The trust and faith of the public in regulators has been belied or at least that is the impression that a large number of people are now carrying and also expressing, said the SEBI Chairman, Mr U.K. Sinha, at an event on Friday.
Speaking at a Chartered Financial Analysts India Investment Conference, Mr Sinha said that the credibility of regulators was being challenged world over and that people were losing trust in these institutions.
Quoting the example of the IMF, he said that the institution revised its growth, employment and national debt September 2011 estimates in December of that year. Also, December end saw words like recession appearing in IMF literature, he added.
He agreed that regulators had erred in being unable to prevent the financial crisis. But the approach of the regulators was callous. “Individual regulators cannot say that it is not my area. It is somebody else's area. But then what have the people of the country reposed their faith in?”
Another concern, according to him, was the approach of the investors themselves. He said that in situations where margins and volumes are low and fresh money flow has also come down, investors may end up taking more risks.
“One of the natural tendencies (of the investors) in a situation like this is to start taking greater risks and measures that might prove helpful in the short-run and that is where the role of the regulator becomes important.
“We do not want investors to take short-term risky measures to deal with the crisis. This is the time perhaps to look back at our own system, our risk-management system and other practices that we follow,” he said.
He also wondered why mutual fund houses had not been able to launch “successful pension products” even though they were legally permissible.
Talking about products, he emphasised the need to protect investors from being sold complex products. The suitability of the products for the target audience needs to be focused on by both the manufacturers and the marketers of the product, he said. He also reminded the manufacturers that their focus should now be on consolidating their portfolios and growing their investor base.
On risk-management, he said that professionals should exercise “whatever pressure they can on their companies about a much-improved risk management. It is no longer the task of somebody sitting in the back office.
“I think all of us working with any entity which is dealing with investment have to re-focus on risk management and we have to build stronger models and more importantly those models have to be followed.”
In response to questions regarding the release of revised IPO process norms, he clarified that it would take a few months as things were still being looked at. “The idea would be to simplify the process and help corporates raise money.”
He said that guidelines for insider trading were also in the discussion stage and said that all entities involved in it were supportive and that the draft bill in the Parliament was also taking a re-look at the definition of insider trading.
As for a principal regulator for alternative investments, Mr Sinha said, this was a matter of discussion with the Financial Stability and Development Council and the government. “It's a very complicated area because state governments also come into the picture and is not very easy to resolve. We are trying to do what we think is our domain.”