Mumbai: U. K. Sinha, chairman of the Securities and Exchange Board of India (Sebi), spoke in an interview on issues ranging from second generation market reforms to encouraging competition in the exchange space. Edited excerpts:
Under your predecessor, Sebi’s primary focus had been investor protection. Will you continue with this approach?
The Sebi Act gives it three mandates—to act in the interest of the investors, develop the market, and protect the market. I won’t like to comment on what happened during my predecessor’s time. But Sebi’s mandate will be to work for all three.
With equal emphasis?
Yes. One has to understand that there has to be a market and then only you can protect investors. If there is no industry and no market, whom do you protect? So it’s not a question of one versus the other. The question is: do we want to benefit from the growth of the economy? Will we reach out to retail investors or not?
However, if there is a conflict between the interests of the investors in any particular situation and the demands of the industry, the overwhelming weight will be towards safeguarding the interest of the investors...
Different view: Sinha says it is wrong to assume that foreign institutional investors are conspirators in India. Photo: Ashesh Shah/Mint
Until three months ago, you were heading a firm regulated by Sebi. Now you’re the regulator. Is it an advantage for you in terms of understanding the market?
...I am perhaps the fourth person who was regulated by Sebi and became its chairman. What is, perhaps, different in my case is that I also have the experience of working in the capital market division of the (finance) ministry. I have dealt with a large number of issues concerning Sebi. I think I am lucky, in a way, that I have got that experience of knowing the minds of the government, its functioning and the industry perspective. I am not unique, but, yes, I am different.
Can you list your priorities?
We must have investors as the first point of focus. Keeping that in mind, we must ensure that we are disposing of all cases in time. We will have to cut down the number of days that we take to clear IPO (initial public offering) applications. Our approach would be to remove the bottlenecks...
Secondly, we need to make life easier for retail investors. If you read the prospectus, disclosure documents and IPO application forms, you will find that it’s very difficult to find out any material information. Everything is there, but the documents are, perhaps, too voluminous for a retail investor to find out any particular information. I have set up a group to look into all these aspects with regard to primary markets... We will simplify the IPO form. The group has started working and it won’t take too much time.
What about secondary market reforms?
I am told that 50 signatures are required when somebody wants to get registered with a broker and open a demat account. All sorts of assertions and all sorts of obligations are made in a form that runs 16-17 pages. It is discouraging retail investors. We would like to simplify these procedures.
Look at the KYC (know-your-customer) requirements that Sebi prescribes. There are different standards between Sebi-regulated entities and those not regulated by Sebi, and even within the Sebi-regulated entities, there are different KYC requirements. We must do away with that...
As chief of a fund house, you criticized Sebi’s ban on entry fee for mutual fund investments. Now what’s your plan? Fund managers have been complaining about decline in business.
I am glad that you agree with me that the industry has shown a decline. I would not like to comment on why it has declined. We have formed a group to look at the mutual fund industry. The idea is to see how the growth of the industry can be accelerated and to arrest the decline... Coming to the particular subject of entry load, we will take a comprehensive view; and I don’t want to say now that something will be done or undone. The whole idea would be to enhance the reach of the industry. In the last one-and-a-half or two years, we have seen a decline in folios and number and also a decline in net inflow in equity assets. The data from other corresponding industries is not showing any general macro reason for this decline. So, obviously, there is something unique to the mutual fund industry...
So there will be some changes in mutual fund norms?
Well, if the committee recommends so...
You are also planning to regulate wealth management and investment advisory service.
This matter has been taken to the sub-committee of the FSDC (financial stability and development council). There are multiple players—one set is registered with Sebi as PMS (portfolio management service) providers, another with banks, and there is yet another large group not registered with Sebi. This industry is worth about Rs 80,000 crore.
We need to regulate them and create certain discipline and provide comfort to the investors. It requires other agencies to come in the picture. Our aim would be to come out with some regulations.
When do we expect to see the new takeover code?
This matter has gone to the Sebi board twice—October, and again in February. In the last meeting, the ministry representatives informed the board that they require certain consultations before they could firm up their view.
They also informed that the CEA (chief economic adviser, department of economic advisors, finance ministry) will lead this consultation process.
I believe that the CEA has already had one round of discussion with the stakeholders in April, but the ministry has not yet come back to us. I would hope that the ministry is able to finalize its decision soon.
Is the government uncomfortable with the proposal of acquiring up to 100% in a target company post open offer?
Sebi has received a lot of representations on this, and I am sure the ministry also has received a lot of views on it. But I am not aware of what is on their agenda...
How is Sebi’s relationship with the government? Is something amiss?
I don’t think there is anything amiss. I clearly understand the regulator’s duties and its limitations in accordance with the Sebi Act. I have a reasonable idea about how the government functions, what are the various stages of decision making and who needs to be consulted. My working with the ministry in the banking and capital market division is helping me.
There will be areas where the ministry will have its views, but I don’t see any interference by government in Sebi’s working. The government is represented on the Sebi board and they have a legitimate role to play for any decision which is going to the board.
Another key issue pending is the IPO norms for stock exchanges. The Bimal Jalan committee report on market infrastructure institutions has drawn a lot of flak from many quarters, even though the previous Sebi chairman seemed to be comfortable with it.
It is still in the process of consultation and Sebi has not taken any final decision on the matter so far, unlike the takeover code where the Sebi management, at least, took a proposal to the board.
You should ask about deadline only if you think that the person you are talking to has the ultimate authority to decide on it. Unfortunately, that is not the case. But, by way of prioritization, my own feeling is that takeover code should get a higher priority because there Sebi’s views have already been taken, and the matter has gone to the board twice. I would be happy if both the things happen at one go.
The terms of some of your key officials are coming to end. The government has already invited applications for the post of two full-time members. You would need to build a new team.
The government has already taken a decision that the selection process should begin for the board members, and it was taken much before I joined. The government has already invited applications. The selection committee is chaired by cabinet secretary and I am also a member of it.
The Sebi board recently met to consider the NSDL (National Securities Depository Ltd) issue after the Supreme Court’s directions.
...The Supreme Court had asked whether the current board of Sebi is willing to reconsider the matter. The Sebi board met on the subject and we have communicated our recommendations to the Supreme Court. An announcement from the Supreme Court will be coming soon.
What’s the status of the cases with Satyam Computers and its auditor? Recently, investors in the US got compensation from PricewaterhouseCoopers (PwC) after filing a class action suit. Can Sebi take some steps on behalf of Indian investors for a similar recompense?
What I understand is that SEC (US market regulator Securities and Exchange Commission) had gone in for a consent order and a certain sum of money was agreed to be provided by PwC to SEC. In India, the accounting and auditing community is not regulated by Sebi.
Because of Sebi’s action, at least there is a judicial pronouncement upholding its right to question the working of auditing firms with regard to listed company and if there is any reason to suspect that they are party to some fraud. That’s a major victory. Whether we can recompense in this particular case or not is something that will depend on how the legal proceedings go on...
There are allegations against Reliance Industries Ltd and Sebi’s decision is pending for long. You take fast action against small firms, but delay decisions against big ones.
Sebi’s track record has been extremely good. In the last three months, we have taken several steps which will help enhance our capabilities manifold. Earlier, the surveillance in stock exchanges was not very advanced. They have enhanced that. Then came integrated surveillance by both major exchanges and the depositories combining together. The data warehousing system has been introduced and implemented in phases and the final stage will be implemented by the end of this year. I would like people to know that be careful, Sebi is watching...
So all cases will be taken to a logical end?
Definitely. Big firms have financial strength to delay our decision. But are we getting intimidated by them? My answer is no.
There is a market perception that you have a soft corner for the National Stock Exchange.
...I don’t think it is a correct perception; but if it’s there, it needs to be addressed. One of the areas of worry today is lack of competition... We will take policy measures to ensure there is more competition. Over the past three years particularly, the competition in the exchange industry has become concentrated. In some cases, a very high percentage of business is with one exchange.
So you will allow MCX-SX to start equity trading.
This particular matter is sub judice. But if you are saying there is a perception Sebi is partial towards one entity against others, my response is this is not our intention...
The advertisement for Sebi chairman spoke about a five-year term, but you have come with a three-year term. Why did you accept this?
Are you saying I should have refused? Or, I should have bargained? I never bargain. Technically, the advertisement mentioned a term of up to five years, not five years.
What all you would like to do in three years?
...I would be very happy if, at the end of the three years, I can see a good growth in the capital market by way of its coverage and depth. I will be happy to ensure the investors’ interests are protected. I would like growth of the mutual fund industry and markets, both primary and secondary. When I use the word growth, I have in mind institutional investors coming in and, at the same time, the benefits reaching out to small investors. We are launching a massive campaign for investor education.
Is pricing of IPOs a concern?
Earlier, the Controller of Capital Issues used to decide the price. We have moved away from that and now it is disclosure-based. We are discussing what information we should provide to the investors to help them understanding pricing of an issue. For instance, if you are a merchant banker and you have done five issues in the last year, can we provide the track record of you on those five issues? Also, can we disclose at a certain price in an IPO what is the price-earnings (P-E) ratio of the stock? There can be a chart on P/E ratios—both for the particular company as well as the concerned industry in the IPO form...
What’s your take on foreign institutional investors’ (FIIs) role in the Indian market?
As a chairman of a committee that looked into FIIs’ role in Indian market, we studied whether FIIs are behaving as a class, and is there a mass exodus. We studied certain incidents when the Indian markets tanked; for instance, in 2004 and in November 2008.
We found that on any particular date, especially, in 2008, when FIIs sold stocks heavily, they also purchased heavily. It is wrong to assume FIIs are conspirators in India. They sell and buy in big numbers; they provide liquidity and volumes. I believe a good market should always have people with different views. But, please do not get an impression that I want to promote FIIs more as compared to DIIs (domestic institutional investors). I will be very happy if DIIs become more active...