Mumbai: U.K. Sinha, chairman of India’s capital market regulator Securities and Exchange Board of India (Sebi), spoke to Mint-Bloomberg-UTV on Wednesday on an array of critical issues ranging from the regulator’s independence to the Bimal Jalancommittee report on market infrastructure institutions, new norms for private equity, and venture capital funds, misuse of the American and global depository receipts (ADRs and GDRs) route by some Indian firms, and restoration of incentives for mutual fund distributors, among others.
You were instrumental in creating India’s first universal bank through the merger of ICICI Ltdwith ICICI Bank Ltd.
When financial sector reforms were introduced and the Narsimham committee report was out, it became very clear that interest rates in the country would have to be deregulated, and it had already started happening. So, the traditional model of a development financial institution where funds were being provided at a subsidised rate, either domestic or foreign (for example, if it was a a foreign fund, the government would provide the exchange rate risk and guarantee it), was seriously threatened. The management of ICICI Bank played an important role at that time. I was then the nodal person in the ministry of finance to take this forward. A development financial institution was going for a reverse merger with the bank which it had created a short while ago, but the bank’s size was very small and the development financial institution was very large and there were so many permissions required, so many approvals which were not strictly in accordance with, the then prescribed norms which had to be amended or changed. Besides, the total statutory liquidity ratio and cash reserve ratio requirements were huge and there were many other things.
Open mind: Sinha says Sebi welcomes suggestions from people, industry groups and even small investors. By Hemant Mishra/Mint
How has your journey been from the finance ministry to Unit Trust of India (UTI), India’s oldest mutual fund? You pioneered the micro pension scheme.
Let me provide some background. When the 2001 crises occurred, I was asked to come to the capital market division, wherein we dealt with all the issues regarding the market misconduct of 2001, including the UTI episode or things which went wrong at that time. We dealt with the joint parliamentary committee and a number of reforms, and the most important of them was the amendment of the Sebi Act. The last amendment of this Act took place during my tenure in 2002. We were also able to introduce changes in the demutualization of the stock exchanges. I was also looking into areas of pension reforms at that time. It made immense sense then for the government to move towards its borrowing from the general public in a deregulated atmosphere. I am referring to the money which the government of India borrows from the EPFO (Employees’ Provident Fund Organisation) and others. So the whole idea was to implement pension reforms so that people could have a defined contribution to the pension system. We created and started the PFRDA (Pension Fund Regulatory and Development Authority). So when I came to UTI, I wanted to implement some of these ideas. Hence, we started what is called a micro pension scheme, and here I would like to acknowledge the help and support I got from the Self Employed Women’s Association (SEWA) in Ahmedabad. It took us some time to convince the SEWA leadership, but once it was convinced, we got full support.
One of the key things you have done in Sebi is to clear the takeover code norms. The takeover code report went to the Sebi board at least twice, but could not be passed for a lack of consensus. How did you manage this?
In 1994, the first takeover regulation came, and in 1997, after the Justice Bhagwati Committee report, the takeover code came, which is in existence. It was revised in 2002, and so Sebi rightly set up a committee. Now why do you have a takeover regulation? On the one hand, you want that when an ordinary shareholder’s money has gone into a company and the management is not getting the best out of the company, the shareholder should not be stuck with it. However, if you are the acquirer of a company, you would like to pay the minimum amount, and if I am a shareholder of the company, I would like to have the maximum amount possible. Hence, there can’t be an ideal takeover code.
Yet we have to try and do what is relevant in our ethos and our economic development. We started by talking to all the people concerned about the basic approach and philosophy and concerns. We met a large number of people from industry groups, subgroups, government, various associations, and got recommendations about enhancing the initial trigger from 15% to 25%. We also looked closely at promoter shareholding data in Indian companies versus the rest of the world and the financing which is available. We considered all these recommendations and other facts and discussed these with the board in detail.
While the code has come into effect, there are no takers.
I won’t comment on whether there is any taker or not, but I suspect there is now clarity and I also believe the situation will improve, given the current macroeconomic developments. For example, the venture capital (VC) and private equity (PE) industry had a genuine problem that it could not acquire beyond 14.99%. So now it has headroom. Similar negotiations are on. You may have to wait a bit longer if you want numbers.
You have a draft norm for the VC and PE industry companies, but they were pretty unhappy with it and perceive you as an activist-regulator wanting to kill the industry.
I don’t know where you got this equation from. Sebi is a very open organization. We welcome people, suggestions, industry groups, and even small investors; so we had a series of discussions with the set of people that you are saying are unhappy and what we have explained to them is the following.
There is a set of people who are being regulated, who are managing somebody else’s money. If you are managing somebody else’s money and you are also pooling it, you will appreciate from the developments at least in the last three-four years which have happened globally, that somebody should regulate it. Even in countries like the US and other places, they are now talking—which they were reluctant to do—that private equity or hedge funds should be regulated. The venture capital industry thought we are also going to regulate those who are bringing money from outside India. We explained that this is not the idea. So we are in dialogue with the industry and, hence, do no share your impression that the industry is unhappy with us. We may come up with some revisions for this industry in a couple of months from now.
You brought back incentives in some form for the mutual fund distributors in August. But the funds flow hasn’t changed.
If we are trying to make a direct connection and correlation between certain measures taken by Sebi and the flow to the mutual fund industry, I think we will have to look at the larger picture. Let us not forget that the whole investment climate in India and outside today is quite muted—very, very muted. If you look at the primary market, I don’t see major activities and if you look at the secondary market, retail participation is low. Keeping all that in mind, let us not connect the current trend with the result of the decision.
Whatever Sebi has done from 2009 to the latest decision this August, a message has gone to the distributors and advisors that the prevailing model is going to be that of an advisory model. So distribution is not going to be a very successful model for most of them. Hence, they are changing their model and getting into an advisory role, and if you are a large company getting into the advisory segment, transactions are perhaps not going to help you.
You also allowed foreign investment in mutual funds and Indian mutual funds. But the progress is very slow.
Again, the process issues have been addressed. First of all, only if you are a subaccount or you are an FII (foreign institutional investor), you can invest in the Indian markets. If you did not qualify under these two definitions, you could not invest. Now you can. We have also said that depositories which have a licence from Sebi can open offices outside India. My impression is that a number of depositories are actively considering this because they have contacted us, and are trying to set up their offices and develop partnerships. But again, to judge the outcome, one has to inspect whether foreign money is coming in to India. The last nine months’ data does not indicate so.
Similar is the case with equity. On our part, the process is over and the rules are there. People can come in whenever they want.
You also promised to change the “know your customer” (KYC) norms.
The Sebi board has approved a uniform KYC. Even for entities being regulated by Sebi, the requirements of KYC were different. To begin with, we have ensured that for activities under own jurisdiction, you will not require different norms. For example, if you have got your KYC done with a depository, the same should be valid for mutual funds and other activities within Sebi’s domain.
We are also talking to other regulators for a similar practice, and I can’t disclose anything beyond this.
The second part of the KYC reforms, which will be a major game changer for retail investors, is that there should be an organization or more than one organizations which will be the provider of KYC. So you and I can go there as individuals, file our papers, and get a KYC.
When do we see this being implemented?
I believe the regulation for these KYC providers should be in place by the end of this month. We are also talking to possible providers of the services.
You are also planning to simplify initial public offering (IPO) norms.
The part about the disclosure document—draft red herring prospectus, or the prospectus and offer documents—is done and we have also provided for compulsory disclosure of the track record of merchant bankers. So if you are a retail investor, you don’t have to look at 200 pages to find out which segment contains risk factors about the company and things like that.
You also have the advantage to know what has been the track record, and we are now having a relook at the entire IPO process. The idea is twofold. One is that the IPO process cannot be decided, depending upon the cyclically of the economy. If the cycle is going up, then we have a different set of rules, and if it is counter-cyclical then, we have a different rule. So we have to make it for all time to time, and the second is that there should be certainty in the minds of people about how to operate, and thirdly, we also have to ensure that we are able to handle large IPOs.
If you look at the numbers which India has had, the largest amount of money raised and the amount of money raised for example, in China, there is absolutely no comparison. So how do we prepare this country so that corporates can also raise large money? I mean, this is one of the roles of Sebi. We are moving in that direction and we have set up a group, which is looking into this.
There is a perception that some of the Indian firms have been misusing the GDR and ADR routes.
It was Sebi and its surveillance team which discovered this. We came across an instance about two months back where the GDR norms were being violated in a substantial way and we have taken serious action against the people involved, both the companies as well as the intermediaries.
When we analyze the way they have done it, we found that there has to be certain restrictions placed on the GDR and ADR routes, and we have sent a policy paper to the government. In the paper, we have recommended, for instance, the amount of money that you can raise through ADRs and GDRs. We came across a case where the paid up capital is X, but the amount being raised through ADR/GDR is 100X or even more than that. Secondly, one can justify it for a short while, saying I had some very great business opportunity and I had to do it, but we discovered that the money never reached India, the money was raised and it remained outside India.
When do we see the new norms?
That is for the government to decide. I have given my inputs.
We believe that you are also fine tuning the consent process. Your internal assessment has shown that it’s not uniform.
Let me begin by saying that consent and proceedings are legally provided under the Indian law and they have proved very useful outside India as well. The perception in certain segments is that what is happening in Sebi is rather arbitrary, and we did some study and we found that in some cases, we will have difficulty in convincing ourselves that same yardstick was applied.
I don’t say that this is done because of any ulterior motive; I think we are not sensitized. After doing a detailed study, we are trying to make a uniform and predictable consent proceedings.
It’s a very major exercise; I believe we will be able to finalize it in a couple of months. After that, the net outcome would be that anybody who is applying for a consent will come to know whether his category of case falls under consent or not. We are going to specify what can be consented and what cannot be consented (to). If something is extremely serious, we will not allow consent, that’s point No.1 .
You can make a rough assessment that according to you based on Sebi’s declared policy what is going to be the amount. So the variation both in amount and terms and conditions will be also decided. That will provide a reasonable amount of consistency about the outcome that you can expect from Sebi.
There have been quite a few high profile cases where you have been sitting on for years and even for decades.
I would expect people to be fair to Sebi, and by that I mean that if any yardstick is applied that certain matters have to be disposed of within a certain timeframe, then we are ignoring the complexity of issues. We have strengthened our investigation wing substantially and we have strengthened our surveillance wing substantially. We get alerts and we act on them, but to hope that everything has to be finished within a certain time frame is not possible. We do not always get cooperation. The intermediaries of the companies involved in the investigation approach different forums. If a notice is served, they would appeal against it, and if somebody has been examined, they would like to have a cross-examination, raising principles of natural justice, etc.
Have you ever felt that in certain areas where you lack expertise, you need to bring in talent?
The capital markets today have become extremely complex, and the way they are integrated with the global markets it is even much more challenging. I must say, though, that Sebi has very talented people.
And you pay them well?
I think we pay them well. If you want to take away any of my employees, you will not find it very easy. We are getting into areas of training and developing them, so we provide them a lot of exposure, which has been our conscious policy, through international interactions and also by having various training and development programmes.
But I would accept your basic point that the requirements from human resources within Sebi are getting more and more complex and we should not be complacent. The board has also decided to have a complete look at the organizational structure of Sebi and we are in the process of hiring some good adviser or consultant.
I think you are suggesting that there has to be a serious introspection, and that is exactly what we are doing.
How did you manage to make the exchanges that have been fighting for years to smoke the peace pipe?
There are certain trade secrets which I think let us keep it for the time when I relinquish this organization…
Was it a threat, or carrot and stick?
All I can say is that we had to first convince the intermediaries that we mean business and are fair. It took us a few months to do that. Meanwhile, things like the request for a liquidity-enhancement scheme was cleared and senior people from both the exchanges felt that Sebi was so fair to them. So the first thing is to act in a very fair manner.
What’s happening to the Bimal Jalan Committee report?
I inherited two important reports—one was the takeover code and the second was the one on the Jalan committee. Consultation is on as far as the latter is concerned. We have a legacy issue in India, and a large number of regional stock exchanges. What should be done about them has perhaps not been dealt with in greater detail and clarity, as it should have been. We do not want to leave this aspect out, so that we have 20-plus stock exchanges, doing no business, dealing with real estate and some of them doing trading. The companies which are listed there have no exit. We would like to resolve this matter, because it leaves a bad impression on India when we have so many exchanges and 80% of them are not functioning.
Which one of these is the correct interpretation? Sebi is ready to give a silent burial to the Bimal Jalan committee and Sebi will institute another committee and in due course will take a look in totality at both the Jalan committee recommendations and the other committee’s recommendations on regional stock exchanges. Either way we will not see any decision in less than a year.
You have been very unfair in making these conclusions. Your summary is extremely unfair and I must protest. This is absolutely wrong. At the same time, if we are trying to tackle the issue of the regional stock exchanges and an impression is created in your mind that this is deviating from the report given by Mr Jalan, then again you are wrong.
What we are trying to say is our consultation is going on and we want to look at the entire stock exchange infrastructure and architecture in a comprehensive manner, including the role and the exit for regional stock exchanges. Sebi tried some things in 2010, it didn’t work out. I don’t know whether you are aware that in 2010 Sebi came out with an exit policy for regional stock exchanges. Not a single exit has happened, so we can’t have a situation where on the one hand we take a position about whether people would have X percentage or a 2X percentage in a particular stock exchange and there are large number of stock exchanges.
How have the last nine months treated you? Have corporate houses put pressure on Sebi?
I don’t know where you get this impression, but since you are raising this, let me give you my perspective. Books or reports which have come out after the sub-prime crisis and the larger global crisis very frequently refer to “regulatory capture”, and there are instances where personalities have been named who compromised their positions. It is very easy to say that a regulator in India has done this or not done this. If you look at this from that point of view, I should demand that Sebi should give credit to Sebi for its independence. The type of things Sebi has done and has done consistently over the last one decade makes me proudly say that it is something remarkable.
But the general perception is that Sebi is susceptible to government pressure.
This is extremely unfair and completely wrong. I had occasions to work with three finance ministers and we got maximum support from ministers when it came to getting independence for Sebi. There were other wings within the government which were reluctant—wings outside the ministry of finance. But the finance minister and ministry have been extremely supportive of the independence of Sebi as a regulator.
Secondly, the role of Sebi is not confined only on policy or regulation. We have largely three roles. One role is to develop the policy or assist the government or the Reserve Bank of India in developing the policy about the market. This is why, for example, Sebi is regulating FIIs. Strictly speaking, this is a Fema (Foreign Exchange Management Act) issue, and if you the finance minister you can give it to some other agency tomorrow. The third is taking action where people are on the wrong side of the Sebi law. This is a very critical area and I would like to assert and tell you that in this area Sebi has been completely independent.
On the question about policy versus the Sebi constitution and people on the board, that is what Parliament has given us. But the board of Sebi doesn’t decide individual cases. There has been only one example so far in the history of Sebi when the board had to look into a particular quasijudicial matter and that is because one of the whole-time members of the Sebi board was earlier part of the organization which was under discussion. So he had to recuse himself.
Otherwise Sebi has been very cautious that we discuss regulatory issues and policy issues. Individual cases are dealt with by Sebi officials who have that delegated power.