From THE HINDU group of publications
Sunday, July 29, 2001


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Reconcile to altered equations

D. Sampathkumar

AN INTERESTING aspect of the downing of shutters last Monday by the stock broking community is the nomenclature used by it, to describe the event.

They termed it a mere `abstention' from work. But to all intents and purposes it was nothing short of a one-day token `strike'. Why this euphemism? It is not as though the community has not resorted to such direct industrial action in the past.

One recalls in this context controversies over the issue of registration fee demanded by SEBI and the Harshad Mehta scam tainted shares entering the trading system in the early 1990s, which led to brokers paralysing stock trading for extended periods. Nobody then, fought shy of describing it as a `strike' pure and simple. Strangely, however, this time around, it was described in more apologetic tones.

Does the label matter? It certainly does. In this age of liberalisation, using the weapon of strike to force the other party to one's point of view has lost much of its efficacy. Bereft of such potency the agents resorting to strikes run the risk of facing defeat with their threatened action and, with it, a considerable loss of face. This is because liberalisation, stripped of all the economic shibboleths, is simply a device that has brought in the entire global supply of tradeable goods and service to the consumers under one market place. A strike derives its strength from its ability to choke off the supply of goods or services that the agents forcing a strike are able to achieve.

Now, when markets are a purely local phenomenon, there is an absence of external supplies. The balance between supply and demand has always been tenuous, with the scales perhaps tipping slightly in favour of the suppliers. In the event, such choking off of supplies effectively means that consumers go without whatever goods or services the producing agents are able to bring to the market place but choose not to.

The pressure exerted by the consuming public -- especially if the product is consumed by a large majority -- is bound to prompt the government into some kind of regulatory action. This often results in the dispute eventually getting resolved to the satisfaction of those with the ability to choke off supplies. The managers responsible for organising the supplies too have a vested interest in restoring order as quickly as possible as a disruption implies the loss of not just `normal' profits but `super' profits as well. As there is now greater access to external supplies, or wider choice, demand-supply equations have undergone a change, with customers gaining the upper hand.

In a stock-broking service, the analogy of expanded supply may not quite apply. But the broker/investor equations are changing to the advantage of the brokers. Investors are no longer scenting instant profits rivalling anything that prospectors in Texan oil or Californian gold earned. So they are not exactly rushing in to put their hard-earned money into the stock market.

The demand for the traditional broking service product has shrunk. This means the balance of power has swung decisively in favour of the consumer, rather than the suppliers. Also, the government is no longer as keen to keep the stock exchanges up and running with the fervour it demonstrated in the early 1990s. Then, it was keen to sell India as an investment destination to overseas portfolio and direct investors. Frequent disruptions in stock trading are not the best advertisement for orderly conditions in the financial sector.

A decade down the reform road, India presents a more confident image to the outside world. It is another matter that the meltdown of information technology stocks in the West has cooled the ardour of global portfolio investors to equity investments, particularly in emerging markets such as India. The Government is unlikely to take the initiative to address the demands of the broking community.

In the circumstances, the timing of the industrial action could not have been worse from the point of view of securing a favourable outcome. But the banning of the badla system of forward trading and the demand for turnover-based fees left the brokers with little choice but to resort to industrial action now and not later. At the same time, it is no surprise that they have been reluctant to call their latest protest action a `strike', given its potential for loss of face which threatens them.

Even had their case been strong, the circumstances would have militated against a conclusion in their favour. As it happens, it is not. Take the case of turnover based fees payable to SEBI. For all the scepticism about the quality of oversight that SEBI provides (which is a different matter altogether) the fact remains that oversight costs money.

The question, then, is: who should bear this cost and in what proportion? It stands to reason that the costs should be borne by those who directly benefit by the oversight -- namely, the brokers -- and the quantum of fees should, again, be in proportion to the volume of transactions which directly impinge on the work of oversight. Viewed thus, the case for a turnover-based oversight fees is unexceptionable.

As for the ban on badla, the broking community opposes it on the ground that such a `deferral product' is needed, but it has not chosen to clarify why it is necessary. The fact is that the product has outlived its utility. It enabled brokers to buy and sell on the `margin'. This was necessary at a time when the market was fragmented, trading was shallow and there was a need for some market-making by brokers to smoothen out imbalances in the demand for and supply of shares. This required funding, and badla performed that role. But the market today has evolved a great deal.

There is greater depth in trading with a larger investor base. The presence of institutional investors, both domestic and foreign, adds solidity to the market. Derivative instruments, such as stock options and index futures, perform the role of `price discovery' just as well as `badla' could be expected to, but with none of the abuse that the older system was prone to. They had better reconcile themselves to the altered equations.

Related links:
Volumes crumble as brokers strike work

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