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SEBI’s Reforms are Enablers, not Creators

SEBI’s new rules for funds and IPOs may have paved the way, but animal spirits will return to equity investing in their own good time

Last week, markets and mutual fund regulator SEBI came out with a package of new and reformed rules regarding mutual funds, IPOs and investmentadvisers. Some of the changes that SEBI wants may hard to implement in spirit, if not in word, but there’s little to argue with as far as the general thrust of these changes.

In mutual funds, the thrust of the changes is to set up an incentive system that will allow asset management companies to charge higher expenses if they succeed in making inroads outside the larger cities where fund investors are currently concentrated in. The new rules also incorporate a series of other changes that collectively improve funds’ economics while imposing a somewhat higher cost on investors.

SEBI has also initiated steps to make stock IPOs available electronically, and to a much wider range of locations across the country, as well as a lot of other fine-tuning to the IPO process. The underlying theme for both the mutual fund and the capital market changes is to enhance their reach, as well as improve transparency and economics so that more people invest more. The need to get savings into the capital markets, something that both the PM and the FM have spoken about recently is the theme of these set of changes that SEBI has wrought. In fact, the headline of the first section of SEBI’s press release about the changes is ‘Steps to Re-energise Mutual Fund Industry’.

However, it would be a mistake to imagine that these steps will actually, by themselves, re-energise retail investment in mutual funds and capital markets. These are no more than enablers—important and crucial, no doubt—but in the final reckoning they are part of the supporting cast.

Investments will get re-energised when savers feel that they’ll get good returns, get drawn to investments and enthusiastically put their money into equity-backed investments. In other words, when they develop the much-yearned-for animal spirits.