Friday, December 31, 2010

Exchange-listing, Free-markets and Ajit-Dayal

This post is in response to a blog (called Honest Truth) by one of my favourite bloggers - Ajit Dayal. He has commented about dangers of stock-exchange listing. I am unable to give the link to Ajit's blog because of some copyright issues. Google it and you shall find. Here goes my response:

Is the Ashok Desai in your blog the same Ashok Desai of 'Price of Onions' fame? I am a layman without any economics background. I remember reading 'Price of Onions' and nodding my head in agreement with most of the conclusions and illustrations. So if that same Ashok Desai is expressing a view, I will rather read it in his own words before agreeing with the opposing opinion (i.e. yours).

I agree and disagree with your post.

First the agreement part. I believe that stock-exchange is like police. Free competition and profit maximization should not be applicable for police. Monopoly of violence should reside with one agency and it needs to be regulated. Otherwise, only rich will be able to afford police and police will become mercenary. Same for stock-exchange. It needs to have regulation. I fully agree with you on that.

Now to disagreements. I do not know what happened behind the scenes, but I do know that private telecom companies come to my doorstep, pester me, plead with me to take a connection. I really get to choose. When there are complaints, I can call up customer care, yell at them and get the problem fixed (albeit in 15 days, rather than the 48 hours they promise). Contrast this with what used to happen earlier with government phones. Or for that mattter what happens today with BSNL connection. No Mr. Dayal, I still believe privatization and profit-making and multiple-players were good for telecom-customer.
On the airlines reference, I disagree again. You get those exorbitant prices only for the bookings made on the day or day before. People like me who plan air-travel 2-3 months beforehand, still get the cheap prices. Regarding service and on-board facility, I am ready to pay 10-15% premium for travelling a route through private airlines rather than air-india.
Your reference to SBI and ICICI was again irrelevant. Yes, I keep my money with SBI for security concerns. However, this sense of security does not come because of any belief in SBI being better regulated. SBI is not better regulated. I do not believe that SBI has better mechanisms and better people than ICICI. I kept money with SBI because I know that government will bail out SBI in case of crisis. This bailing out of SBI/LIC is not healthy but it is precisely this unhealthy assurance which makes me keep money in SBI. I am not very proud of this, but such is life.

Bottomline, I agree with your main assertion that exchanges should not be listed. I do NOT agree with many other points you mentioned in your blog. I would rather read a blog/article by Ashok Desai on the same topic before making my mind. I will not send the email to SEBI right now. I also hope that SEBI looks at the logic rather than #-of-emails they receive. Even if Mr. Ajit Dayal's is the only mail against listing of exchanges, it should win over crores of opposing emails on the strength of logic and not numbers.

9 comments:

Maaran said...

"I believe that stock-exchange is like police." - Dead Wrong. Stock exchange is just a market place. SEBI could be called the Police.

How do you think access to markets have gone UP and brokerage & transaction costs have gone down dramatically from the early 90s.

Fear of competition is what is keeping the BSE& NSE available/accessible when we need. You make them a monopoly and it would be like any govt monopoly . eg., Electric Power distribution or BSNL of old. The decay of service will be inevitable & you will be left crying to go back in time.

"Monopoly of violence should reside with one agency and it needs to be regulated. Otherwise, only rich will be able to afford police and police will become mercenary." - Profoundly wrong. This is the status quo in our social lives in India. Makes it easy for the Rich to bribe their way out of trouble.

The very fact you see SO many businesses in India employ private guards should tell you something - they don't believe in the monopoly of force provided by govt.

Sambaran said...

@Maaran, Thanks for your honest, no-nonsense and passionate comments. I am still holding to my opinions though. I will counter-argue on your comments. It will take some time. It will be great if you can subscribe to the comment section of this post. Otherwise, drop me a mail at baransam at the rate of hotmail dot com

Rajesh Thangamani said...

Sambaran, Sure. I just subscribed

- Maaran

Sambaran said...

You are right when you said stock-exchange is a market-place and SEBI is the police.
However when I said stock exchange is like police, I was intending to limit the likeness to profit making aspect only. Police should not make profits. Stock exchanges should not make unreasonable profits either. I am only restating what Bimal Jalan said about the topic. Please read up relevant sections in:
http://www.equitymaster.com/ht/detail.asp?date=12/30/2010&story=3&title=Vote-against-the-listing-of-stock-exchanges

You also differed with the point about police having monopoly of violence.
It is true that police is not in good shape. It is also true that anybody who can afford is employing private guards. However these truths do not imply that monopoly of violence should be taken away from police. It only means that police needs to be improved, keeping the monopoly intact; it is doable. Developed countries have shown how the police can be a monopoly and still perform well. In some pockets, Indian police is also doing a good job. So we do not need a free market of police forces for better policing-services.
PS: Private guards do not replace police. Private guards only attempt to restrict access, which is a subset of police responsibilities. A police's mandate is much more.

Maaran said...

Ajit Dayal, like so many indian entrepreneurs, is either just a confused capitalist or worse yet malicious crony capitalist. He supports SEBI's ban on initial load (which suits him) but won't support SEBI determining minimum asset size for MFs (which obviously doesn't suit Quantuam). For Ajit, SEBI makes a good decision if only it suits his interests.

Which regulator or govt in the world invented Stocks or Mutual funds or Mobile telephony or internet or petrol or TV....? Zero. Ordinary people did while "competing" in markets.
We don't respect the institution of market place & competition as much as we should in India.

Govt & regulators are always looking for ways to intervene in the market place & "regulate" the lives of people. The incumbent players in industry are only happy to welcome govt/regulatory intervention. They can "lobby" or "bribe" the policy makers & regulators to protect their market share.

SEBI's rules on MF entry load means no new MF fund house can possibly hope to compete with existing MF houses in future with no distribution network readily available to tap into. No wonder that makes Ajit happy.

To me, the role of SEBI should be greatly restricted. They shouldn't have anything to do with MF industry at all - deciding who the players are or the rules of the industry. The market will help the rules "evolve" like in so many other industries & countries around the world. Great institutions can only evolve through competition not arbitrary govt intervention. Tech industry is the least regulated and it has wonderful examples. Google, microsoft, apple. Closer home Airtel, Infosys all evolved not created by TRAI or IT ministry.

I don't have any opinion on listing of stock exchanges. That's for their owners/shareholders to decide. What SEBI should be doing is allowing free competition in the stock exchanges. MCX-SX's proposal to enter stock trading was recently rejected by SEBI. SEBI I believe wants to maintain the duopoly in Stock exchanges. There is heavy lobbying (or worse bribing) going on.

How can competition between stock exchanges be such a bad thing? Competition between NSE & BSE in the initial days is the reason why stock trading is a little more accessible & transparent today than the dark days of harshad mehta.

If the stock exchanges, god forbid, are nationalized (that would be utterly disastrous) or as Ajit seems to propose (regulate Return on Equity RoE just as for power companies) stock exchanges will go the way of power industry. Power companies may go on generating "reasonable" profits. But power will continue to remain scarce to the consumers.

Anonymous said...

India is at cross roads, with a choice of private health insurance versus fully self funded medical care. Which direction should it take ?

Sambaran said...

@Maaran,
I find Ajit Dayal's stand on no-entry-load and no-lower-limit-on-fund-size consistent. Just because one is SEBI endorsed and other against SEBI (possibly, not yet) you cannot say that Ajit's thinking is inconsistent. That finishes my today's quota of Ajit-Dayal-fanboy-role. However I am not alone. There is a horde of Ajit Dayal fanboys commenting at http://www.subramoney.com/2011/02/lies-lies-and-honest-lies/
BTW, I am not a die-hard fanboy. The blog was written in the first place to express my disagreement with Ajit.

Sambaran said...

@Anonymous
You asked a crore-rupee question. I do not have an answer although I have spent hours wondering about the healthcare issue. American model (private insurer) has its drawback. Government funded model has its drawback too (as we Indians are painfully aware of). Confused very much I am. I am sure about two things though. There are way too many restrictions in opening a hospital in India. There are way too many restrictions in opening a medical-college in India. These restrictions should be abolished.

Anonymous said...

What is dis-heartetning is lack of national debate on the issue.