Keeping a close tab on market, SEBI style

U.K. Sinha, Chairman of the Securities and Exchange Board of India (SEBI), has the onerous responsibility of being the regulator of the stock markets in India. Although the country may have moved away from the era when stock markets were seen as nothing more than gambling dens and casinos, there are new challenges that confront the regulator often. As Sinha says in the course of the interview, the market has a lot of smart people who are frequently testing the regulator’s capacities of detection and investigation. A combination of tough rules, rigorous enforcement aided by state-of-the-art technological systems, will help the regulator keep a close tab on the market and its many manipulators.

Excerpts from a wide ranging interview, the first given by the Chairman after the new rules announced to revive the mutual fund and primary market last week:

There is a general feeling that regulatory bodies are losing their independence or autonomy to some extent. Do we see a pro-active Finance Ministry creating problems in the market place?

All decisions which we took in the last board meeting were not taken overnight; they were in the pipeline for more than six months. Talking of Mutual Funds, we had a meeting of the Mutual Fund Advisory Committee and set up three or four sub-groups. At the same time, my officials were meeting various stakeholders. For example, we had three or four rounds of meetings with separate groups of Asset Management Companies. All these were going on for last five to six months.

The work on IPO process has been going on even longer. Even if you look at your own archives, you will find that as early as December-January, we had announced the process of review of entire IPO things. And as you know when the Finance Minister made a Budget announcement, there is some interaction with agencies like us. So when it came in the Budget that there will be E-IPO, obviously it was in consultation with us. So the work had started long-long ago.

In his first interaction or review meeting with the Ministry officials when the Prime Minister took over the Finance Ministry, he highlighted that Mutual Fund and Insurance Industry must be revived. He said this again in the context of Gold imports, because people are investing more and more in gold as an asset class rather than financial assets.

So the factual position is all these things were going on. SEBI has representatives of Ministry of Finance, but the decisions are actually taken by the Board. Whenever we have to amend or enact a new regulation, we have to go to Board. That power is not with me. So there are many other powers that are with the Chairman or members. Any change in the regulations requires the approval of the Board. And the Board of SEBI has representation from the Ministries of Finance and Corporate Affairs and Reserve Bank of India. So we have to consult them.

As a part of consultation over those important matters, we did consult with them. It will be wrong for me to say that we did not consult them. But to get the impression that the Ministry is getting overpowering is not correct. Also, kindly recall that even in the previous regime, there had been some media reports that Ministry has been trying to dictate the agenda. Ministry has been trying to decide what has to be done.

We have been working very hard to maintain our independence. At the same time, on matters of policies, the primacy of the Government stands. If you are talking about what policies will be enacted, the Government has the final say. Broadly, you take three categories, one is policy, second is regulation, and third is the independent cases in which we act against offenders.

In the first case, the Government has the primary responsibility on the policy area. For example, what should be the FII policy in the country — do you allow $60 million or $66 billion of debt, SEBI cannot decide it. This is decided by the RBI and the Government of course in consultation with SEBI, but SEBI cannot have a final say. The scheme of arrangements is such that it has to be done by the Government, because it has to exercise its power under FEMA.

But if you look at regulation framing, once a policy has been decided, than that is the prerogative of the regulator — in our case it is SEBI. And finally when it comes to taking action against offenders or taking enforcement action, there SEBI must act independently and we do act.

I have dealt with four Ministers, not in SEBI but over the last 12-13 years. All Ministers have their own different style of working and they have their own approach to the work. But my feeling is that it will be wrong impression to guess that because of the change in the Minister, the initiative has been taken away.

Your last Board meeting took several big decisions; still there is a feeling and indications coming out from the Government that more need to be done. What we should expect now?

In a dynamic organisation like SEBI and in a dynamic situation like we are having, we can never have a situation where SEBI reforms agenda is over. But I would like to remind you about what has been done and I will only give you illustrative list, not a complete list. If you take Alternate Investment Funds, we had a serious problem that there were no regulations for the private equity into the country. There were no regulations for the hedge fund and Venture Capitals were also having serious difficulty. We in SEBI believe that for the growth of trade and industry in the country, for the entrepreneurial energy to be channelised, this alternate investment can be a very good way. If you are an entrepreneur and you have started a small company, the first stage ideally should be that you should go through venture capital or private equity fund. But regulations to regulate them in a proper manner, both from the point of view of investors in those funds and asset management companies in alternate investment area, was lagging, so we came out with that.

You look at KYC – ‘Know Your Customer’ regulations. KYC has been the huge problem in the country. SEBI, in the last one year, has come out with a new set of regulations called ‘KYC Regulatory Authority.’ Here you will be surprised that for those who are working within the Capital Market, there were separate set of KYC requirements and for every transaction or for every agency you go to, you had to go with new KYC. You have to prove yourself again and again.

So a very simple thing SEBI has done is that it made all the requirements uniform and it come out with a new KYC regulation. Now, the second area we are working on is whether this KYC regulation framed by SEBI can be made uniform for all other activities in the financial sector.

If you are an individual registered with KYC Regulation Authority for mutual fund transaction or primary market transaction, why that the same can’t be valid for your insurance transactions and banking transactions. This is one area in which we are working very seriously. It is very high on our agenda.

We have been talking to the Government to assist us in doing that.

Why is a common KYC important?

It is the job of SEBI and other regulators to provide convenience to the people to come into the financial market. The people should not feel that it is not their cup of tea. If it happens, they just leave the market. If you look at the penetration level in India Capital Market, it is extremely low and in our judgement, besides the performance of the economy and performance of the market, which is not bad by the way, it is lack of awareness and good amount of convenience in dealing with the market is the deterrent.

Do you for example, remember that if you had to open a secondary market transaction with a broker, you had to sign at 57 places? We have now only made it necessary at two places. We have simplified the document.

If you remember how to fill up an IPO document, it used to be a nightmare. We have simplified that.

Your operating the market should not be as difficult as for example, pardon me for saying that, getting a passport.

So, the experiences which you have in dealing with the market have to be very positive and there should be ease there. KYC, in my judgment, is very-very important. I mean the whole requirement of KYC is that undesirable people should not come in the market, their identities should be known in case of investigation or enquiry and terror or such money should not be allowed to come in and go out of the market.

We feel that by doing common KYC, we are going to attract more and more people.

Earlier you were asked to produce a ration card or your gas connection or electricity bill to establish your identity. Now we have AADHAR . We have issued a circular to use this for identification. This can be used for proof of identity as well as proof of residence.

We have done our bit. Now we are asking other regulators to not force your clients to get a new set of rules, a new set of requirements. In case of investment up to Rs 20,000 in mutual fund scheme, we have allowed cash payment and without PAN.

What is the timeline we can think for implementation of common KYC?

That question you should not be asking me, ask the other regulators. I am working with them. I am trying to allay their fears, doubts etc. I am trying to help them in understanding the concept. Let me also tell you, the SEBI KYC system now has crossed 1 crore registrations. We started in January and today it is 1 crore 11 lakh.

SEBI banned 19 entities after probe in midcap stock crash on July 26. Can we expect some policy action to avoid repetition of such incidences?

You should re-frame your question! I must tell you that this probe was done not after somebody alerted us or somebody else did the investigation and then we took the action.

Now you may ask, how did detect you these 19 cases and how soon? These cases were detected because we claim that we have a very strong surveillance system. Nobody complained to us. No information came to intelligence bureau or foreign or Indian agency. Our system alerted us. So, you must give credit to SEBI that now it has been able to detect the things on its own. This system got activated only in January.

We have a surveillance system. We do not publicise it too much which needed a very large up scaling. Now it is called ‘Data Warehousing and Business Intelligence System (DWBIS).’ It is a maddening place. Every millisecond, people there are getting information and we have built certain computer logic to generate alerts. We are getting hundreds of alerts every day which we were not getting earlier. And these cases, for example, have come out of those alerts.

You should give credit to SEBI that within 5-6 days, not only alerts were taken to enquiry stage, preliminary enquiries were completed and we banned those 19 firms. Not only did we ban, after two days of incidence, when pay out had to happen, we banned that, too. So, if you have short sold and you have parted with your securities, the payment that you were supposed to get, that was also banned.

Talking philosophically and in a theoretical way, this is not the end of the road. Just on Tuesday, I had serious review with surveillance and investigation team. The stock market is full of people who are smarter than us, they will always try to be one step ahead of us and our task is to match up and may be ahead of them. So, our task is not over. We will continue to upgrade our system.

Now there are questions being raised on the menace of the insider trading. What is on the cards to curb that?

We have already asked the exchanges and company to do something about this and it is in the implementation phase. We have asked each company to tell the exchanges who are the ‘insiders.’ Instead of an enquiry being done by SEBI and then asking the company to give the list of insiders and then matching who can be an insider or not, we have asked for a detailed list ab initio. The CEO, the CFO, the auditors, all these names, we want to keep in the list.

We do not have all these details at one place. We have the list of top officials of a company, but the list of insiders will be slightly bigger than just the list of top officials. It will have people in the account departments, in treasury departments. That list we are asking them to update it and have it with the exchanges.

That list will be fed into SEBI’s surveillance system. So if any buy or sell of the same company’s shares or allied shares are taking place, I will get an automatic alert. Hopefully this will be implemented into next 3-6 months.

How do you define ‘insider’?

That is a matter of detail. We will try to include as many people classified as insider. At the same time without constraining the normal day-to-day activity of that company. And it is something which will evolve. We have some parameters on how to define an insider.

The second thing is what we have done to check insider trading is that under the consent mechanism, insider trading is not negotiable. It cannot be consented. In the new consent mechanism, we are trying to do two things. One is we want to tell the outside world that in our judgement certain offences are too serious and you cannot commit those offences and pay a certain amount as settlement charge without even admitting guilt, without even any slur on you and then you walk away. We cannot allow that.

Some people in media and outside have criticised this. Their argument is that, using the word ‘boxed in,’ SEBI has boxed itself. I am very happy to box myself. Certain things cannot be negotiated. If I catch you, if I catch somebody, he should know that if he is going to commit a crime tomorrow, he should know that he has to suffer the whole process.

SEBI act provides for serious penalty and other punishments if you are doing insider trading. Insider trading is a serious offence. I want to say it to the whole world.

In the past, people were committing insider trading offences, paying a certain settlement amount and getting away with it. It means they didn’t have to disclose it on their Web site, if they want to raise future money. In any filing with any of regulatory authorities, outside SEBI, they were not required to do so. That cannot happen. You have to suffer.

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