The Hindu : Move may trigger negative fallout

Online edition of India's National Newspaper
Monday, Feb 23, 2004

Business

Business

Move may trigger negative fallout

POST-SEPTEMBER 11, a tested America moved to fingerprint visitors to the U.S. This drew protests from Brazil, which did a `tit-for-tat' on Americans visiting the South American nation. A decision occasioned by genuine security consideration met with resistance. Biometric identification like fingerprint on a normal person whips up negative sentiment howsoever noble may be the objective behind such an exercise.

Not surprisingly, the move by the Securities and Exchange Board of India to create a central database of market participants and investors has kicked up a controversy. None wishes to question the SEBI exercise to develop a database with unique identification numbers (UIN) to them. When the exercise extends to unanticipated proportion — as in this specific instant — however, it gives way to avoidable suspicion.

A little peep into the SEBI initiative will put the issue in perspective. Following response to a discussion paper, the regulator notified on November 20 last the SEBI (Central Database of Market Participants) Regulation 2003. The ostensible objective of this is to develop an inventory of market participants and investors and set up a standard for client code. A laudable effort if it forms part of a larger identification process. As per this notification, the mutual fund industry has been given time till March 31, 2004 to obtain the identification number.

The National Securities Depository Ltd. (NSDL) will maintain such a database. NSDL has, in turn, appointed points of service at various centres to facilitate the identification process for a fee of Rs.300. The market regulator is convinced that in the days to come, such a database will go a long way in furthering transparency in market operations.

Investors, intermediaries and the public alike will get information about each other to arrive at a better view of market participants. The SEBI has said that those who do not obtain the unique identification numbers within the stipulated time will not be allowed to continue their business. In fact, it has issued a list of intermediaries to obtain the unique identification number. Well, everything appears all right up to this point. What is threatening to sour the whole exercise is the insistence of biometric identification details such as fingerprint in the case of natural persons.

A cursory perusal of the SEBI notification is enough to understand the ramification of such an exercise. The notification besides giving out the list of intermediaries who are required to get the UIN has also identified the `related persons' who by virtue of being natural persons are required to provide biometric identification such as thumb impression and what not. The SEBI definition of `related persons' brings under the ambit almost all, from employees of the intermediary firms to promoters and directors. In all these cases (nominee directors are excluded, though), such biometric identification is insisted upon for their spouse, dependent children, dependent parents, brothers and sisters.

What is worse, all these related persons have to inform the notified authority of any change (like change of job) within a stipulated time.

Surprisingly, the implications of the SEBI move have not sunk yet on the minds of corporate India. So far, the opposition to the SEBI notification has not reflected in any vocal way though quiet concerns are already beginning to be expressed at varied quarters in industry circles. The move on biometric identification, at least a section of the corporate India feels, betrays a sense of suspicion. What has upset many is that the requirement of criminal laws is applied in economic and civil laws. More than anything else, the SEBI notification is seen as an intrusion into the privacy and denial of fundamental rights to the citizens granted under the Constitution.

Assurances notwithstanding, there is a genuine apprehension about the notification being misused by unscrupulous officers. The correctness or otherwise of the notification aside, the SEBI move may trigger quite a negative fallout of avoidable types. Why should nominee directors be excluded from the ambit of the notification? They are also natural persons. There cannot be any discriminatory application of rules and regulations. If the rule applies to all `related persons,' the exclusion of nominee directors is beyond one's comprehension.

The scope of the notification covers not just the `related persons' vis-a-vis the intermediaries but also the relatives of the `related persons.' As it is, all market participants are required to open a de-materialised account with any one of the depository participants. This requires provision of complete details for getting UIN. If this being the case, where is the need for a fresh biometric identification? Can't this be integrated into the central database without in any way upsetting the sentiment of all concerned?

The biometric identification can trigger a host of unpleasant happenings. For one, it will deter people of eminence from holding directorial and the like positions that will force them to undergo biometric identification. Corporate India will find it increasingly difficult to get neutral persons of eminence on their boards. As it is, corporate India is finding it tough to attract talent what with greater accountability is cast on even the non-executive/independent directors on the boards of companies. Second, it can force all these intermediaries to go in for more non-regular staff among its rolls. Third, the move can trigger lots of offline transactions through circuitous routes, much to the chagrin of the regulator.

Is the regulator stepping out of its assigned role? In the guise of ensuring transparency, it appears to assume itself the role of a super cop. The SEBI, it is said, will do well playing a proper facilitator role in wealth creation.

K. T. Jagannathan

in Chennai

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