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Interview: Reforms On Top

Sunlight is the best disinfectant. The more things come out in the open, the better

To say that SEBI chairman M Damodaran is a busy man is to put it lightly. Back from London for just a day, en route to China, he met us in his Mumbai office.Though hard pressed for time, he showed no sign of stress or jet lag as he talked about SEBI's role as the mutual fund and stock market regulator.

Mutual funds have become powerful players over the past few years with fund managers handling huge amounts of money. What proactive tightening of regulations is SEBI working towards?
The first issue is who can manage funds. To distribute funds you need qualifications but to manage them you don't need any. Almost anyone can be a fund manager since there is no regulation specifying any qualifications. We are addressing that. We will soon state the structure of what qualifications people need to have to manage funds. The second issue is of what is happening within the business of asset management. We believe trustees, as the first level regulators, have an extremely important role to play.

People have started to believe that you give money to AMCs and that they are the custodians of the fund. They are not. The trustees are the custodians. The message should go across that trustees have the responsibility to question the AMCs if they do not deliver. If not satisfied with the answers or they believe that practices followed by an AMC are inappropriate, trustees have the right to change the AMC keeping the investor interest in mind.

We now correspond much more with the trustees. We want them to be more proactive and do their job correctly. For instance, on new fund offerings we have told the trustees that they need to see if there is anything new in the scheme? In a couple of cases we have sent it back to the trustees telling them to look at this scheme again and tell us how it is different from the existing ones. At the end of the day, it is their judgment versus mine. Not that we are going to take the final call but we force them to look at it a little more closely. Transparency is a great deterrent to any scam.

As far as mutual funds are concerned, why do you ask only for a six-month disclosure of portfolio and not more frequently?
As they say - sunlight is the best disinfectant, the more things come out in the open, the better.

Having said that we should not prescribe a regime which is extremely costly. No one is in this business for charity. At the end of the day, all the costs involved are passed on to the investor. Compliance is very good but should not become so costly that it's a disincentive for the investor.

Frequency of disclosure in a cost effective manner has to be addressed. For instance, putting it on the company website is definitely a more cost-effective method rather than a newspaper advertisement. The problem with this country is that not everyone who is invested in mutual funds look at a website. I would not call it a digital divide but digital inequality.

But, undoubtedly, it will bring accountability once put into the public domain. Frequency and disclosure on the website is something we can look at. If the market practice is better than regulations, which is the case here, where mutual funds are disclosing portfolios every month though they are required to do so only every six months, then we need to move regulation towards market practices.

What are you doing about the number of companies listed?
India has the largest number of listed companies in the world, even more than the US. These were listed because at one point of time it was tax effective for a company to do so. It did not matter if a company was small and closely held. The management never intended that the company should be seriously traded in the market.

Our first step is to cleanse the exchanges of those companies that have no business of remaining listed. Some are limping and not able to pay even the basic fees. We have to reduce these numbers and see that only the serious companies with a reasonable free float can list otherwise it does not make sense for the company. If the float is not sufficiently big then you give people more chance for manipulation.

The thing that investors need to know is what we are doing to safeguard their interest. We take action in case any stock is moving up significantly. There is a band during the day that it can move within. People then say they are trying to find an exit but not getting one. What they don't see is that they wanted an exit and we helped them get one without a price collapse.

Mid-September, markets fell and a newspaper report attributed it to PAN being made mandatory for demat accounts, resulting in people exiting the market. Do you think that is a genuine statement?
To say that the market is going to get destablised because a third of the people would not have PAN cards by the deadline, is a wrong statement. In fact, I don't think that is a problem for the market. If yes, then why would the market fall 350 points one day and rise 110 points the next? We prescribed PAN for demat account holders sometime back. It's not as if it happened yesterday. Those who applied for a PAN and did not get it have a genuine grouse. But if I did not apply for a PAN, I cannot have a grouse.

If I had said in the next two years everyone must have a PAN card, no one would wake up except in the last month.

What about Clause 49? There were two extensions given and everyone thought a third would be given. I had public sector employees telling me that it takes months to get directors appointed and it is a long process. Sure. But they had several months. Why did they wait for the next possible extension?
For quite sometime we had a situation where people could file their income-tax returns by just giving a copy of PAN application. Maybe when the time comes we will think of a halfway house but in the meantime everyone must start applying for the PAN if they do not have one. Let them show that they are part of the system. People must demonstrate that they have at least applied for a card.

The resistance is not coming from the small investors. It is coming from others who may even have the PAN but will be operating in an environment in which you cannot not trace certain transactions, the benami transactions. Now that the date is getting closer they are getting uncomfortable. Now they say that an average guy who is new in the market does not have PAN. They are citing this as a problem because they want the date differed.

What are you doing on the data front and how are you working on the data you get?
One problem is the availability of good, reliable and tested data in a reasonably good time. The other is even if the available data is good, who is putting it to what use.

The data for listed companies comes from the continuous disclosure requirements. They are supposed to file their quarterly accounting with the exchanges and with SEBI. So companies listed on the BSE and NSE file with both exchanges and SEBI. With such a large number of companies, you need the manpower, skill set and ability to look at all the quarterly information. And, I am not talking about material developments reported to the exchange but just looking at the accounting aspect.

We have now said there will be a common platform on which a company listed on NSE or BSE or both can file the data. So there will be just one electronic filing that will be accessed by both the exchanges and us. When that happens, you will know whether the company is complying with its filing and also that different things are not being filed at different places. We have recruited a few chartered accountants and cost accountants to look at the filing and see whether there are any material developments compared to the previous quarter. I won't call it a discrepancy but changes from last quarter till now which does not have a satisfactory explanation in the accounts itself.

This is a great opportunity to ask a few more questions to those companies. Not that we will be able to ask in all cases or prove wrongdoing in all cases. So even by asking tough questions in a few cases, they will know that there is information that someone is accessing, analysing and responding to.

In three months you will see that more such questions will be asked by SEBI. Whatever the exchanges will do is different. This will be a major move in the capital market regulatory environment.