The expenses charged by mutual funds are now a serious drag on the returns that investors get on a relative basis. You have pointed out several times that this is an area of focus for the SEBI. Do you have any specific targets - in terms of time and quantum - for reducing expenses?
The SEBI has the concept of allowing a certain total expense ratio. Earlier, we had a system of having a sub-target or sub-allocation. We have done away with that because we wanted that the total expense ratio should be understood by the investor and within that he should be allowed to make whatever savings he can make.

According to a report, India is among the six costliest countries so far as mutual fund costs are concerned. The SEBI believes that the costs need to be further reduced. At the same time, we are also conscious that we should not do anything that ends up creating an impression in the minds of certain segments that the SEBI is against them. I do believe that IFAs (independent financial advisors) have played a very important role in the growth of the industry. But I think that they need to change with time. Perhaps that change has not happened. The writing on the wall is very clear.

I had given a project and made a request to Mr. Nandan Nilekani to help the SEBI in planning some infrastructure for selling asset-management products online - the way e-commerce products are sold. And after consultation with iSPIRT and Mr Nilekani and after involving the industry, we have come out with a series of guidelines so as to encourage people to seamlessly make investments. The trend going forward is going to be that certain segments of investors will make direct purchases, just like they are making direct purchase of cinema tickets, booking taxis online and buying products online.

We must also realise that the Indian financial market and more so the asset-management market is not one unique market. There is still space for everybody and we are very conscious of it. There are all types of clients - those living in smaller towns or even in bigger towns who have some understanding, those who need certain handholding, and those who know everything or they think they know everything and they are capable of taking their decisions. They are also young. They are tech savvy and they have investable surplus at a very early age.

In my generation, nobody had thought of making any financial investment till he/she crossed 40 or 45. Now, in mid-20s, people have surplus money and they are aware and they are making investments. So, for various segments of client needs, all the players are required.

So, what we are trying to do is to make the investor aware of the different options available to him. Nobody should have any grievance about that. If we are asking for transparency, we are asking the disclosure of fees and costs. And we are also trying to make it known to them that there is a direct plan to which they can resort to if they are capable and willing. I think we are on the right path but we are against fixing any fees by ourselves.

We had serious discussions with AMFI. Last year, AMFI had voluntarily decided that it would have a certain ceiling. In 2014-15, huge amounts of commissions were charged and we had expressed our dissatisfaction. I am happy that the industry listened to us.

Recently, we compared the expense ratios of direct plans and regular plans of fund companies. We found great variations. There were companies where direct plans were cheaper by about 30 basis points and companies where direct plans were cheaper by one-and-a-quarter percentage points. In fact, the alarming thing was that the companies whose direct plans were very cheap didn't want to reveal that their direct plans were the cheapest because of conflicting interests. So, do you think there is a need to actually specify a ceiling for direct plans?
You are right that direct-plan costs are different amongst different fund houses. Ideally, one would argue that the entire benefit of not coming through an advisor or a distributor should accrue to the investor who has bought the direct plan. We are studying the situation and if certain intervention is required, we will be not be averse to it.

From the data on expenses, it appears that the T15-B15 expense framework has played a role in the rise of expenses. Is this scheme permanent?
The T15-B15 framework has worked at a time when the mutual fund industry was not in the best shape and certain help was required. I am happy that this has worked. You must be aware of the data and the data are very encouraging. I think almost 35 per cent of the retail AUM now is from B15 cities and 65 per cent from T15. When this scheme was introduced, the share of B15 was hardly 15 per cent. I can give you some other numbers also to show you how the framework has helped. The total number of investor accounts is now close to five crore.

To answer your question, I would say nothing is permanent but if the question is if the time has come to have a relook at it, my answer will be no. We would like to wait for some more time.

The conversion to digital transactions and tracking has been facilitated, but it seems to be happening at a slow pace. Are you planning to expedite this somehow?
More and more informed, educated people are taking recourse to digital transactions. They are increasing every day, not only in big cities but also in small ones. And it was in that background that we got in touch with Mr Nilekani and with iSPIRT. They made a number of recommendations. We have implemented those recommendations. The main hurdle was regarding an electronic Aadhaar-based KYC and we have issued the guidelines. Unfortunately, a new development has taken place by way of centralised KYC, where this mode of KYC verification was not envisaged. We have taken up with the government to reconsider it and implement it.

Basically, what we have done is that no in-person verification is required, no wet signature is required. So, if you have an Aadhaar number, you can have your e-KYC done and you can make investments. That was found to be very helpful but the numbers are not very encouraging, and part of the reason is the new rules regarding centralised KYC.

What were the goals of asking AMC executives' salaries to be made public? How should investors use this data to benefit in the investment process?
Let us look at it this way that if you are a key management person of any company, the data about your compensation can be known to people - it has to be in public domain. The idea in the SEBI's mind was that there are fund houses where fund performance was not up to the mark but the compensation was extremely high. Now, we don't want to take a position as to what is high and what is low compensation. It is for the boards to decide. But we felt that investors should know that while somebody's performance is in the third quartile or fourth quartile, his compensation is higher as compared to others whose performance is better.

And if this happens on a regular basis, maybe this is an extra input for investors to decide whether to remain in that fund or to go out of it. If an investor finds that he is having lot of hassles in dealing with an AMC and the CEO of that AMC is not listening to investor grievances and at the same time he knows that there are other fund houses where the compensation levels are much lower and the level of investor satisfaction and servicing is much higher, executive compensation can become an extra input for him. Our regulations don't provide for any ceiling on anybody's compensation but nobody should mind if that information is made available to investors. And I must reiterate that the information was in any case supposed to be in public domain in a particular format under a particular legal requirement. What the SEBI has done is to make it available to the investor who wants it.

Concentration is rising in the mutual fund industry. Five largest AMCs have about 57 per cent of the total AUM. Reduced competition has never benefitted customers. Does this worry you?
At this stage, it doesn't worry us because if you look at other financial markets, banking for example, concentration levels would be almost the same. If you look at even the insurance industry, maybe the concentration level is even higher. And there is always a possibility that top ten or top 15 will have disproportionate share.

So, the question right now is if people have entered this industry because this was an extra thing for them to do. Or have they got their heart and soul into this business and are actually working towards it? If you recollect, in spite of criticism in certain segments of media and opposition from certain quarters, the SEBI enhanced the minimum regulatory capital requirement from Rs 10 crore to Rs 50 crore. The entire idea was that we should have serious players here. Because mutual funds are a pass-through entity, there are cases where things can go wrong. In my tenure, I have seen two-three instances where things have gone terribly wrong with some debt funds. And if you have no stake in that business, what sort of fund manager will you hire? What sort of research will you have? So, from that point of view, it is important that serious players are here. My worry is just the opposite of what you are saying. Your worry is that top five have got 57 per cent; my worry is that the bottom ten have less than 1 per cent AUM.

And that doesn't reflect the seriousness in the business...
Yes, it doesn't reflect it. And I do hope that there is consolidation in the industry because how many AMCs are there in the country is not important. The important thing is that how easy it is for an investor to reach out to an AMC of his choice. The earlier argument was that if there are more AMCs, they will go to more places and physically be present. Physical presence is not exactly the only requirement. So, we should worry on the other side that we should have serious players.

If we should have enough choice, then that can be had with 20 players too...
I would hesitate to give you a number of how many AMCs should be there.

The principle is that there should be adequate choice and serious players.
My point is if years after year after year, the same bottom ten players are in existence, then I do hope that the investors, shareholders and promoters of those funds have a relook at their strategy. How can it happen that year after year, somebody has Rs 100 crore AUM? With Rs 100 crore AUM and you are there for five-ten years, what sort of fees are you earning? Is it not looking bad on your own P&L? And if it is, then why are you in this business? But this is not a call the SEBI should take. I am expressing my anxiety about how well prepared they are to protect the interest of investors in their funds.

Last year, in the wake of the JPMorgan-Amtek affair, a lot of attention had come upon the conduct of credit-rating agencies. The SEBI had started a process of reviewing their functioning. Can investors expect any improvement in the processes followed by these agencies?
A lot of improvement has already happened. We had multiple interactions with credit-rating agencies and we have ensured that the same rating symbols are there.

Making them consistent...
Earlier there were different rating symbols, so investors used to get confused. Even advisors used to get confused about any particular paper.

Second was the idea of suspension of rating. Now, what is a suspension of rating? As an investor, I should understand it. Is there a business dispute about fees not being paid by that company to the CRA or is it because the company is not providing adequate information so that the rating person is not in a position to give a view. So, we have said that all those reasons have to be disclosed. Earlier they were giving rationale for downgrade. I said that rationale for suspension of rating should be given. Let analysts in the market - companies like yours for example - know this so that you can take a call and advise your readers and your subscribers. So, that is one other thing we have done. Plus, in case of credit-rating agencies, India is in a better position compared to the rest because we started credit-rating activity much earlier that the rest of the world.

Another area where we have acted with regard to credit-rating agencies is that credit-rating agencies and debenture trustees were not in good dialogue and communication. If, for example, some interest payment has not taken place, either the CRA should tell the debenture trustee or debenture trustee should tell the CRA. If there is good communication, then mishaps will be avoided. So, we have insisted on that. We have taken a number of these measures.

Are you satisfied with the way cases like Sahara and Pearl have progressed?
I hesitate to talk about any particular case to you or anybody in the media but let me put it this way. The action has been taken by the SEBI in cases where unauthorised money collection has been made, primarily through two routes: unregistered collective-investment scheme or violation of the public issue as a process. What I would like to tell you is that the moment these things have come to our notice, we have acted.

In one case, the SEBI passed the order in 2003, but the promoters were able to take advantage of legal delays and finally the matter got resolved after ten years. And in those ten years, they were able to amass a lot of money. So, when you talk of satisfaction, I am satisfied that we took prompt action. The SEBI took prompt action in 2003 and 2011. We are following up in both the cases as per the directions of the Supreme Court and it has appointed retired judges, and in one case retired Chief Justice, to monitor them.

And it's progressing nicely...
As far as the satisfaction is concerned, for everything that we do there, we get approval from the Supreme Court.

We are in the midst of an IPO boom after a long time. Compared with the past, the higher quality of these issues is noticeable. Are there any process changes in the SEBI that have played a role in this?
We have done a number of things. The first issue or problem used to be that many issues which opened were at a price which was much lower than the issue price. So, the price on listing was much lower than the issue price and it continued to be lower for months and quarters together. If you look at the data prior to 2013-14, almost two-third of the issues were trading at prices below the issue price and in some cases substantially lower than that. The SEBI thought of various interventions in this. One intervention was very seriously criticised by media and experts. We came out with a discussion paper on providing a safety net. Everybody criticised it saying how we can have a safety net in equity, although our safety-net proposal was very mild in form and it was capped at a very minimal amount of cash requirement on the part of the promoter. And the idea was that they should be conscious that if they are very optimistic with valuations, then they will have a problem. But it was seriously criticised and we dropped the idea.

So, what we did was we thought that we shouldn't regulate the company which is coming for listing - we don't know them; they are unlisted companies. But there are these merchant bankers, investment bankers which come under our regulation. So, we tightened our regulation over them. Three-four very important things happened. Firstly, earlier there was no prescription with regard to how investment bankers of the company should do due diligence. So, we made them do it under our supervision. We came out with a manual of due diligence.

Secondly, we said that the manual and the document have to be kept for future examination by the SEBI. So, even if an IPO has come today, even after three years, the investment banker should be able to produce the document if the SEBI wants to know whether it has done due diligence.

Thirdly, if you see any of our documents today, you will find that, in a very prominent box item, there is history given of the investment banker itself - its own track record. If it has come out with five issues in the last two-three years, how many of them have been trading above the price or below the price. So, this is one set of activities through the mechanism of tightening the role of investment bankers. Second is we have been asking very tough questions. When we dropped the idea of safety net, we have started asking tough questions about pricing justification and we insisted on disclosures. And we have been insisting upon very tough disclosures.

Now, in disclosures there was another problem that in a 300-400 page document, everything was getting disclosed in one place. An investor needs a whole day to read it, and he may not have time. So, we have now gone to the extent of having all the material disclosures in one place. With the abridged prospectus, we have reduced the size. Now, there is a ten-page abridged version. It is a delight. Earlier the abridged prospectus used to be 40-50 pages; now it is ten pages and very well organised.

The next thing we have done is that we have made lot of changes on procedure of IPOs. For example, we have made ASBA compulsory. Now issues are getting listed in t+6 days. Earlier it used to take t+12 days. So, on the one hand, you are not signing a cheque. On the other hand, you are not afraid about what portion of your money will be allotted and what refund you will be getting and whether the refund will be in three months or six months or whatever. All that worry has gone. From a retail investor's point of view, applying in IPOs has become very easy. His amount would be deducted only to the extent he is finally allotted shares.

Earlier we had the old lottery system. Now everybody has to be compulsorily allotted something - minimum Rs 7,000 or Rs 10,000. All these changes have happened. And finally and the most important change - earlier there used to be lot of volatility on the opening day because we were guided by the concept of free price discovery. We didn't want to say that if an issue has been sold at Rs 100, it can only open at Rs 110. That would have been ridiculous. But this was being seriously misused - a Rs 100 issue would open at Rs 150, go to Rs 200, come down to Rs 30 all in one day because on the opening day there was no price limit.

No circuit breaker...
No circuit breaker, no price limit. So, what we have done is we have introduced the concept of call auction on the pre-open market. So, before an issue is opening on the first day, in half an hour before the market hours, there is a call option. At whatever price the highest number of shares is bought or sold, that price becomes the opening price of the market. So, the call auction helps the market to decide the right price. The SEBI is not deciding it. That has helped tremendously.
And lastly, there were certain operators in the market who used to take contract from promoters for bringing out their IPOs and enriched themselves in a short period. We have acted very strongly on them. In four or five IPO-manipulation cases, we have taken serious action.

You have been in a variety of personal-finance-related leadership roles in the last two decades. Having seen the development from all sides, do you believe that in the coming years, market-linked investments, like mutual funds, can grow significantly in India? Have we reached some inflection point where something magical can happen?
I think so. If you look at the numbers, in the first five months of this financial year, the growth in AUM has been 27 per cent. Our equity AUM has become Rs 4,67,000 crore. I couldn't have imagined this three years ago. When I came to the SEBI, the total AUM of the industry was less than Rs 6 lakh crore. And today it is Rs 15,63,000 crore. The number of folios have come to five crore. The SEBI has conducted at least 35,000 investor-awareness programmes. Even AMCs are doing them. And the new rule that we had introduced that one basis point of investor education will be centralised in the AMFI and there will be a centralised message has already started coming. All this is helping. Besides, I must give credit to the media. I must give credit to analysts like you who are also keeping the market aware and informed and educated. So, I think that the inflection point has come and the mutual fund industry is going to see a lot of growth.

So, can we expect magical growth from here on...
I would hope so... I would hope so.