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Correcting The Larger Picture

U.K. Sinha, Chairman, SEBI, outlines his larger reforms vision for the markets in an interview with Dhirendra Kumar

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.

Are you satisfied with the profit maximizing business model for stock exchanges? These stock exchanges love to print out the huge volumes of achievement, but Indian stock markets have no breadth and higher and higher volume for speculative short-term F&O product help achieving the capital channelizing goal of exchanges. These people, they keep making a claim that they channelize household savings into India’s capital markets, but they are basically luring people to speculate their way into something which is not even security.
tioned that we are noticing that in the F&O segment, retail participation is going up. And I see no economic justification of that. So it is a worrying trend. And I have asked my people to look at this matter in a very systematic manner. So I consider your point that whether stock exchanges are actually serving the purpose for providing a platform for retail investors to participate in the growth of this country? SEBI should be looking into it and I am informing you that we have started looking into it. For the same reason that you are saying that the current role of the stock exchanges and they are worried towards profit maximization, for the same reason I suspect that the platform for selling mutual fund products through the stock exchanges has not succeeded. My data says that right since inception, when the first platform was launched till June 2011, the total net sales, total sales, are in the range of around Rs 650 crore, and this includes retail and non-retail; Rs 350 crore by retail and Rs 295 crore by non-retail. So the sales which have happened are hardly Rs 650 crore, which shows that the business model is not supportive of products where the commercial benefit would be limited and it is geared towards something else. So you are right in pointing it out. I concede this point and we have not done much on this so far but we have started looking at it.

SEBI has always looked at primary market as a way of democratizing stocks in the past for Indian investors. Historically, IPOs have been referred to as something that democratizes markets for retail investors. Do you still think it is that high a priority, a way to democratize markets for Indian investors? And what is your thinking on democratizing IPOs? Do you have any specific plan to look at making IPOs more attractive?
question has to be answered in the context of the stage of development of the market in any country. There are examples when retail does not participate in IPOs. Why? Because the investment by retail through institutional investor is very much high in their system. So that should not be a cause of concern.
In India, if you look at IPOs, the IPO market grew, or the talk about retail making some money through the IPO started sometime in the 1970s and the 1980s when government came out with a direction or a rule regarding FERA companies. That FERA companies have to have X percentage in Indian markets, and they had to offer that to the retail public. So many people who invested in those companies around that time, they made money, and they made money immediately in many cases. So a culture was generated in the country that an IPO is a bonanza, an IPO is a bonanza on day one, it’s some great benefit that is coming to you, government or some larger system has ensured that you make it.
That happened for a limited period but cannot go on. No country can permit that system for a long time to come. But that mindset is still continuing. So our dilemma is do we go to the other extreme to allow no retail participation and allow only institutions to come. My feeling is that corporates would be very happy if we do that, but again, that would mean that we are denying the retail participation, primarily for the reason that the stage of the development of the institutional investor in the country is lagging. We have to cover tremendous ground. So a certain balance has been attempted and that balance is that we have quota of three types, and a minimum of 50 per cent is for the retail. Another mistake many of us do in analyzing the situation is the rule by SEBI is only for a time frame or for a time period when the market is going up. So why do you have 50 per cent quota? Why shouldn’t you have 60 per cent quota? Or 100 per cent quota? And the counter argument is that the market can go down, like right now the market is not going up for quite some time. And if you participated in an IPO and you make a loss then you are very unhappy. Rightly so, you are unhappy from your point-of-view. So making a system where 100 per cent or more than 50 per cent is given to them, that also is a problem. I was talking to a journalist friend only three days back and his argument was that why SEBI increased the retail definition from Rs 1 lakh to Rs 2 lakh and I explained to him the same thing.
However, I am not communicating to you that everything is right with the IPO process. As a very small measure, what we have done is we have tried to simplify the forms, the IPO application forms. And simplified it from the point-of-view of retail investors. The data that he should know about the risk factor in that company, and the data that he should know about the PE multiples of similar companies in that sector. We are now providing the track record of the issues handled by those merchant bankers in the past. What has been the outcome of those IPOs? So this is one move towards disclosure. At the same time, I have in mind to set up a strong group to review our entire IPO process. So I segregated the issue into two parts, I thought that something has to be done immediately, that is simplification of KYC, simplification of application forms, disclosure and the order in which the information is coming is investor friendly. So that part we have done, it will be implemented shortly, but the SEBI Board has approved. The second and bigger question of how we can streamline our whole IPO process, we are going to do that. But you must appreciate that it will take some time.

Day before, I came across this very damning cover page story in a newspaper on a rating agency. This is quite alarming, given the global backdrop of rating agencies. It’s a regulated entity. This is a great matter, US rating agencies, dominant partners of these Indian ones have fell in the prices. So, do you plan to investigate them?

Yes, we look into it very seriously, because we have made some changes in the regulations for the rating agencies and the type of obligations they have. A small thing we did about three months back was with regard to having a standard set of nomenclature, which was otherwise misleading to many investors. But this question about rating shopping and all is an area…I have read that article…is an area where we would be looking into seriously. But we don’t want to de-stabilise the industry at the same time. But if there are any instances, we’ll take them very seriously.

SEBI: Securities and Exchange Board of India / IPO: Initial Public Offering / KYC: Know Your Client / F&O: Futures & Options / FERA : Foreign Exchange Regulation Act / PMS: Portfolio Management Scheme/ AMC: Asset Management Company