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For The People

SEBI's chairman, U.K. Sinha, tells us that protecting investors' interests will be SEBI's top priority

Given his background — he was chairman of UTI Mutual Fund before becoming SEBI chairman — U.K. Sinha’s appointment has raised high expectations. And he has hit the ground running. The IPO application form has been simplified, while promoters and merchant bankers have been asked to make more disclosures. Rating agencies have been directed to use uniform rating symbols. In this interview with our editor Dhirendra Kumar, Sinha outlines his larger reforms vision for the markets.

How would you articulate the vision you have for SEBI? You were the Chief Executive Officer of UTI Mutual Fund before taking over as the Chairman of this regulatory body. That obviously puts you in a position to bring a special perspective to the job.
The mandate given to SEBI is very clearly articulated in the statement of objects and reasons of the SEBI Act and also in the preamble. The better way to appreciate what is expected out of SEBI is to go into parliamentary debates. Any law that has been in existence, if you want to know what was the thinking of the people while creating that law, go into the parliamentary debate, and I have tried to do that. The whole idea is two-fold, if you look at those debates. One is to safeguard the interest of the investors. But it is also, and that too very clearly, to ensure that SEBI becomes a facilitator in India’s growth. If capital is required, whether it is risk capital or is it a debenture or a bond, if capital is required, what can SEBI do to ensure that it is being sourced in an efficient manner? Efficient means time-wise efficient, efficient means the cost, and at the same time, for those who are investing here, how to safeguard their interest.
So keeping all this in mind, three broad mandates have been given.
The first is to safeguard the interest of the investor.
The second is to develop the market.
The third is to regulate the market.

Any one of them takes dominance?
My vision would be that safeguarding the interest of the investor is our primary responsibility. Keeping this in mind we have to look at the other two as well.
There has been a perception, both inside SEBI and outside, that are these three mandates contradictory or in conflict with each other. I’m very clear in my mind that all the three supplement each other.
Let me give you an idea, the capital market development in China is very recent compared what India can be proud of. But they have been able to develop their market, or their systems, on a much wider and greater scale than in India. In one IPO, they came out with a very large number. My feeling is that perhaps we are not ready to have an IPO of that size. And I’ve told SEBI executives let us get into that vision mode, how can we be facilitators for India’s growth. At the same time, we have to safeguard the interest of the investors. My vision would be that if entrepreneurs feel that SEBI has set out a mechanism for them to raise money in a very transparent and efficient way and the rights of investors are protected, I will be very happy. Right now I feel there are areas of improvements.

Are you readying for scalability - growth?
Scalability would be a very small component; the whole idea is how to make it very efficient. In comparison to the rest of the world, how can we become a leader in providing efficient fund raising, or efficient functioning of the market?
Let me also tell you that in matters such as trading and risk management in the secondary market, SEBI has done extremely well.
So those are areas where perhaps we need to do only a little more. But there are other areas like broad basing the investor base, attracting retail investors, where we need to catch up.

There is a widespread perception that the retail investor is missing from the stock market. And it is necessarily a bad thing. Given the research and understanding required, and given the risk, should retail investors actually be encouraged to invest through funds rather than directly through risk-mitigated techniques, systematic investment plans and all that? Should you, as a regulator, be taking a position that you are committed to getting retail investors back into market? All your regulatory moves are about making him participate. Should it be a little guidance oriented?
If you talk about guidance in the sense that we should make preference for mutual funds, I think that is a fair point.
Let me begin by saying that one set of data that we are looking at is the turnover and when we are looking at derivatives trading in the stock exchanges, we find that the participation of retail investors has gone up. And we are worried about it.
We are worried about the fact that a retail investor who is not coming into the market via mutual funds and the primary market, is only getting into the options market, for example. So, is it that we are not communicating properly to him? Is it that there are some incentives for agents or distributors to motivate his behaviour like this? So we are worried about it and are looking into it seriously. But I do feel that for retail investors, a Mutual Fund product which is a product for the benefit of the large number of retail investors, something which is coming through an expert fund manager is the best alternative. That is why another decision which we have taken recently is that we had reviewed this artificial segregation under Regulation 24(2) of SEBI (Mutual Funds) Regulations, that if you are doing an offshore fund, you create a separate vehicle, you are doing another insurance fund, you create another vehicle, you are doing a pension fund, you create another vehicle. So what we have said is that those separate vehicles required on paper, as per SEBI’s mandate to create a separate research team, separate fund management team, separate dealing team…so they had to do all the three. My understanding is that it was not working. So what we have done is that if an AMC is managing even a pension fund, or even an insurance fund, they can do it along with their normal fund management team. And our logic is like this: there would be hardly any fund manager in this country working in an AMC of a reasonable size who is not managing multiple funds. The same fund manager is managing multiple funds. But we are comfortable with that sitting in SEBI, why? Because all the funds that he is managing have got a broad-based nature. So we have applied the same logic that if he is managing an insurance fund, or a pension fund, he is again managing a broad-based fund. So why not permit that?

Managing a conflict they are geared to handle?
Yes, they are doing it. Otherwise SEBI could mandate that Fund Manager can manage only one fund. I don’t think we are anywhere near that. But we have deliberately kept managed accounts, or segregated accounts away. If you are having a PMS license, for example, then there you have to have a separate fund manager. So that is the distinction.

Pooled investment and managed accounts are separate.
Yes, separate. That is the philosophy we are following.

The second part of the interview will be put up on October 27, 2011