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Setting the Pace

SEBI’s chairman, UK Sinha, talks to us about the direction he wishes to take the regulating body in…

During his stint as the chairman of UTI Mutual Fund, Sinha was outspoken about his views on the regulator’s decisions. Now he has switched roles and heads the Securities and Exchange Board of India. Here he speaks of the direction he wishes to take.

In your speech to the mutual fund industry summit this year, you said that mutual funds could play a greater role. You have a lot of groundwork done in your earlier role as a bureaucrat in the area of pensions, what concrete steps could this take? What regulatory steps could be taken for this to happen? Is there a road map for this?
The current situation has become a little confusing because of the tax requirements and the proposed changes in the tax laws. It has not been made very clear whether certain schemes in the mutual fund industry today, which otherwise qualify for tax exemptions, would be covered or not. On the contrary, there is belief in many corners that the day the new laws become effective, these concessions will be withdrawn.
SEBI is in touch with the government on this and my belief is that because nobody outside government and parliament can give a guarantee on this thing, it is their mandate. However, SEBI has articulated a point to the government that the tax benefits are required for pension products on the same lines as it is there for other pension products or insurance products. My feeling is that the industry is gearing up towards providing lifestyle planning, lifelong planning and they are realizing that pension plans could be a good plan for them. However, the tax issue is one issue.
The second issue is that there are different segments in the regulatory super-structure where people are really not very clear which way to go. And when I talk about pension money coming into, or retail money coming into the pension industry in a big way, or in the market in a big way, I also have in mind my hope that the largest pension funds in this country, say for example, Employees Provident Fund Organisation (EPFO) or Gold Mines Provident Fund Organisation, would also start thinking in terms of investing a small portion of their money into the market through a fund manager or through an expert body. But can they come in?
My understanding is that more than six years ago, the Ministry of Finance permitted it. But with regards to EPFO or Gold Mines Provident Fund, and there are two other smaller ones, they have not taken any view. I think we are losing an opportunity, I think we are losing a chance in the interest of the workers. So that is another area where we would like to clarify positions to those who are taking a decision on this matter.

At the distribution level, as well as from investors’ point-of-view, there is a great deal of commonality between mutual funds and savings-oriented products from insurance companies. Very often, the same entity is selling both products, targeting the same pool of savings. The intermediary is the same, the customer is the same. Is there any framework between the IRDA and SEBI to coordinate regulatory actions to better achieve the common goal of investor protection? Is there any active co-ordination between the two bodies?
I would like to take a position that the relationship between the regulators has improved tremendously over the last few months and SEBI is in constant dialogue with the other regulators.
On various matters, we are talking to each other and the position is being well understood. I think it has also been guided primarily by the fact that the last amendment on the FSDC has made it very clear to all the regulators that the people of this country want them to work together.
Now coming to this specific issue about how we can coordinate the issue of distributor regulation, you will appreciate that globally the way insurance products are sold and the way mutual fund products are sold are not exactly similar, because the incentives are vastly different. So we will be working with IRDA to ensure that there is some commonality in the basic approach - for example, disclosures, mis-selling and transparency in dealing - and I suspect that we will be making progress.
My approach is that before I start doing that, I must put my own house in order - the distributors or IFAs who are working within SEBI’s exclusive domain. To that extent we have started a very small initiative by regulating those distributors who are above a certain threshold. And in the last meeting of the board, we have announced that. The good thing is that although their numbers are small, the industry that they control is 50 per cent. So 50 per cent of the industry business will be through this mechanism. And again, this is an area of cooperation between the regulators because as you know, some of the entities who are distributing these products are regulated by other regulators. So there have been consultations with other regulators even to reach to this point.
Our thinking is that this is only the beginning; we will go into a significant amount of regulation for the distributor. This is the first step. And in this first step, what we have done is, again, to insist on data dissemination and on disclosure. About the two measures we have taken in the last board meeting, the second one is about due diligence on the distributors. If you are a particular distributor and you are part of a group which also manufactures some asset management products, what portion of your distribution is for your own group product? Our suspicion is that it would be predominantly high for your own products. But if it is happening across the fund houses, or across the distribution houses, it points to some sort of a bias or mis-selling in dealing with the distribution of products. We can’t stop it by a mandate, but we are at least beginning to ask them to disclose it, that if you have distributed Rs 100 crore worth of products, have you distributed Rs 50 crore, Rs 70 crore of your own products? And if it is happening month after month after month, let people know first. If things don’t improve, we will take some action.

It has been a long time that a common electronic platform for mutual fund distributors and investors has been talked about. And it could be transformational for the mutual fund industry. However the industry has not been capable, or willing, to start any work on this. What benefits would SEBI expect from such a platform? How hard will SEBI push for creation of such a platform?
We have already mandated in the last board meeting that common account statements have to be provided. SEBI’s approach is that we do not want to be pro one industry, or anti another industry, we do not want to be promoting a particular company, or a particular group of industries. There are competing industry claims that they want to do this business. It could be a depository or an affiliate of a depository, it could be an R&T agent, it could be the platforms created by a group of IFAs, it could be a platform created by AMFI, it could be a platform created by the stock exchanges, so we feel we will be agnostic to it, so long as the end requirement is that the customer gets his common account statement. My feeling is that this mandate will start a serious thinking about how to do it. But we do not want to be favouring a particular industry.

There is another goal which is being fulfilled by a very robust platform, which is ease of transaction, simplifying the procedures. Common account statement is just one aspect. Will you be pushing for any standardization?
My feeling is that instead of SEBI prescribing a particular standard, the pressure from SEBI for the industry to come out with certain outcomes, will itself lead to thinking on those lines. If you recollect, AMFI was thinking on those lines for a very long time, and then they gave it up. Why they gave it up I don’t know.
Then there have been individual R&T agents who have set up their platform, or who claim to have set up their platform and they have been asking for it. Stock exchanges keep telling us that their platform is very robust and they can take care of everything. But sitting in SEBI, our worry is that we should not be seen to be promoting the business interest of a particular company, or a particular group of companies. Common account statement is not the total end result that we are looking for. We’ll keep pushing, that’s all I can tell you - that we will keep pushing in this direction of encouraging such platforms. Do note that I am using the word in plural because I am very particular and conscious that we are not pushing or favouring any one single one.
If I can take you aside to a different situation, you will appreciate the context and thinking of SEBI. We started by saying there will be a single common account statement. Once our board decided we looked into all the arrangements, and in that arrangement again we are saying that there would be multiple KYC registration agencies, KRC, we are calling that KRC. And we have developed qualifications for them. So who can do it? Is it limited to only the existing ones? The answer is no. But the existing ones can also come in. What we have insisted there in that KYC decision is that even if there are multiple KYC registration authorities, there should be inter-operatability.
So coming back to the mutual fund example, whether one agency or ten agencies come, there will be inter-operatability. So your basic point that how money is given, how things happen…my feeling is we’ll push for it but we’ll not push for it in a manner that industry thinks or everybody thinks it is disrupting. The way things have emerged over the last few years, one good development I am noticing is that the direct sales, I am talking about equity schemes only, the direct sales as a percentage of the total sales has gone up. I was looking at the data, you will find that IFAs are selling about 22-24 per cent of the net sales. Direct sales have reached the level of around 20 per cent. This is a silent change which has happened. People are now coming into the funds directly, through the internet and other methods, without employing any intermediary.
So my belief is that in this country, if we are able to propagate the use of mutual fund products, there will be a huge demand for manufacturers as well as service providers to develop a seamless system. SEBI doesn’t want to be appearing to be saying that this system is good, or that system is good. There was some confusion about it a few years back, that SEBI was perceived to be favouring a particular system. We want to distance outselves from that perception.

We have heard a lot about mis-selling of financial products. Is there any systematic effort to study and quantify mis-selling? Are there types of products, types of investors, types of distributors who are more prone to mis-selling?
Yes, it is a possibility. I think your suggestion is welcome and SEBI would like to undertake a study.

On the roads we see these signs put up by the traffic police stating ‘accident prone area’, ‘steep turn ahead’ and so on and so forth. Should SEBI put up, in a manner of speaking, signs like ‘mis-selling prone product’ or ‘mis-selling prone distributor’…is it a possibility?
SEBI is now asking the AMCs to monitor the distributors, specially the top 50 per cent business-wise distribution. There is also a provision there that AMCs will have to do due diligence in the selection of their distributors and they will have to keep a record of the due diligence that they have done. We have also said that when this due diligence is being done, they should also question whether mis-selling has happened or not, which means whether that product is appropriate for that particular person or not? And we have said that if you feel it is not then you should directly contact the investor. So we are beginning by asking the AMCs to look at some of the top…if you want them to do it for 100,000 IFAs or others, it will not be practical. We are not ready. But, we are moving in that direction.

One can take a small but random sample or conduct a survey to detect trends in mis-selling, because it is all very notional. Nobody figures out what is mis-selling, but there is a sensationalism to it because victims will not come and report such things. That is the nature of this crime…
One thing I would like to add, that in addition to SEBI or the victims coming directly, I am happy to point out that certain sections of media are pointing it out very effectively. And we have received some evidence from one of the TV channels and you will be happy to know that I had a review with my entire surveillance team a few days back on that aspect. What happened to that information we got? Who is pursuing it? What are the steps taking? What investigation has happened? So, we are pursuing it. So the comfort I would like to give to you is that if we get any specific instance, we take it very seriously. That’s not a final solution, but we take that very seriously.

In our interactions with investors, we have always observed that a high degree of mis-selling comes from banks. They routinely use customer’s confidential financial data, which they possess because they are their customers, and inputs to financial distribution…. Is SEBI comfortable with such practices? And what can you do with other regulators, the RBI in this case?
I will start by one disclaimer that unless we conduct our own study, we will not like to come to a conclusion that X set of distributors are doing much more mis-selling than the others. But you may be right in your observation…
But let SEBI not take a position on that unless we have got some evidence to support it. That’s the limited point I am making. But whether it is one category of distributors or some different category of distributors, again I would like to point out that we are looking at them about the disclosures through this new mechanism. Going forward, we are debating how to ensure that the entire community is regulated.
The current thinking in SEBI is that it is too much for us to take on our plate and we will have to take the help of some SRO. But who is going to be that SRO? How well prepared that SRO is we do not know at this moment. But we have in our annual budget for 2011-12 set apart a very sizeable amount of money to seed a creation of an SRO. So our seriousness is there, otherwise we would not have created a fund of Rs 10 crore only for this purpose. So we have done that. On the question that if somebody is a distributor being regulated by some other regulator, are we feeling tied up because of that, the answer is no. My feeling is that no regulator in this country today wants that any of its entities should be indulging in any sort of malpractices. So when we want to act, we can act.

RNT: Registrar and Transfer / FSDC: Financial Stability and Development Council / IRDA: Insurance Regulatory and Development Authority / IFA: Independent Financial Advisor / AMFI: Association of Mutual Funds in India / SIP: Systematic Investment Plan / KYC: Know Your Client / AMC: Asset Management Company / RBI: Reserve Bank of India / SRO: Self Regulatory Organization