Breaking Resistance to Change | Value Research The market regulator has been actively advocating several investor-centric initiatives over the past year
Interview

Breaking Resistance to Change

The market regulator has been actively advocating several investor-centric initiatives over the past year

The chairman of Sebi, UK Sinha, speaks to Dhirendra Kumar on some of Sebi's measures and how it is changing the perception in the markets

What has been the most challenging aspect of your term so far?
I would say that there are two things which make me feel very satisfied. One was to bring about transparency and certainty in the working of Sebi. There were doubts in public mind that in a similar situation, different type of people will get different treatment. That impression was prevalent and it is a part of evolution. So what we have tried very consciously is to remove that sort of bias and to build trust--that for similar offences, similar misdemeanours, uniform actions will be taken.

And I will give you the example of two cases. One is the area of consent mechanism clean up. There were serious doubts in the minds of people and some of them thought that you could get away with any large violation and Sebi will call you on the table and consent with you. Now we have clearly said that certain things are non-negotiable. So if you're doing insider trading, if you're doing violation of serious nature, unfair trade practices, front running, you should be ready in your mind that you're consciously doing it to face consequences of punishment.

So that message has gone out very fast, very well and very strongly. And also in some cases we have now decided that we will go for Consent Order. In those cases also, a mathematical formula has been provided. The dream for Sebi is that any offender, if he is coming for a consent, should be able to calculate himself that amount. Earlier, a practice led to a situation where somebody got a consent amount of Rs 50,000 and somebody of Rs 50 lakh for similar offences. This has been one of the major satisfactions for me and for Sebi that we have been able to work in this manner. Now, other countries are looking at this.

The second is in the area of primary market. In the primary market nobody ever thought that an offer document could be rejected. Nobody ever realised that merchant bankers can be put to task and more obligations can be placed upon them. We now have a rule stating that an offer document can be rejected. And there are consequences of rejection. You as an issuer cannot come back to Sebi for the next 12 months, you will suffer entire fees that you have paid to Sebi and the merchant banker will also have to suffer reputation loss. Plus, if a merchant banker has not done his due diligence, we will be taking action against him. In fact, we have already taken action against some merchant bankers.

So these things are helping us give a clear message to the market that for good companies Sebi is always willing, but if there are efforts to manipulate the market through the IPO route then Sebi is going to be very tough. These measures have brought results. For example, there were operators in the market inviting people to weave a very hefty commission and then guide them through the IPO process. In the last one year, those kind of IPOs have stopped coming. And we took action in case of seven IPOs. We found that they made some mistakes and we took action against the merchant bankers as well.

Likewise, the due diligence process was not very clear, there were no benchmarks, so we have now provided a standard due diligence that has been taken as a guide by the entire industry. Due diligence records have to be kept for three years for Sebi to go and inspect. Those things are bringing in certain amount of obligations and discipline in the merchant banking industry. Initially they resisted, they felt that Sebi is going to affect their business, but now they realise that this has led to respectability of their business.

In areas where small shareholders have been compromised through schemes of arrangement, mergers and acquisitions, through amalgamation, we have taken strong and clear actions. For example, we have said that in any scheme of arrangement, before going to the high court, they have to come to us. The voting will be by non shareholder promoters and they have to give a percentage of voting. We have allowed for e-voting and we have allowed for postal voting. So if you look at the full picture, I would like to give you the impression that we have been focusing on how to avoid misuse of Sebi laws or bypassing the Sebi laws and we have tried to tighten them to ensure that there is a trust in the market.

What were the most difficult things for you to deal with? Any surprises?
On the mutual fund side, we did not have any surprise. Whatever we wanted to do, we got full support. Our biggest resistance came in consent mechanism. There were apprehensions in the public mind that large corporates are getting away with bigger offences without being penalised, without having the stigma of being penalised, because in consent you do not carry that stigma. So that has been the major thing. In areas of investigation, we had some challenges. Things have been going on for 10-12 years and to change that culture, to change that approach, to empower the team, to use new methods, it was a challenge. For example, physical verification was not happening. For the first time we have started checking people who have misused the funds, averted the funds, or made a misrepresentation. So, investigation is an area where we have made progress.

Despite everything, retail equity participation in mutual funds and through the direct mode is dormant. Can it be revived or are we in for a very long term stagnation?
My own feeling is that more than three-fourth of the assets under management of the mutual fund industry have outperformed their benchmark on a medium- to long-term basis. The mistake which people do in India and other parts of the world, is that they start making comparisons in the short-term by way of returns from other investment avenues. They also worry about capital loss and why there is no capital protection. But that is the nature of equity investment; the capital is at risk. So a lot of effort is required in the area of investor education. The mutual fund industry, and I have been arguing with the government, the mutual fund advisory committee is also looking into it, that we must develop a mutual fund policy.

The idea behind the policy is to clearly state where mutual funds stand in the hierarchy of investments. Does it serve a larger public purpose or not? And if it does, then what tax benefits the government can give. If you look at other parts of the world, including the US, mutual fund industry manages substantial pension money. And that is because tax breaks are given. In India, there are only two schemes where tax breaks are given. After that, tax breaks have been stopped. I would like see a mutual fund policy in place. The government and general public must understand the role of mutual funds in the larger interest of society. And then appropriately steps need to be taken to get retirement savings here. This point was very much in the minds of the people in 1963-64 when the Equity Act was passed.

It was enacted with the purpose of mobilising retirement savings with the growth of the industry and growth of the economy. And, how the growth of the economy will be shared with the households across the country. Somehow it has got diluted because so many new things have happened and the important point for us to understand is that there has been a telecom policy, there has been a pension policy, there has been an insurance policy, there has been a policy on electricity. But time has come for us to highlight that there has to be a mutual fund policy. In my judgment, mutual fund in the equity area can play a great role. UTI is an example where we did it for decades together. So that has to be brought out again, first on the policy front and then on tax breaks.

Watch this space for next part of the interview.




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