The Securities and Exchange Board of India (Sebi) badly needs to improve administration and accountability and restore its credibility as a powerful regulator. With a new chairman in place, the signs of a major change in policy and direction are already evident.
One quick decision is to formally shelve the move to convert the Association of Mutual Funds of India (Amfi) into a Self Regulatory Organis-ation (SRO). Sebi has correctly told Amfi the time is not right for self-regulation. The timing is fortuitous for retail investors, who have been flocking back to equity mutual funds (MFs) in the hope of participating in the powerful bull run. Almost every major MF is out in the market with an initial public offering (IPO) for an equity scheme. It is imperative Sebi assumes direct responsibility for their supervision and keeps a hawk-like eye on their activities.
Converting Amfi into an SRO was one of the many ambitious, but unsuccessful, projects pursued by former chairman GN Bajpai. Market intermediaries believe Sebi’s main objective was to distance itself from direct supervisory responsibility over MFs. This would be similar to the secondary market, where stock exchanges are primarily responsible for ensuring fair and transparent trading.
Ironically, self-regulation by market intermediaries was a failed global experiment of the 1980s and early 1990s, but Sebi doggedly pursued the idea even after a study commissioned by a multilateral agency noted potential conflicts of interest. The study had said a MF which is an SRO was unworkable, because disciplinary action against one fund would immediately create business opportunities for rival MFs.
Moreover, when Sebi’s own high-profile case against Samir Arora was comprehensively thrown out by the Securities Appellate Tribunal (SAT), it could hardly have expected any better from Amfi. In fact, most MF investigations in the past three years have gone nowhere. Although fund managers themselves admit late trading is fairly rampant in India, Sebi concluded the practice does not exist. Similarly, market circles say its reluctance to act had ensured that a couple of fund managers were quietly allowed to resign or leave the country, instead of facing disciplinary action.
• Sebi has been struggling for months to clear IPOs in the Rs 20 crore range
• Its supervision department requires a major revamp
Initial Public Offerings (IPOs) are another area needing attention. Here, too, the Central Listing Authority (CLA) was so structured that a high-profile board, headed by a highly reputed former chief justice of the Supreme Court, would have been responsible for clearing issues. But the CLA was stillborn and Sebi has been struggling for months to decide whether or not to clear a score of IPOs in the Rs 20 crore range.
Apart from finding a sensible solution to IPO clearance, the Sebi chairman will have to focus on seemingly simple issues, such as ensuring that Sebi files and maintains its own internal databases accurately and efficiently. While Sebi is in charge of registering a variety of market intermediaries and collects a fee from all of them, its database maintenance is so shoddy that its officials struggle to find names and addresses of brokers and sub-brokers through a simple search. Its electronic data filing efforts are even worse. Edifar, its Electronic Data Information Filing and Retrieval system, which copied the US Securities and Exchange Commission’s database, is turgid, badly maintained and all but defunct. Yet, Sebi wanted us to believe its database of market participants (Mapin), which used biometric identification for granting a Unique Identification Number (UIN), was going to help it improve market supervision.
Fortunately, Mr Damodaran has postponed the last date for a Mapin registration until December 2005. This will give him time to put Sebi’s own internal data in order and to avoid embarrassment if Mapin fails to deliver results. But this won’t help unless there is a major shakeup in the supervision department and those responsible for delay in deciding high-profile cases are held responsible and punished.
Some decisions are also pending at the Union finance ministry. The Securities Appellate Tribunal (SAT) has been reduced to a one-man body from March 1 and the government needs to ensure the new members understand the intricacies of capital market investigation and the importance of circumstantial evidence in unearthing market manipulation, insider trading or fraud.