Sucheta Dalal :Regulation: SEBI chief’s agenda
Sucheta Dalal

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Regulation: SEBI chief’s agenda  

July 29, 2011

Will the SEBI chairman leave behind a better legacy than many of his predecessors?

Sucheta Dalal

Three months after taking over as capital market watchdog, UK Sinha has revealed his priorities in a series of public meetings and media interactions. In effect, he has said: ‘my clock starts ticking now’. We, at Moneylife, are happy that he did not wait to put in place his top team (two whole-time directors and at least four executive directors are set to change) before speaking his mind.

Mr Sinha has started by defining his mandate as chairman of the Securities and Exchange Board of India (SEBI). He says, it is to protect investors’ interests, promote market development, regulate intermediaries and ensure that the three tasks do not contradict each other. He also promises to remove ‘irritants’ to investment and to improve disclosures. This, in a nutshell, covers most of what has gone wrong in the capital market over the past decade. If Mr Sinha also ensures that SEBI is fair, unbiased and non-partisan, he will leave behind a better legacy than many of his predecessors.

Interestingly, Moneylife has written about several of the issues flagged by SEBI’s new chairman; we have even raised many of these with his predecessors. So we will watch with interest how Mr Sinha deals with the issues that he has himself identified in the past three months.

These are:
•    Incentivise Mutual Fund Distribution: Since August 2009, Moneylife has repeatedly pointed out that ‘disruptive’ changes in mutual fund regulation have caused investors to exit. The fund industry used to dread the weekend circulars that mandated drastic changes in policy or ways of doing business without even the pretence of consultation with stakeholders. Its zero-load policy, while good for investors, didn’t bother to take them into confidence or work out a viable alternative and smooth transition for those who are not tech-savvy.

Consequently, the investor ended up paying the same amount of money or more—not as a load, but to banks, who offered to manage their accounts. The new SEBI chairman has now put some statistics on the table. He says, direct sale of mutual fund units is up 2%, while those sold through financial advisors is down 7%. In effect, the industry is a loser.

Mr Sinha has openly abandoned CB Bhave’s stubborn no-load stand and admitted that rural penetration of mutual funds will not happen without incentives for distributors; he also says he will avoid disruptive changes.

Unfortunately, the initial attempt at deciding incentives is already controversial with the lone investor representative on the mutual fund advisory committee accusing it of ignoring his views. The committee’s suggestion of a flat Rs100 fee is also ill-conceived and expensive for small investments.

•  Increase Retail Participation: Changes in demat, IPO (initial public offering) and secondary market trading rules should enhance this. Mr Sinha says, disclosures in IPO prospectuses are ‘too voluminous and too unstructured’. Funny, but this is something that was repeatedly raised at the Primary Market Advisory Committee (PMAC) by several members at least six to seven years ago. Isn’t it worth asking why SEBI has consistently ignored this obvious fact? In fact, the complex and turgid nature of disclosures created the need for IPO ratings. Again, investor activists had demanded that ratings fees be paid out of investor protection funds to avoid rating-shopping. We are glad that Mr Sinha has expressed concern about rating-shopping and plans to make it mandatory for companies to disclose negative ratings as well. This will be an important step towards improving transparency. Getting merchant banks to disclose the performance of IPOs managed by them and attacking the cosy nexus between them and other intermediaries with regard to IPO pricing and subscription will also ensure a much needed clean-up in this sector.

•  KYC Reforms: Mr Sinha plans to introduce uniform ‘know your customer’ (KYC) norms for all SEBI-regulated entities in the capital market. He is also quoted as saying, “I found out that different market intermediaries regulated by SEBI have different KYC requirements, only after I joined SEBI.” While we welcome Mr Sinha’s intention, it is hard to believe that as joint secretary-capital markets division and later as chairman of UTI Mutual Fund, he has not read or heard about the hardships faced by investors in dealing with KYC requirements.
Investors have long demanded that the KYC by a depository must be accepted by all capital market intermediaries; but SEBI hadn’t been listening.  

•  Retail Investors' Problems: We, at Moneylife, have repeatedly pointed out that complicated norms, mindlessly lengthy documentation and high entry costs have driven retail investors away from the market. Today, when India’s investor population has dwindled from 20 million in 1992 to 8 million (the D Swarup Committee says this includes mutual fund investors), it is hard to accept that the market regulator was unaware of the hardship. Or the fact that it costs well over Rs10,000 just to prepare oneself for equity investment (this covers the cost of opening a brokerage account, a bank account and demat account as well as their charges and minimum cash requirements insisted by brokers). Things have reached such a pass that brokers who do not earn revenues by encouraging mindless speculation, day-trading or pattern-trading are rapidly shutting down branches. The share prices of all listed brokerages reflect the true state of their business (most are down 80% from their peaks), but neither the finance ministry nor the regulator is even looking for ways to address the problem.

•  Revive EDIFAR: Mr Sinha has asked mutual funds to reveal the track record of fund managers as a step to increase inflows into better-performing funds. This is a positive move, which will work even better if SEBI asks fund companies to report performance to a statutory database in a manner that makes data comparable. In fact, all market intermediaries, including portfolio management schemes and mutual funds, must be asked to report performance to a statutory database. SEBI must revive the Electronic Data Information Filing and Retrieval (EDIFAR) system, which was abandoned without explanation in April 2011 so that detailed annual reports and announcements by listed companies are available to existing and potential investors. Today, companies send abridged annual reports or e-reports to existing investors, while those who want to research a potential investment have little information available in the public domain. If SEBI is serious about attracting equity investment, it must fix all the things that its past three chairmen had steadfastly ignored.

A few other issues, which embarrass the regulator everyday, need to come on Mr Sinha’s main agenda. First is the rampant market manipulation in existing and newly-listed securities. These require SEBI to act instantly, at least by announcing an investigation. A starting point would be the extraordinary trading in Timbor Home on the day it was listed and the collapse of the GTL stock on one fine June morning.

SEBI has to show that it is alert to speculators’ tricks. Another is the non-transparent and erratic nature of consent orders. The Supreme Court’s observations in the NSDL (National Securities Depository Ltd) case ought to be a wake-up call for SEBI. After two decades of existence, it must realise that its quasi-judicial rulings must be transparent, speaking orders that can stand scrutiny in a court. Former SEBI director, Dr Mohan Gopal, has raised this in a letter to the PM. The truth is that if the regulator and an intermediary work out a ‘consent deal’ whereby the order is deliberately vague regarding the nature and gravity of offences, nobody has the incentive or power to challenge it.

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached a
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-- Sucheta Dalal