Bringing back retail investor directly into the stock market and indirectly through mutual funds is a priority for Mr U.K. Sinha, who is close to completing three months in his role as SEBI Chairman. The man who has dealt with almost every facet of the financial market in his career talks to Business Line about how he wants to make the Indian stock market a safe place for investors, and SEBI a strong organisation for rapping wrong-doers.
There is an increasing feeling that the market is becoming very shallow, that the cash market is shrinking, and that retail presence is also shrinking. Are you going to address this problem? Do you propose to do something about it? Can you make delivery-based settlement compulsory to deepen the market?
No, no. To the specific question you ask, the answer is no. But to your question whether market has become shallow, I myself said that (is true).
Yes, the market reach has become concentrated. We are having an issue of geographical concentration, of institutional concentration. So we are going to remove that. For doing that, one has to create a general feeling in the minds of the investing public that there is somebody to whom we can go for redressal.
But, more importantly, we have to look towards procedures.
For example, if you want to open a demat account or if you want a trading account, you have to sign in 50 places and go through a 70-page document versus buying a fixed deposit in a bank, or buying a postal product. For a large number of people the tendency will be to go to the second one, everything else being equal.
Everybody is now waiting to see what SEBI will do in the matter of mutual funds.
What are they expecting?
If you will do anything about the entry load.
We will do something about incentivising sales of mutual fund products, because we feel that it is a very good product for retail. How we will do it… for that we have set up a committee. And the committee has representatives from AMFI, it has outside experts, it has got some researchers and also investor associations.
They are jointly working on it. And I hope to complete the exercise at the earliest.
SEBI has tightened norms for FIIs regarding declaration of issuance of Overseas Derivative Instruments. They also have to give an undertaking on who the ultimate beneficiary is. But what is the system by which one can verify what they declare? If you look at a lot of SAT orders (example in the case of Goldman Sachs), SAT has said SEBI has no powers to call upon FIIs to submit certain details. How does SEBI deal with this matter?
Whatever you are quoting is an order after which things have changed in SEBI. And by that I mean, FII regulations give enough powers to SEBI to demand this information. So any direction or judgement that you are quoting may be right in that particular year, in that particular time, when regulations had not envisaged these situations. Our position is the following:
In case of any enquiry or investigation, we need to know who is the end investor. And this country has an example of having suffered because of lack of powers of SEBI to do this. We have seen that example.
What example?
I am referring to the 2001 scam. There is a learning for SEBI and for the larger government system that in case there is a second stage, third stage or nth stage beneficiary, SEBI should have a right to know this.
Now if you want to have a right to know this, you have to prescribe it in the regulations. If you have prescribed it in your regulations, the intermediaries (FIIs) have to honour it and obey it.
Now your question about how will you track; our answer is if you get data in a structured way on a regular basis, today SEBI has the capability to analyse it. Secondly, in case of any investigation, we can ask all sorts of questions and also get cooperation from the regulators of those countries. Because SEBI today is a very active member of IOSCO. It has also signed MoUs that give us the right on a reciprocal basis to get information.
A lot of margin funding is now done by NBFCs after badla stopped. There is concern in some quarters that there is regulatory arbitrage here, because SEBI does not regulate NBFCs. So one never knows the quantum of outstanding borrowings in the market. Is it a concern? If borrowing takes place within the exchange mechanism there would be so much more transparency.
Concern would be a strong word. But we have started looking at it. It is quite preliminary. But there is a case of realigning the two systems. There is a case. But you know that our margin funding requirements are something that have not taken off in a big way. And here you can go only up to 50 per cent, there (with NBFCs) you can go to any levels.
So I will agree with you that this is something that needs to be resolved along with other regulators. We will do that.
Many people feel that over the last 3-4 years, serious cases have been settled by consent on very easy terms. Are you going to do anything about this?
My position is that those who are having this view or spreading this view are not being fair to SEBI. My position is that the consent system in SEBI has good checks and balances.
However, we are going to make further improvements. Because the very fact that you are saying this means that there is a perception that it is not fair. And we would like to even want to deal with perception.
I have already started the process of viewing how, for example, we can ensure that in similar types of offences, there is uniformity in the final outcome. For a particular type of criminal offence there are particular punishments. In SEBI, whether it is a consent case or whether it is an adjudication case, we would like to have a similar mechanism. So we are working on it. I do accept that there is scope for improvement.
There is a perception that in the case of smaller companies your investigations are very fast but that the larger companies have the muscle power or money power to delay the process.
You will be surprised, for example, that people can come and tell us that we want to cross-examine your investigators. We want to examine people on whose evidence you have relied upon. I would not like to refer to any particular case. And when we pass an order they go to a superior court that this order is not fair. Obviously in such cases there will be delay.
I want the media and the people to appreciate this instead of complaining that SEBI is inefficient. You should appreciate that these are the difficulties. Unfortunately, I don't see that happening.
Now, under the Indian law they have a right to go to various places. A small person, maybe he is not able to go; but the others who are able to go, things will get delayed. But it is not SEBI's desire that things should get delayed. In spite of all this, I think, SEBI has done admirably well in enforcement.
SEBI and exchanges advocate the quarterly reporting system which is mostly unaudited. ICAI is for the annual reporting system which is audited. How do you plan to harmonise this?
Let us not confuse ourselves. On the one hand we argue that we want good governance and higher standards, and on the other hand you are saying why the hell are you asking for quarterly results? Let us understand things in a comprehensive manner. Companies should disclose (information) as frequently as possible.
In March we issued a circular saying that if there is any unusual price movement in any company, the management of the company must inform the stock exchange whether there is any information which in their judgement could lead to (price fluctuations) or whether it is unconnected.
Either way, people should know because you know in our market when there is anonymous order driven trading, the best thing is for people to have information about it. So I would not argue that quarterly should be made annual. This would not be the right approach.
There are concerns about lack of competition among stock exchanges. BSE has lost its strength. MCX has not got permission for stock trading. Are you proposing to do anything about this?
Across all activities that SEBI is regulating, competition should be encouraged. To give you an idea about depositories, we find that competition is helping. In mutual funds, competition is helping investors in the quality of service and also in cost and fees, which have come down. Beyond that I would not like to comment about any particular case.
We hear you have worked out a short-term and a long-term action plan for SEBI. Could you give some details?
One is the action plan for 2011-12. We have given ourselves a detailed plan.
But as a vision for this institution, this organisation, we have some long-term plans and since I have come recently, it will take me a little more time to fine-tune them. But some of the basic points on which SEBI staff and I, all of us are in agreement, are, for example, how to reverse the trend that Indian citizens are investing less and less in the mutual fund money; how to reverse the trend that the spread of market should go beyond certain geography. You know disproportionately large percentage of trade is happening only in first five or first 10 cities.
The focus for us is to communicate to the investor that this market is safe. So our attempt will be to ensure that people feel that this is a well-regulated market where grievances can be redressed, where wrongdoers can be punished, where the market watchdog is alert to deter people from committing violations. So that's the one part of it.
What do you plan to do with listed companies who do not have even a basic Web site with financials and investor information?
We in SEBI have started a project that should be implemented during the financial year where automatically the data about all the listed companies will be available on our Web site. All the data relevant to a company will be in one place. This is called SUPER-D (SEBI Unified Platform for Electronic Reporting- Dissemination).
SEBI has brought out guidelines on SME exchanges. But nothing appears to have moved. Also what about exit plans for the regional exchanges that are around?
On the first question; we have received proposals from two stock exchanges and we have given them in-principle approvals. About regional stock exchanges, your question was about exit. Imagine an exchange that is derecognised. And there are companies on this exchange that are listed only here. So both the promoters as well as the minority shareholders are stuck up.
There could be another situation where the exchange is recognised but there is no trading taking place there for years. We would like to tackle these issues. The guiding principle will be how to safeguard the interest of the minority shareholder there. Once we do that, many things will follow. We have already had a review of these things. So it is on our priority list.