Mumbai: Rajeev Kumar Agarwal, whole-time member, Securities and Exchange Board of India (Sebi) says the regulator will increase accountability for credit rating agencies which are rating bonds. Sebi is also set to slow down algorithmic trading to ensure a level playing field, said Agarwal, who handles market regulation, intermediaries and surveillance at the regulator. Edited excerpts from an interview:

A Sebi committee report recently found that the systems of an exchange were misused which led to a case of unfair access to certain brokers while trading on the algorithmic platform. Would you highlight for us what action or rather regulations Sebi is considering to make algorithm trading a level playing field?

Sebi was probably the first to come out with algorithm regulation back in 2012. However, we are working on improving the algorithmic trading regulations further. The main considerations are risk management and level playing field. Various options such as two queues system, speed breakers, periodic call auction and stopping dissemination of tick-by-tick data are under consideration.

Recent events have put the spotlight back on credit rating agencies and the quality of disclosures. When should the guidelines be expected and what areas would they tackle? There were two rating agencies which did not follow Sebi guidelines on suspending ratings while rating the Amtek Auto paper; will Sebi take action against them?

Sebi has taken cognizance of recent events as far as rating of bonds is concerned. We are in the process of tightening the supervisory mechanism of credit rating agencies. The new guidelines will further improve transparency and accountability on their rating actions.

Rajeev AgarwalAgarwal joined Sebi in 2011 from the erstwhile commodity mark-et regulator Forward Markets Commission, where he served as a member. An electronics engineer from IIT Roorkee, he is a 1983 batch IRS officer. Before joining FMC, he served as income tax commissioner in the direct tax department.

Sebi is going to undertake a massive clean-up drive of companies that have been suspended for more than seven years. What prompted this move?

The first reason for undertaking this exercise emanates from the incidence of involvement of penny stock/shell companies in facilitating tax evasion using the stock exchange platform. It is necessary to periodically weed out companies which are prone to manipulation and have been in serious violation of listing regulations. In the first phase, this exercise is being attempted on the companies which are suspended for more than seven years.

The second reason for attempting this exercise is to reduce the regulatory burden of the exchanges, as well as the regulator. As far as the issue of bouncing of the communications of the exchanges is concerned, I would say that there are standard procedures for dealing with these issues. Exchanges are determined to make this exercise reach to logical end.

Can you elaborate on the action taken by Sebi in the cases of tax evasion? The Special Investigative Team (SIT) on black money has also highlighted these issues in its interim reports.

Our surveillance department found that certain penny stocks/shell companies were being used to generate bogus long-term capital gain in the hands of certain persons who apparently wanted to convert their unaccounted income into the accounted one through this route as it is exempt from income tax. The whole exercise involved examination of trades/ orders in the scrip over a period of more than one year and the fund flows involving hundreds of bank accounts. The detailed investigation is being done in these cases; however, in the interim, 1200 entities have been debarred from participating in the market and about 200 shell/penny stocks have been suspended from trading. Prima facie, the amount of income involved in these cases is in the vicinity of 15000 crore. The information has been shared with other concerned enforcement agencies which are investigating the matter independently.

Recently, Sebi took cognizance of the SIT’s suggestion on Participatory Notes and made suitable changes. Would certain changes in the current regulatory framework to put a stop on market manipulation for tax evasion by small value companies be considered?

No generalization can be made in this regard. There are small value companies which are being governed well and there are companies which may be used as vehicles for tax evasion. Therefore, the only remedy is that all the concerned agencies involved may step up the surveillance and enforcement (penal actions). Better co-ordination amongst different enforcement agencies is also the need of the hour.

Sebi has simultaneously been tightening screws on opaque fund raising and investment by foreign investors, case in point the P-note regulations and lack of allowances for depository receipts, and making it easier for foreign investors to register in India for investing. However, there is still room to ease the regulations for Foreign Portfolio Investors (FPIs) to invest in India compared to other jurisdictions. Would Sebi be considering more changes or lobbying with ministry to encourage more fund flows from FPIs?

Sebi has already simplified the regulatory regime for the FPIs especially by resorting to risk-based Know Your Client (KYC) and doing away with the direct registration of FPIs with Sebi. The process of simplification followed in the last few years has been instrumental in reducing the percentage of foreign flows through p-notes from 55% in 2007 to 10% as on date. However, the reforms are an ongoing process. Sebi is ready to further simplify the procedures, if need be, to attract more long-term foreign investors such as global pension funds and sovereign wealth funds. As this is a $50 trillion industry, there is good scope for much higher allocations to our markets.

Recent global events such as Brexit had an impact on the Indian stock markets with BSE Sensex registering a fall of as much as 1000 points. How do you think that Indian markets should look at such evens? What role can regulators play to prevent panic in markets in response to global events?

Any important global event has some impact on the market. As far as Brexit is concerned, the market had instantaneous reaction. However, in the medium and long term, markets will be governed by fundamentals of the economy. The role of the regulator and the government in such situations is to ensure flow of information so that the participants are not misled by the rumours about the likely impact of such global events. Cooling down of the emotions and assuring the markets about the robustness of the surveillance and risk management systems are also important.

In our markets, small investors always feel that because of the volatility in the markets especially generated by global events they tend to lose money. How is Sebi going to deal with this volatility and give comfort to small investors?

Markets have experienced volatility in the recent years as some very significant events have taken place at the global level. In these times of globalization, the global events have unavoidable impact on the markets across the world. In the event of “risk off" or “risk aversion" in the global markets, the redemption from the global funds takes place which leads to withdrawal of some funds from the Indian markets too.

The best remedy for reducing the volatility on such occasions is to have more domestic institutional players who may act as counterparty to the foreign investors.

A very healthy development that has taken place in our markets recently is that mutual funds are emerging as a very strong counterparty to the FPIs. They had very strong inflows in equity schemes in the last two financial years i.e. 71,000 crore and 74,000 crore respectively and have played important role in stabilizing the markets in the wake of withdrawals by FPIs from May 2015 onwards. In this regard, small investors should have long-term view so as to minimize the impact of short-term volatility.

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