In the second part of this special interview, U K Sinha, Chairman, Sebi talks about the working of Sebi and his views on insider trading.
This is not to do with mutual funds. But, occasionally, there have been murmurs of political meddling with Sebi. The case where a Sebi member officially complained about such interference received wide notice. What is the reality of such interference?
This has to be understood in the constitutional and legal scheme before I come to the practical side of it. Sebi is the creature of the Parliament. Sebi has not been created by the executive; it derives its powers from the Parliament. So, the people of India through the Parliament have given it powers. At the cost of repeating, its broad mandate is to protect the interest of the investors, develop the market and also regulate it.
So far as protecting the interest of the investors and developing the market are concerned, Sebi takes decisions through its Board. Now, there are areas where larger policy issues are concerned. For example, there are areas where tax issues are concerned, where Sebi can only recommend to the government. Sebi cannot decide on what taxes to be passed and which ones to be withdrawn. The most recent example is of the Rajiv Gandhi Equity Savings Scheme (RGESS), where the government asked us to place it before our Board. Fortunately, the Board unanimously favoured mutual fund investments to be allowed under the RGESS and the government accepted the proposal.
So, there are areas where there are policies, but the interface of policy with the regulators cannot be very easily defined. Another example, FII investments or QFI investments in the country are precisely 100 per cent in the regime of the government. And, once the government has taken a decision to allow the FIIs, they can decide to allow more or not, to open up or close down, or put conditions. They derive their powers from the Foreign Exchange Management Act (FEMA). The Sebi or the RBI comes in the picture because in the case of Sebi, we are the implementing agency, so we frame the FII regulations. But the FII regulations have to be within the policy norms under the FEMA which is the domain of the RBI and the government. So, these are all very complex and integrated areas. The point that I am making is that in case of policy areas, the government will have the upper hand. Let us not forget that this cannot change, they have the legitimate right to have the upper hand.
The second area is where Sebi is framing its own regulations and is deciding on how to implement a policy within its own domain. My feeling is that it is entirely the domain of Sebi. Nobody can interfere, and nobody should be allowed to interfere. But unlike some other regulators, specially the regulators who are old generation regulators, the Sebi Board is represented by the government representatives.
Is that a formal representation?
Yes, formal representation by an Act of Parliament. The Act says, it is not only under the rules, it is under the Act that I will have a nominee in my Board from the RBI and the Ministry of Corporate Affairs and nominee from the Ministry of Finance. So these three people as nominees of their respective organisations naturally bring their own perspectives, which is quiet legitimate. But, it is the Sebi Board which takes the decision together. As a Board, we take the decision, so some amount of input from them is also possible. Lastly, the areas of enforcement regulating the market, I feel that is the area that is exclusively Sebi’s. And, we regulate them as we do the investigations, we mete out the punishment, and also the final enforcement action. This is an area where any interference is uncalled for and should not be allowed and Sebi is working on those lines.
Sebi has recently been reported as having started the exercise to ask listed companies to define insiders. Is this the beginning of some big move on insider trading?
The whole idea is that once you get some alert or some input, some intelligence input or some surveillance input that certain sells and buys have happened, Sebi starts investigating and asking questions. It is a cumbersome process. So, what we are doing is making it possible for companies to decide in advance who can be treated as an insider. The idea is also to put a moral pressure on them, and a person knows himself that he is under Sebi’s records or the exchange’s records as an insider. This puts that extra discipline on him.
We feel that insider trading is a very serious offence. We have, for example, decided that in our consent mechanism, insider trading offence will not be consented. We have decided that they must suffer punishment. So, if somebody has gone through insider trading, they cannot come to Sebi, pay an amount and get the matter resolved without even admitting guilt.
About 6-7 months ago, we upgraded our surveillance mechanism. The people who have been involved in that exercise are so emotionally and sentimentally involved that they claim it to be the best in the world. I leave that decision to judge to outsiders. But, I think it would be fair to say that we have improved the mechanism.
So, we are getting much more number of alerts and much more quality alerts from what we were getting in the past. We would be putting in a lot of efforts towards controlling insider trading. An area where we feel we have a little disadvantage is in getting call data records from people who have made phone calls. We have separately taken it up with the government because we do not want to do any eavesdropping. But, call data records will lead to who has spoken to whom, which will help us, without breaching privacy, in getting circumstantial evidence of interaction.
In the August 16, 2012 board meeting, a new system for ensuring reasonable allotment to smaller investors was mooted. Is there a time-frame for implementing it?
That regulation has already been framed in the beginning of September. So, if any new IPO is announced, it will be as per the new regulations.
Read the last part of this interview tomorrow.
To read Part 1 of this interview click here