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Agitating brokers refuse to learn from the past

Last Thursday, the baton of leadership at the Brokers Forum truly passed from the hands of M G Damani to his one time protégé Deena Mehta. In the early 1990s, Damani, the former Brokers Forum president who passed away on July 26, 2001, had led a belligerent brokers' agitation against the creation of the National Stock Exchange and various proposals of the Securities and Exchange Board of India including the ban on badla trading (the uniquely Indian system of carry-forward trading which has been prone to much manipulation and malpractice) and payment of registration fees.

All through the 1990s, the Brokers Forum hogged plenty of newsprint because the pugnacity of their leader -- his allegations against the then SEBI chairman always made colourful newspaper copy. However, reforms in the capital market pushed ahead relentlessly despite brokers' protests. The NSE, financed by financial institutions and structured as a professionally-run company, came into existence as a counter to the frequent closures and agitation by Bombay Stock Exchange brokers.

With strong support from SEBI, NSE set the agenda for systemic reform, automation, efficiency and market discipline. Settlements were conducted in time, investors across the country gained access to a single national trading platform; messy paper trading was eliminated through the depository and the NSE pushed for derivatives trading and globalisation.

If anything, NSE was only handicapped by the inability of the banking system to keep pace with the paper reforms in the capital market. In less than five years, trading turnover on bourses had jumped exponentially. From around Rs 3 billion a day on BSE (when it accounted for 75 per cent on national trading turnover), the turnover on BSE and NSE averaged Rs 50 billion plus and was often twice that level. This growth coincided with a spectacular bull run, which ultimately turned into mindless mania until the great chase of technology stocks finally collapsed. In India, Ketan Parekh led the market and his cronies are alleged to have diverted several billion rupees to him from their companies in order to fund the rally. The losses have taken a toll on corporate bottom lines and wiped out the investment of millions of investors.

For brokers, the bull run was a huge bonanza. They invested in offices, technology and staff. Even brokers of smaller bourses benefited from inter-exchange arbitrage opportunities. But let us not forget that it was SEBI and NSE, w hich laid the groundwork for this change. That was in the last century. Cut to 2001 and the brokers' one-day strike last week. Led by Damani's one time protégé, the ambitious Deena Mehta, brokers across the country stayed away from their terminals for a day.

An advertisement issued by the brokers claimed that they have the largest stake in the capital markets and are the single largest contributor to its growth. Interestingly, the ad itself makes no specific demands on behalf of the brokers. It merely points out that

• Brokers not against reform and rolling settlements, however, the poor process of implementation of reforms and lack of infrastructure for derivatives trading had led to falling volumes and erosion of investors wealth. The ban on leverage products such as ALBM (Advanced Lending and Borrowing Mechanism) and BLESS, they claim, prevents investors from participating fully in the market.
• They go on to say that the broking community is the 'most regulated, maligned and misunderstood community in India'. Broker-bashing should stop, they say, 'the whole community cannot be labelled as "BAD" because of a few black sheep'. "Brokers have invested in 25,000 terminals across the country", they say, "no outsider has contributed for this development. Brokers have the largest stake in the capital market".

Since the flimsy statements contained in the advertisement formed the basis of the brokers' agitation, and is the framework for subsequent discussions, we must examine its claims.

Let us start at the beginning. Is the capital market only about the broker? Surely not. The capital market helps the corporate sector raise funds and creates investment avenues for investors. Brokers facilitate the process that too after a public offering of equity is listed on stock exchanges. A capital market cannot exist without investors - they are its largest stakeholders, which is why so much of corporate time is expended on discussing the constant breach of investor's rights and the need for good corporate governance. Indian investors are not just the biggest stakeholders in the system but they are also its biggest victims - they are cheated by brokers as well as corporate houses.

Brokers are the middlemen - they have an important place in the system, but must not delude themselves into believing that they are the system. Their investment in infrastructure and technology are only business costs and not a social duty. Often, paradigm changes in the business environment kill business despite the investment in systems and technology. The Indian reality is that nearly 20 small bourses face extinction due to technological changes. They are deeply in the red and are struggling to survive. Predictably, the most vocal members of the Brokers Forum are members of the small bourses. Members of the larger bourses sympathise with their plight and many of them participated in the strike only as a gesture of solidarity. But they are clear that solutions will have to be found and the brokers will have to find new opportunities.

When the Brokers Forum met after the strike to chart its future course of action, many members were firmly against any further stoppage of work, while others demanded an indefinite agitation. Some demanded that bringing back the entire leverage-deferral package of badla/ALBM/BLESS should be the main demand. A few brokers wanted introspection into the role of brokers' as well.

Previous experience shows that agitation and belligerence has only hurt BSE brokers. The NSE came into existence because of brokers' recalcitrance and quickly went on to become numero uno. The card value of the BSE dipped and competition intensified. Similarly, brokers across the country paid a big price for their decision to press ahead with litigation on the issue of turnover-based fees - leading to an embarrassing defeat in the Supreme Court after eight long years.

This time, the NSE brokers are also part of the agitation. Many of them are also cardholders at the BSE and smaller bourses but their protests are still perplexing. However, the biggest problem with the agitation is its timing. There is a huge crisis in the capital market and it has already led to the arrest of the top brass of India's largest mutual fund - the Unit Trust of India. Ketan Parekh, the central figure of Scam 2001 has been arrested and released and dozens of brokers on top bourses have been suspended. Some are in police custody for cheating investors even today.

Investors have lost a few hundred million rupees, a few have committed suicide - all this is bound to have a debilitating impact on trading turnover. The opposition parties in Parliament are baying for the finance minister's resignation and a fed-up prime minister has offered his resignation instead. The drama continues.

Amidst all this, if brokers insist on ignoring ground realities and pushing their demands, without acknowledging their own weakness and without giving the new system a chance -- they will be ignored. The proof lies in the fact that their strike merited a small single column write-up in most newspapers. The market too is unconcerned about brokers' complaints because it has simply moved on. It has adjusted to the changed environment with a quick shift in the flow of funds to the wholesale debt market. The turnover in this market has quadrupled to cross Rs 60 billion on July 30. Trading in the cash equity segment is also growing steadily from the July 2 levels when the new compulsory rolling settlement came into existence and arbitrage was banned.

It is now for the brokers to draw their lessons from the capital market and accept the new realities or pay a heavy price.

Sucheta Dalal

Money