The game of fortune has become highly unpredictable at the stock markets where stakes are huge. It may make a pauper a king or vice versa overnight. Who could have thought it possible for the Sensex that touched 21,000 points to hit the nadir of sub-8000 points in the same year! But this and many other developments are not making regulator C B Bhave lose his sleep. He takes comfort over the fact that there was not a single default or payment crisis duirng the highly volatile period. For him every rupee lost by one investor is a gain to another and his role starts only if there are any systemic failures. Securities and Exchange Board of India Chairman Bhave gives his perception of the market and the role of the regulator in a free-wheeling interaction. Excerpts:

PTI: When the global turmoil began, different regulators reacted or acted differently. Stock markets in India, although their fundamentals were strong, too left investors with losses that ran into thousands of crores of rupees. Is there a remedy?
C B Bhave: If you look at what has been happening over the past 15 or 20 years, the world is shrinking and countries are becoming more and more inter-dependent. So you have software companies who earn 90 per cent of their revenues from exports. To say that software companies will not be affected if something happened to those countries where they export, would be looking for the impossible. As the companies are becoming global, we have to be aware of the fact that what is happening in the outside world will affect us.

PTI: The market often spirals down or up by 1000 points buoyed by global developments and, by the time the circuit breaker comes into place, investors end up losing or gaining hundreds of crores. Do you think there is need for tightening the system of circuit breakers?
Bhave: Unless we see some system collapse possibility, we would not want to interfere in the price formation function. At times we forget the fact that there are two sides to the transaction: someone is selling and someone is buying. If Satyam’s share quoted at Rs 20 in January and they are being traded at Rs 60 today, then somebody had made money; those who sold in January on fear that this company was going to disappear, would now want to be part of the company, has in a sense lost money. Market is where people make money, people lose money and there isn’t much we can do about it.
People ask why did you close the market for the whole day on 18 May after the election results; because everybody knew election results were there and the market was going up you could have given a two hour halt and allowed the price to go wherever it went.

PTI: You said that the market was up on the day of election. Many theories say that most of the brokers had already sold their shares before the election assuming that there would be no decisive verdict. So they had covered the position and wanted to buy at whatever price was available. That is why it was going up in one direction?
Bhave: If it were true then on Tuesday also same thing would have happened. Because on Monday they were hardly given any opportunity to do anything. In one instance the market closed in 10 seconds and in the other the market closed in 15 seconds (for the day). So they didn’t get the opportunity to cover their positions. Next day they were able to cover those positions. Assuming what you are saying was right: they were able to cover those positions without any disturbances to the market price.
Because by then supply came in. You see even the fact that the market is going up like this is news and that is not known to everybody instantly. So when people got to know that, look these prices are available, many people decided that, ok at this price it is worthwhile selling the shares and book profits.

PTI: So you didn’t see any hanky panky or anything worth catching your attention or your intervention in the entire flunctuation? Whether it is global market turmoil or Indian market fluctuation, you are fully confident that, the system is good and it can handle any kind of fluctuation?
Bhave: Yes. In fact, if you look at our last year’s experience, in 2008 beginning the market was at 21,000 and we ended the year at about 9000. So the market could take in a year a fall from 21,000 to 9,000 without a single settlement failure. And every settlement being done on time on a given day is something that created lots of confidence in the minds of people that these are assets that you can sell.
If you look at the global financial turmoil, one of the problems that faces these banks was the so called derivatives that they have entered into - exotic derivatives and so on - and they did not know how to value those assets on their balance sheet. Why? Because there were no organised market so there was no price that they could look at. None of that happened in the equity markets.

PTI: Would you entually eliminate the system of circuit breaker ev?
Bhave: There is a bit of contradiction in saying that I want free formation of price and I am also saying I want circuit breaker. Where we set the limit is a matter of judgment but there are some practical difficulties when prices suddenly rise and suddenly go down.
Those people who have buy and sell position in the market may find that the margin they have given to the exchange is not enough and the exchange may make a call for extra margin. Typically what the brokers do is, they handle this by keeping some extra margin in the exchange so that their variations are nullified. If it’s too big a call, then the broker may take some time. He has go back to the client and collect the margin because it is a client’s position then; the way the trading system is we cannot do it in a short period of time. Somewhere we have to keep the limit if the market varies beyond this and then we have to shut it down for the day. We are still studying the subject since the demand has come up.

PTI: In the case of Satyam the disclosure came in the dead of night and the American exchanges were informed before the Indian stock exchanges or the stockholders got to know about the entire scam. The American exchanges put a ban on trading in Satyam, whereas the Indian regulators allowed the trading to go on. The market crashed. Your comments?
Bhave: The email that (Satyam founder) Mr Raju sent to the exchanges, as well as officials in SEBI and even me, was actually sent between 9 and 10 in the morning. So actually our market got the information first. When the email came, the issue before us was that if this email is fake, then disclosing it to the market is a big risk. If it was true, it was dangerous not to let the market move. At that time the issue was: do you close the market or do you allow the market to operate? Now if there is somebody who wants to get rid of the shares because of Mr Raju’s confession at price ‘X’ and somebody knowing about such a confession wants to buy at that price ‘X’, should we as a regulator be coming in the way of such a transaction? And our judgement at that time was that we shouldn’t be coming in the way of such a transaction.

PTI: The common investor is often puzzled when the market goes up and down in one day. How do you address the issue if you have to draw a large number of people in to the market?
Bhave: I think what we need to do is investor education and this is a continuing effort. If you are an investor, however, enticing it may be, don’t look at the things going up and down from second to second. It does not make sense. You are not a trader. So investors need to invest with a different philosophy. Whereas trader will keep looking at it.

PTI: In the peak of financial turmoil, some countries banned short selling. Are there chances here?
Bhave: We studied as to what these people did in terms of banning short selling. You have the US where they banned short selling in the cash market but let the practice continue in derivatives. So you could short in futures but you could not short in cash market. What purpose does it serve?

PTI: Do you think Indian markets behave much better than American markets and Indian regulation is much better? Are you also saying that Indian regulators or Indian markets should not play a subsurvient role to others and be leaders?
Bhave: I would agree with the second thing. With a caveat, that we should know that our size is still small we can be market leader in certain respect; in certain other respects we can’t because wherever size is required we are not able to provide that size. But our advantage is that our size is growing and growing at a far more rapid pace than their size. So when their economy grows by 3 or 4 per cent, we grow by 9 per cent. And when their economy is minus we are at 6 per cent plus. So that’s not bad. That means that our size is growing and if we really want a place at high table, then we have to learn to lead.
The other question whether we have been better regulators in the face of crisis that came in, probably it is too early to judge. The world is still in a turmoil and we shouldn’t make the mistake of patting our backs too early. It appears that the crisis was handled much better in India.

PTI: Did you find any instance where India handled a situation much better than the American or European markets did?
Bhave: Our Central Bank was far more alive towards what was going on in the market and from 2007 itself the RBI started putting restrictions on lending by banks against real estate.
They did a wonderful job in saving our system. As far as those complicated products are concerned, we cannot take credit for that because for something that is not here we should not be taking credit. Probably we were lucky that the market was not evolved enough.
Our debt mutual funds on the liquidity position in October had become so tight, because everybody was crying for redemption, the liquidity needs were handled very well among SEBI, RBI and the government.
We didn’t have problem as such. Whatever was borrowed in October could be returned by end of November. Quickly the market came to normal level.
I feel we can truly be proud of some of the things that happened in India in last one and half years.