal Indian institution and destroying its credibility can bestow a systemic advantage to those who envy India’s rise.

Hindenburg may be a player or a willing conspirator in this “Discredit India” effort. Either way, the Indian government has to remain vigilant, for India’s rise will neither be uncontested nor automatic. Indian markets should see through this poor-quality conspiracy as just another hurdle in India’s journey to a high-middle income nation.

Syed Zubair Ahmed is a London-based Indian journalist with 30 years of experience with the Western media. Zubairster65@gmail.com