Financial inclusion, Bimal Jalan style

11 JUNE 2011

The Bimal Jalan committee has made recommendations, regarding to the development of capital markets, that are, to my mind, illogical and retrograde. (Disclosure: this columnist is India representative for Institutional Investor, and MCX-SX was a sponsor of its investor conference in 2010). Less than 1 per cent of India's population invests in equity and the amount invested is probably 4% of household savings. If we are to have genuine financial inclusion of India's population in its economic growth, it must surely come from expanding both the base of investors investing in equity as well as a substantial increase in the % of household income that goes into it. Don't Miss! Best of The Daily Reckoning... -----------------------------

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Bank deposits, where about 80% of the household savings go, do not give a return which is higher than the rate of inflation. The money invested there is thus like a cancer, with inflation eating away into its purchasing power slowly and relentlessly.

The mutual fund industry has also not been marketed well in India; consider that in the USA the mutual fund industry controls assets greater than its banking industry! Recently, SEBI has imposed a ban on payment of upfront brokerage to distributors of mutual funds, which has led to a shrinkage of mutual fund assets, instead of growth!

Come to stock exchanges. Action here is concentrated in a handful of cities, mainly Mumbai, and in a handful of stocks. Existing stock exchanges or mutual funds or insurance companies have made little effort to spread the message that investing in equity (directly or through a mutual fund) is advisable and a means of achieving the desired goal of financial inclusion.

The Jalan committee has recommended that no promoter of a new stock exchange be allowed to hold more than 5%, from the start. He should gather 19 other investors but they must not be 'acting in concert'. The Exchange must be a 'not for profit' organisation and earn only a modest return. The report discourages a listing of the Exchange, on the ground that it would then become a 'for profit' organisation and would thus have a conflict with its role as a first line of defence for its regulatory obligations.

These conditions are such that it assures no competition will emerge for existing exchanges, of which NSE is a market leader. And hence it ensures there won't be financial inclusion. The limit of 5% is also arbitrary and inconsistent, when compared to other asset classes. Banks, insurance companies and commodity exchanges are equally institutions in which there is large public interest. Yet RBI, the bank regulator, allows a promoter to hold 40% in a bank; IRDA, the insurance regulator, has placed a limit of 26% and so has FMC, the commodity regulator. The other 3 regulators permit 100% ownership initially, and give a certain number of years for bringing it down. Why would anyone promote an exchange, take the risk, manage the business, if he has only a 5% interest in it, equal to that of other passive investors?

The Jalan Committee has arrived at erroneous conclusions because of its single focus point of 'conflict of interest' between a commercial and a regulatory function. This single focus has detracted its attention from taking a holistic view of the benefits greater competition can bring in exchanges. Primarily by spreading the equity cult beyond the 1% of population that currently invests in it. The fact that it is only 1% despite BSE being over 120 years old and NSE being around for decades, is indicative of their inability to widen the base of investors and thereby promote financial inclusion.

'Conflict of interest' exist in daily life; the important point is how they are dealt with. Take banks. Most of the household financial savings go into banks, so we should be more concerned. The RBI is a vigilant regulator. Yet we do have banks (remember GTB?) which go under and have to be rescued. We also have banks, like PNB, with a solid and consistent financial performance.

Or take IT companies. One can argue there is a lot of public interest. More than 100,000 families depend, e.g. on TCS, which has over 100,000 employees. In this sector, too, we have reputed companies like TCS, Infosys and Wipro but also the oddball like Satyam. Do we impede new IT entrepreneurs, or banks, by saying they cannot hold more than 5% and may not list?

The Finance Minister has expressed concern at being able to meet revenue targets, because the growth in corporate profits is expected to be moderate, leading to lower tax collections, and because the stockmarket is not conducive to making more IPOs of PSUs and meeting its disinvestment target. Perhaps if there were more investors who were more willing to invest in equities, both these concerns may have been allayed.

Several sectors have been affected by rising interest rates, which are being raised to try and tame inflation. The auto sector is one such; auto sales in May were up 7%, compared to over 30% in the prior two months, thanks also to the hike in petrol prices, raised in a catch up attempt after the petro pricing subsidy model ran to the inevitable unsustainable mode. A six day strike in Maruti's Haryana plant, now declared illegal after it threatened to spread to other auto companies, will depress figures for June as well.

Export growth was a surprisingly health 54%, yet, because imports grew too, thanks to higher crude oil prices, the trade deficit of $15b. for May is a source of concern. It is ironical that we encourage imports, by underpricing petrol/diesel, and discourage exports, by the IT Departments claims that onsite IT work is export of manpower (taxable) and not of IT (tax exempt), and then worry about why the trade deficit is widening!

The IT Department has, as per Yahoo, stated that it is useless to attach the assets of Hasan Ali, as the assets are nowhere near enough to meet the tax liability slapped on him. Either the claim by the Department was eerroneous or its assessment of his ability to meet it is. Both can't be true.

The inflation that is of greatest concern is food inflation. A June 5 article in the New York Times 'Food Supply Under Strain' explains why. We have a massive food crisis on our hands, because growth in population, combined with higher food intake as emerging economies grow and people eat better, has overtaken growth in food productivity. Governments are not putting enough money to fund research into improving crop productivity and coming out with improved seed varieties. So food inflation will continue, which means interest rates would not be coming down in a hurry.

Crude oil prices are also unlikely to come down; we have probably already reached 'peak oil' or are near it. Several steps need to be taken; India has just recently mandated fuel efficiency norms for cars, something that was done decades ago in the US and which this column has been long advocating as a sensible step. India also needs to immediately place a ban on gas guzzlers and SUVs which do not meet efficiency norms. At the least, a punitive duty should be put on them. Efficient public transport systems must be built without delay or controversy.

China has moved far more sensibly in this respect, and has designed, with Volkswagon, a single seater car that costs only $ 600 and gives 258 miles per gallon!. The current automobile was designed and built at a time when oil was cheap and plentiful and is thus a wasteful use of the energy contained in the oil. 80% of the energy in the oil is used to move the vehicle and 1% is used to move the passengers, in proportion to their respective weights. (see It, therefore, makes eminent sense to design cars where the weight of passenger/weight of car is higher. That is the premise behind the Tata Nano.

Instead of planning for food security, instead of planning for a world in which fossil fuels are disappearing, instead of planning for how more of our citizens can benefit from corporate growth, we waste our time in chasing away salwar-khameez clad gurus, in scoring brownie points debating over the use of thieves and rogues to describe politicians, and in inappropriately dancing at the Samadhi of Mahatma Gandhi. When will our political leaders behave like mature adults and fulfil the responsibilities of nation building imposed on, and accepted by, them?

Looking to the utter lack of governance from all political parties, one cannot be over optimistic about markets, and could expect the sideways movement, with a downward drift, to continue. Last week the BSE-Sensex fell 107 to close at 18268 and the NSE-Nifty fell 30, to end at 5485. If India is to grow, as its people are capable of doing, and if a larger part of our population is to share the benefits of that growth, it is high time that political leaders also grow, and shoulder the responsibilities of their office.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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18 Responses to "Financial inclusion, Bimal Jalan style"


Aug 11, 2012

Superb ,future market wil be of only and only for SIPs and Mutual fund were we will get wealth after 10 years and in long terms



Jun 19, 2011

No comments on the content as you largely know what you write about, but I have a distaste for arrogance, which was screaming through this letter.

Politics is a difficult subject, stay away from it please. It depends on a vision and a vision can't be analyzed without having the ability to see through it.


Jawahir Mulraj

Jun 19, 2011

Soumitra, I enjoyed your comments. You have studied the subject and have put thought behind it.
Yes, governance of an exchange is a very important component of the decision in granting of it, undoubtedly. But it is not the only issue. As my article sought to convey, there are other factors to look at, equally important. The spread of the equity cult by having more exchanges, and through it the financial inclusion in India's economic growth, are compelling arguments.
The argument that Infosys, with a 16% promoter holding and a well managed company, compared to 8% of Satyam being a poorly managed one, as being a point in favour of capping promoter holding, is unacceptable. It cuts both ways. One can argue that a lower holding, as in Satyam, does not guarantee good governance as indeed, it does not. In the same industry, the promoter holding in Wipro, a well managed one, is 80%

It is also to be borne in mind that this promoter holding of Infosys was not ab initio but after the business had been built up, the value created for both promoters and minority shareholders. I do not think the ceiling of 5% for promoter holding would be objected to were it imposed after a period which allowed the business to be built and the valuation derived - entrepreneurs take risks to build value.

On the point of governance, exchanges are, admittedly, the first line of regulation. There is, obviously, a regulator, with enough powers to enforce regulation and penalise wrongdoing in the fulfilment of its duties.

I did mention the seeming anamoly between the different levels of permitted promoter shareholdings in banks, in commodity exchanges and in stock exchanges. All three types of institutions have large public interest; in fact the assets controlled by or traded on the first two are larger than stockmarkets.

I am also at a loss to understand how 20 owners, with equal holding, would manage to build up an organisation and a business.


Soumitra Chatterjee

Jun 17, 2011


I am a regular reader of your and Ajit's column. In this particular column I have few issues.

1. The question here is of governance and in India corporate governance is very poor and Mr. Jalan's main concern is that the stock exchange should not fall in hand of a promoter who past track record is not that great. Picture this:
To meet the requirements of SEBI's MIMPS rules, MCX-SX cancelled 29 percent shares held by each FT and MCX (promoter company) and alloted them warrants to meet the MIMPS norms. 5 percent stake was sold to IFCI for Rs250crore valuing the exchange at USD1bn which was more than 3x the price at which 6.48 percent stake in MCX-SX was sold to Union Bank and Bank of India. This 5% stake sale was subject to a Buy Back option wherein IFCI had the right to value the exchange back at USD300m incase the valuation of MCX-SX falls below USD1bn, i.e. a purchaser put option. Neither MCX-SX nor FT disclosed this put option in their annual report and now IFCI has exercised its option and FT has paid Rs180crore back to IFCI valuing the exchange back at USD300m. I think this raises question on overall governance issues.

2. Bimal Jalan committee is not recommending this 5% ceiling. This 5 percent ceiling is already mentioned in SEBI's MIMPS rules and Bimal Jalan is just reiterating this 5 percent rule. Infosys promoters holds just 16% stake in the company and still Infosys is perhaps the best managed company in India. Contrast this with Satyam where promoters just held 8 percent stake and committed biggest corporate fraud in the history of India. In my view recommending a ceiling on promoters is not a retrograde step and if promoters background/intention of running a stock exchange is clean then they will be more than willing to comply with this norm.

3.United Stock Exchange was launched in September 2010 and October 2008. In SEBI, FT argued it wasn’t given sufficient time to offload its stake to investors, to which the SEBI counter argued giving an example of USE (United Stock Exchange) launched recently in Sep’10 being compliant with the norms after offloading its promoters stake in one third of the time given to FT. If USE can do this then why not FT. In my view, the motive of FT was to wait for some time and gain higher valuation (i.e. greater then USD1bn) and not lose control. Whilst FT was given sufficient time to dilute its stake to comply with the norm, SEBI’s stance to take strong action against MCX-SX deterred FT and it appears to have used loop holes to comply with the norms by converting its 29% shares to warrants convertible to equities at any point of time subject to MIMPS norms. So Bimal Jalan committee has recommended inclusion of this warrants in calculating the 5% ceiling limit. This was inadvertantly missing in SEBI's MIMPS norms and while cancelling the application of MCX-SX for a stock exchange SEBI decided to look at the bigger picture and Jalan Committee has just put this bigger pciture in writing.

I agree recommending non listing on stock exchanges is an anticompetitive measure and this recommendation should not be accepted. Even putting limit on profitability is a retrograde step and international exchanges like ICE and CME enjoys an EBIT margin of 60% and this recommendation of Jalan Committee too should not be accepted. But there is no harm in accepting other recommendations of the committee like the limit on shareholding. I am asking, if other stock exchanges like NSE and USE are complaint with SEBI's MIMPS norms and and willing to comply with Jalan Committee norms on shareholding then why not MCX-SX.

Looking forward to hear from you



Jun 14, 2011

The article even while it puts a nail on the head, is depressing. All the problems we read and see everyday are repeated, but in a greater detail.Now the policy has to be framed by the politicians who are in power and they get this power by corrupt means and there lies the root of all India`s ills. Hewre we have to blame the people also who get bought for votes and surely they get the Government they deserve for after all if you vote for a thug, criminal what else can you expect?



Jun 14, 2011

An excellent article. I have not read a more lucid story
in a long long time.


Jawahir Mulraj

Jun 13, 2011

Im afraid I don't quite follow some of my reader's comments.

Naveen: my math is right. it is 19 other persons which, together with the promoter which is 1, equals 20. and 20 X 5% = 100%. Yes, in a free market, regulation is necessary and nowehere does my article say that it is not. But we do have a fairly efficient regulator already in SEBI. Im afraid I don't understand the term khodus, though I did try to look it up in

2. How I wonder What u r?: I dont believe you have read, or understood, my column at all. Where am I 'praising to them' (sic). In fact, I am asking them to behave like mature adults and shoulder their responsibilities. Do please read the column one more time, slowly.

3. J Diwakar Jain : should also read the column one more time, and slowly. What I have written is 'in scoring brownie points debating over the use of thieves and rogues to describe politicians' and NOT to describe sadhus and sanyasis, as he wrongly accuses me of. I think he owes me an apology for saying the article is utterly insensitive of the feelings of the billion strong populace of India. It is not. I would also ask him to respect the sincerity of independent commentators, by carefully reading and understanding what is written.

Pankaj: Of course, the regulatory role is different from that of a player. It is so for each and every thing we do. What I was pointing out was that it is one aspect of the matter of whether or not to allow competition amongst exchanges. Greater competition brings in several benefits, not least of which is the expected widening of the number of equity investors. Stock exchanges of other countries similarly have a conflict of interest between their profit motive and their regulatory role but they manage to resolve it. No business can wantonly keep flouting laws in order to enhance profits; ultimately bad governance is brought to task. So, in short, yes, there is a conflict of interest but no, I do not think that discouraging competition through the sort of restrictions sought to be imposed by the Jalan committee, is the way forward.



Jun 13, 2011

Regarding Stock exchange ownership/partnership:
Exchanges are formed for a purpose in mind. I believe this cannot be considered as another industry...
It needs regulations and the body which regulates needs to have a head which is not cynical as the time goes by for the various reasons known and some reasons which are not known to be left in future..
I WILL be right in thinking that Bimal Jalan committee coming up with Less than 5% stake for each
***(so, that originator need to find other 20 (not 19 as mentioned)**** to form a an exchange (mind you not a company or such industry) is a valid clause.
1) They want it to be difficult for anyone to form an exchange and so it is with an intant. Khodus if anyone does and whichever group (with 21 of them together) forms one need to be praised and will be truely serving the purpose of being an exchange.
2) Its is not about competition when it comes to regulation...So, there isn't a question of monopoly or "being a Leader" as stated in the article.
3) Moreover, Its a challenge from Mr. bimal Jalan committee to an open market to form such a group....Any takers with some Guts to serve the financial industry...

Its really a good thought a wise one.

I doubt one will be formed in the very near term with the above criteria, however, we have HOPE.


How I wonder what u r ?

Jun 12, 2011

Instead of planning for food security, instead of planning for a world in which fossil fuels are disappearing, instead of planning for how more of our citizens can benefit from corporate growth, we waste our time in chasing away salwar-khameez clad gurus, in scoring brownie points debating over the use of thieves and rogues to describe politicians, and in inappropriately dancing at the Samadhi of Mahatma Gandhi. When will our political leaders behave like mature adults and fulfil the responsibilities of nation building imposed on, and accepted by, them?
On Sat, Jun 11, 2011 at 1:35 PM, Straight from the Hip

How I m bewildered about yr stands

this politician did nothing in even after 60 years
of independence and you are praising to them !!!

and who the people.. are at least showing there courage to speak against
them n there policies( policies of looting, raping n selling India) ...
u r highlighting there fraction of details...(not the agenda )

Who are u ?
no difficult to understand u r among the first mentioned group..
who actually want keep open the way to looting and selling India
in the name of so called Development...

Unfortunately u people r more dangerous than those
politician u r highly educate n intelligent.



Jun 12, 2011

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