The Right to Information (RTI) Act passed by the Indian parliament in 2005 is a historical piece of legislation that for the first time opened up public entities for scrutiny by the citizenry. Since it came into effect in October 2005, the RTI Act has been successfully used by individuals and private citizen groups to gain access to information from a diverse array of public institutions. About ten lakh RTI applications were filed last year.
As individual citizens and activist organisations experiment with new ways of using the RTI Act to increase transparency in government and quasi-governmental entities, they constantly tease the limits of what constitutes a 'public entity' under this law. The RTI Act is applicable only to 'public authorities', a term that includes statutory institutions established by the constitution, entities established by laws passed by the parliament or state legislatures, and institutions created by executive notification. Additionally, the RTI Act is also applicable to non-governmental institutions that are 'controlled [or] substantially financed directly or indirectly by funds provided by the appropriate government'.
Do stock exchanges fall within the ambit of this law? The Central Information Commission (CIC), which oversees RTI compliance, had ruled that the various stock exchanges in the country were in fact public entities, and that citizens could seek information from the bourses under the RTI Act. The CIC has based its view on the fact that "[a]ll stock exchanges are created by orders of SEBI. In passing the orders of registering the stock exchanges, it is exercising the authority of the government". This the reason why the CIC thinks stock exchanges are included under the purview of the RTI Act. The Securities and Exchange Board of India (SEBI), the regulatory authority overseeing the functioning of the stock exchanges has concurred with the Central Information Commission.
However, the stock exchanges challenged the CIC directive in high courts (the Bombay Stock Exchange in the Bombay High Court, and the National Stock Exchange in the Delhi High Court). The bourses argued that every public limited company needs some form of a license to carry out its business activities, and that alone does not automatically make it a public entity. In their interim orders the courts have issued a stay on the CIC directive that would have brought the stock exchanges under the purview of the RTI Act.
The rationale for bringing the bourses under the purview of the RTI Act is in fact very sound. However, the narrow legalistic argument put forth by the CIC is not the most persuasive reason for extending the RTI Act to include stock exchanges. When the CIC v. bourses case comes up for hearing in the Supreme Court, the Commision will have to present a much larger social-legal case that clarifies how the stock exchanges are 'public authorities' despite being run as limited liability corporations.
What distinguishes the bourses from other limited liability companies? To answer this question, we need to take a step back and ask what is the good
or service that the bourses 'sell'. Unlike companies that sell cement, steel, or software services, the stock exchange business is built around providing the
infrastructure that enables a smooth flow of price information between buyers and sellers. The importance of this crucial price information notwithstanding, the 'good
or service at the heart of a stock exchange's business is fungibility. However, unlike businesses that sell cement or software services, the bourses do not produce
fungibility.
Fungibility is best thought of as a public good. It is a socially owned asset; not produced by any one individual entity. In its natural state, no one individual or institution can appropriate it. However, in the real world powerful economic interests are often able to manipulate how fungibilitly is used by different sections of the society.
To understand fungibility in the context of capital markets, consider a company that is about to be listed on a stock exchange for the first time following an initial public offering (IPO). A share certificate is a piece of paper that represents the extent of an individual's stock holding in the company. Before the company lists on the stock exchange, it is not easy for the holder of that piece of paper to trade his or her holding in the company. However, once the company gets listed on a bourse, the same piece of paper is as easily traded as a currency note. It is for this reason that IPOs are said to unlock the wealth that a company represents.
Even while fungibility is a socially owned asset, vast sections of the Indian society do not directly benefit from fungibility at the bourses. If there were such a concept as a 'fungibility rent', it would be one of the most unequally distributed rents from a public good - it accrues disproportionately to select stake holders in publicly traded companies. A significant portion of the 'unlocking' of the value of a company when it is listed for the first time on a stock exchange comes from appropriating the fungibility rent. The returns to entrepreneurial risk and expectations regarding the magnitude of dividend income do not fully account for the listing value of a company.
The social ownership of fungibility that stock markets provide is a key reason why the bourses must submit themselves to scrutiny under the RTI Act. The larger society has a right to know if the stock exchanges that are entrusted with protecting an important social good are mindful of that trust.
In recent weeks, small individual investors have complained about some brokerage firms unwilling to transact during downturns in the capital market. Brokers lay the blame at stock exchange trading terminals being unavailable. If small investors had recourse to the RTI Act, it would be possible to get to the truth of the matter. The issue here is if fungibility, a public good, is being monopolised by powerful players in the capital market.
Even while stock market participation rates in India are very low, the health of the capital markets impacts every section of society. Fungibility is again the fabric that connects capital markets with disparate sections of society. Because stock holdings are fungible, speculative notional wealth can be used to lay claims on real goods and services in an economy. Without transparency on the stock exchange it would be impossible for society to impose limitations on speculative capital over-running the real economy. Most significantly, speculative gains on the stock exchange can drive up inflation in an economy by laying claims on real goods and services (by fuelling fresh speculation in sectors like real estate for example).
When the current legal cases surrounding RTI and Stock Exchanges come up for hearing in the Supreme Court, the CIC will do well to present a larger social case that is centred on bourses as trustees of society's collective fungibility.
