Mr. Girish
Managing Editor of BFSI Vision

The Burden of Over Regulation

We seem to be doing it again. This time it is SEBI’s turn to over regulate. SEBI is planning to lower the limits of liquid stocks. This is in response to the flash cash of NIFTY on Friday. I have an issue with such knee jerk reaction by regulators. Our regulators – RBI, SEBI, IRDA and their ilk have the unique ability to jump in with intrusive regulations at the drop of a hat.

The usual process would be to understand the root cause of the problem and fix it. The regulators would do well to remember that the proverbial last straw that broke the camel’s back is not necessarily the culprit. It is the millions of straws that were already on its back. I also find it extremely disturbing that we make laws and regulations for the lowest common denominator, and not for optimum efficiency. I would start from something that everyone can relate to.

With great fanfare, the government announced the construction of the Bandra – Worli sea link in Mumbai. A nice six lane bridge across the sea. A few crashes later, we have a speed limit of 50 Kmph on the bridge! If the problem is with poorly maintained vehicles that lead to accidents, please ensure that such vehicles are not allowed to ply on the streets – much like Japan and Singapore. If the problem is untrained drivers, make the process of getting a driving license a bit more efficient – like the developed nations and stop issuing mail order driving licenses. Coming back to the history of financial regulations – let us start with Harshad Mehta Scam. The scam broke and the RBI was quick to ban everything that came to mind – ready forward deals, short sales, the brokers, you name it. As if the instruments were at fault. That the scam (if we can call it that – and I do not believe this was a “Harshad Mehta” scam) was a result of a few inept bankers lending money to brokers for quick gains was lost on the regulators. The correct way would be to see how such nexus could be broken. Instead, we banned instruments – some for a very long time! And some – like the restrictions on brokers which exist till date! Again, the easy way out. To give RBI its due, they did reform the operations of the securities trading to plug most of the loop holes.

Cut to the current proposal – to reduce the limits on liquid stocks so that the market does not suffer. Let us look at this. The proposal assumes that the problem is the 20% price limit being too high. They want it lesser than that. If the regulator believes that the cause is the 20% price limit, the why did the set it? And as a corollary, are the reasons for choosing the 20% still valid. If so why tinker with the limits? I see a spate of “inquiry Committees” constituted every time the limit is triggered. In a country with chronic unemployment, this is indeed a welcome measure. But ask yourselves, what was the problem – was it that the limits were too low or was it a fat finger error, compounded by high frequency trading (HFT)? Some unfortunate soul in a brokerage goofs up, the HFT engines pick these up and go to town. Some rich institutions made money, some other rich institutions lost money. The poor “mango people” watched from the sidelines. And by the end of the day, the prices were back to where they should have been. Why not simply let those rich institutions suffer the consequences. Especially since the “mango people” were not affected.