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Sebi moots central monitoring authority

Market regulator, Securities and Exchange Board of India has come out with a six-point strategy including a central authority to monitor flow of funds into the market to prevent stock scams in future.

The four-volume interim report, running into 1500 pages, said establishment of such monitoring authority would insulate the securities market from the vagaries of indiscriminate funding.

It said every person and entity participating in the securities market should be monitored by the central authority through the allocation of a 'unique client code' on the lines of security number of the US.

Money laundering bill is pending before the select committee and once this bill is passed, the required central authority should be established.

A major reason for distortion of market equilibrium was unregulated flow of liquidity into the securities market leading to inefficient price discovery.

Under the present dispensation, there is no regulation or monitoring of flow of funds in and out of the securities market and this was a major contributor to stock market upheavals.

The report said the brokers should be required to disclose the source of their own, borrowed and client funds to the central authority for trading in excess of a certain limit of say Rs 50 million in a month or Rs 200 million in a year.

This requirement should be made applicable to clients as well.

It said submission of annual audited accounts by every person or entity participating in the stock market for gross turnover in excess of certain limit, say Rs 50 million a month or Rs 200 million a year, be made mandatory.

It was making the suggestions as the recent investigations have showed that certain market operators were able to build up concentrated positions due to large funds available from the banking systems and corporate houses.

Such flow of funds was inter-woven into a myriad of complex transactions through a number of entities and given varying nomenclatures like share application money, loans and advances, inter corporate deposits and bill discounting.

This, it said, diffused the source of money and identity of the financier in the stock market.

Sebi also suggested changes in the policy for sub-accounts of foreign institutional investors as investigations of trading pattern revealed that these entities might have been used for parking of shares and creation of an artificial market.

These sub-accounts also appeared to have been used for building up concentrated position and circumventing takeover regulations, besides issue of participatory notes abroad by some of the FIIs sub accounts, which are backed by shares of Indian companies.

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