The SEBI Chairman Mr M. Damodaran, who completes three years in office next February, takes stock of the year that comes to a close this week and looks at what lies ahead. His agenda? The ordinary investor should not aspire to be a day-trader; and more shareholder activism, especially institutional, would serve the markets better, he told Business Line.

Excerpts from the interview

How would you sum up SEBI’s activities in the year that is ending; and what is the agenda for 2008?

At the beginning of 2007 clearly we found that the Indian capital market was getting exported. If you went overseas and made a GDR or ADR issue, you got the funds very quickly because you were only talking to institutions.

So, one challenge at the beginning of 2007 was to give the Indian market a product that persuades at least some people not to automatically look at the GDR as the first option. And that is why we introduced the QIPs, (Qualified Institutional Placements) for qualified investors. I think it is an unqualified success.

We do have the Company Law restriction that says we cannot offer to more than 49 people, and that is one of the weaknesses in our product but we will have to address that alongside the company law prescription. We can’t do it unilaterally or we would have done so.

We have also said that large, well-known companies are ‘fast-tracked’ to file with us for raising capital. Clearly, in terms of the present Indian ‘book-built’ process, the merchant bankers or the lead bankers decide the band, which is judgemental; then comes the process of offering it to investors, the cut-off at which retail would come in — all of which is not exactly the most efficient way to do things.

It is still the process we follow. And that is the challenge for 2008.

You have earlier talked about increasing retail participation too.

Every SEBI Chairman for the next several years or a decade will see this as his major challenge. Now, as one step, we introduced the grading of IPOs, which no market anywhere else has done.

We were, of course, told nobody else has done it. The answer is nobody else knocked off the discretionary quota for institutions. We did that and we were told that everybody would walk out of the market. But nobody did.

We said we would put in place a 10 per cent margin (on the application amount) where it was zero for institutional applications. Everyone said they would walk out, today the same people are editorially pleading for a 100 per cent margin.

We have also looked at the fee structure in mutual funds. For open-ended funds we made some change in the fee structure and suddenly the industry saw virtue in closed-ended funds, which we are tackling. You will find that in a few days’ time, that will also get addressed.

Now direct investments and the entry load… We will see that that gets addressed as we go forward.

We have also introduced a common platform for electronic filing and dissemination of information.

But who will supervise whether companies are actually filing? Some 2006 annual reports are still not on the earlier platform EDIFAR.

Now if you assume a responsibility of that kind you must have the staff that looks at it, monitors it, and sees that non-filing is punishable.

It is only now in the recent past that we have actually recruited people — chartered accountants, and so on — with the kind of qualifications for this.

We have not gone public, but India will hear about this soon, that SEBI actually reads these documents and is going to ask some tough questions.

There are some very large companies, for example, who announce acquisitions whose financial details one does not come to know of till the annual report is actually out.

For a listed entity, who is the first-level regulator? It is the Exchange. It is a contract between the Exchange and the listed entity.

If anyone is in violation of that, the first responsibility to look at — a) whether there is a disclosure being made at the right time, and b) if that disclosure is complete and correct — is that of the Exchange and not of SEBI.

Now exchanges are also business entities, post demutualisation. With that, somehow, the business of first-level regulation seems to be moving away from where it ought to reside.

But this should be a matter of concern…..

It is. That is why at our weekly surveillance meetings, our people asked them that, and in the last Board meeting we had, there was a decision where we advised the Exchanges that they should set up their own internal surveillance committees of their Board.

We can throw the SEBI Act at everybody who violates its provisions, but at the end of the day, it is materially a departure from the listing agreement and, therefore, Exchanges should really look at compliance with listing agreements.

You have also held that insider trading remains a challenge for exchanges.

Our job is to reduce information asymmetry, not rule it out. There will never ever be a situation in which everybody knows the same as everybody else, and at the same time.

We’ve had some very good cases in the past. SEBI had some years ago passed orders.

Unfortunately at that time — I am talking about my predecessor’s time — they were not upheld in appeal and now they are in the High Court. They are still pending final decisions.

We are hoping that some of those will go through because the way to deal with this is to get a few high-profile cases determined in your favour rather than try and get 500 or 1000 cases. This is not about numbers, it is about the ability to demonstrate that we can catch the guy who is at this, and do something.

There was a recent instance of trading in the futures of a large company where there was a large build-up at price levels that got punctured following a certain corporate announcement. Surely, something could have been done about the abnormal build-up which, in the instant case, hurt those on the buy side of these transactions?

We have our integrated market surveillance system which throws up hundreds of alerts every day. We pick on some that are glaring examples.

Then you have to look at whether there is a corporate action which has led to this. I don’t want to comment on specific cases because what we are doing I don’t want to disclose. But, clearly, you don’t go out and warn the public. That is not what we do.

On retail investors, this is all about the business of investors understanding what is this asset class, what market are they in.

Are they there for the short term? Are they driven by rumours of stocks moving up intra-day, or may be even intra-week?

Now you are not a farmer, or doctor or engineer investing, you have become a hard-core 100 per cent day-trader kind of chap. We don’t want to encourage that.

So many people report to the market at the end of the day, I don’t think we need to add our voice too, the numbers are the same.

Our job really is investor education. In 2008, in a nationwide investor campaign, we are going to explain to people what this asset class is. We will do this along with the National Institute of Securities Markets.

Would you encourage investor activism and why is not enough of it happening in India?

In a market, at our stage of development, institutional investors who put in enough money that ordinary people have entrusted them with — whether these are mutual funds or, going forward, pension funds, or whatever — ought to ask questions at AGMs, about what is happening.

There are two ways of looking at it. Even in the US, people feel they are not here to improve company managements. If they don’t like something, they can always go out and put the money where a company is better managed.

My take on this is that, today, how can institutions — say, large insurance companies and that kind, with the kind of money that they have — move that kind of money from company to company?

So stand inside there and make a point. I am saying vote with your hands first, only if that fails, vote with your feet.

Don’t go there passively or, what is worse, even stay away from meetings, saying why send an officer? Send some people, then you will see some company managements respond.

What about those who have board seats? Not the mutual funds, but other institutions that have board seats… are they asking questions at board meetings? It would be useful to ask some of these things.

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