Subhomoy Bhattacharjee: Are there any fears that there would be a spillover effect of the NSEL (National Spot Exchange Ltd) matter on the securities market? Sebi has asked stock exchanges to strengthen their SGF (Settlement Guarantee Fund).
In India, when commodity markets were opened for national-level trading, one major decision taken by Sebi and the government together in 2003 was that a broker trading in the securities market will be allowed to trade in the commodity market only through a separate company. That stopped the problem of contagion?problems migrating to the securities market from commodities and vice versa. My own feeling is that it has helped us tremendously in this particular episode. However, it is quite possible that some entities have some stress. So, we have reassured ourselves not once, but three-four times about the securities and the collaterals that have been provided by those people, so that there is no stress in markets regulated by us. But on a long-term basis, there are a number of developments happening in and outside India which compel us to look into the matter of SGF for improvements. Our current risk management systems were started in 2001. They have withstood the test of time, but it would be wrong on our part to assume nothing is to be done. I have already started re-looking at our systems and have set up another group under KV Kamath to look at long-term measures.
Priyadarshi Siddhanta: Do you need more powers to deal with ponzi schemes?
Ponzi schemes have many dimensions. Collective Investment Schemes (CIS) became very important and large in size around mid-1990s. In 1999, the Sebi Act and SCRA were amended. By amending the SCRA, CIS was declared to be a security and the Sebi Act gave us powers to regulate CIS. Ever since we framed our regulations, only one company has registered as CIS and that company has done no business so far. People do not want to come under CIS regulations as they feel the regulations are very difficult and tight. Sebi has been inundated with requests that CIS regulations should be diluted. What the current ordinance has done is that if the amount raised is beyond R100 crore, then there will be a legal presumption that it is a CIS and Sebi will have jurisdiction. But there are six exceptions which too are being sorted out. I had written a letter to the government on November 15 saying two things. First, we need effective coordination at the operational level with state governments ? EOW, RBI, MCA and IT all meeting at least once in two months to share information. Second, I said that there should be one nodal agency. My sense is that even with the ordinance, the government has just gone half way. Their argument was they wanted to do something by way of an ordinance. If they have to give entire residual powers to Sebi, they need to consult the states as they are the regulators for chit funds. They did not want to go through that process because that would have taken time.
Priyadarshi Siddhanta: Are you referring to prosecution powers?
Not only prosecution powers. As of now under the Sebi Act, we have limited powers like passing an interim order. Or we can ban entities from the market.
kaunain sheriff*: The finance ministry constituted the Financial Sector Legislative Reforms Committee (FSLRC), which recommended a unified financial agency. Do you think it is appropriate to have a single regulator for the entire financial market?
One day, I was thinking how many regulators there are in this country and I could not count. In 1991, when economic liberalisation and financial sector reforms started, one of the arguments was that this would lead to reducing the size of the government. Everything will be driven by competition and market. Today, unfortunately, we have reached a situation where nobody has a count of these regulators. So, fundamentally I support the recommendation made by the FSLRC. However, I have one word of caution. Various areas have their own important technical requirements. So one should not rush in without creating the required technical manpower in that agency. My feeling is that in our excitement, we might forget this point. I also think that the current government has made it clear that it is not very keen to carry out the core recommendations of the FSLRC, so a final view can be taken only after the next government is formed. Some of the recommendations are very far-reaching, but very well-thought-out. But I would reiterate that we need to be conscious of the structure that we create. For instance, in 2003-04, the then secretary of the ministry of consumer affairs had chaired a committee that recommended that there should be one extra post of whole-time member at Sebi dealing with the commodity futures market. He also recommended that both (Sebi and FMC) should be merged. But in 2004, the government came to a decision that it is better to have a separate commodities market regulator. Implementing the recommendations of the FSLRC is going to be tough.
Coomi Kapoor: Almost all regulators are headed by IAS officers. Would someone from the markets be better?
You are putting me in a personally embarrassing position because I was an IAS officer for more than three decades. But this debate needs to be taken to a higher level. My take is that you should not let any group of people monopolise a particular regulatory environment. At the same time, it would be also wrong to ban a particular group of people just because they belong to the IAS. Find the right person. My feeling is that with the activism happening in the country, both by interested people and judiciary, there is more transparency in the election process. Civil servants have one natural advantage, that they are familiar with the subject for a slightly longer period of time than other groups. But, it is wrong to say that all the posts should be filled by IAS officers. Going to the other extreme, you should have people from the private sector or those who are experts in that area.
But the system has to guard against two things. One, if someone is on a very high market salary then what is the need for him/her to leave that salary and work for a sarkari rate of compensation. Second, there should be a good amount of thinking on whether the issue of conflict of interest has been properly addressed or not.
Krishna Uppuluri*: In the current market, how does Sebi plan to raise its own finances?
In spite of the current volatile situation, we are able to meet our current expenditure from our current revenue. In 2011, we recruited 70 people. This year again we are recruiting 75 people. Our manpower requirements are going to increase, which means our costs will also go up. Right now, I do not have a problem. But going forward, we will have to find a mechanism whereby we are able to raise our resources. Hopefully, when the markets rebound and people start raising capital, we will be able to raise our resources. I would, however, very strongly argue that in no situation should Sebi lose its financial independence, which means that I am not looking for any support from the government, because that will compromise my financial independence, which is the main plank on which a regulator can function.
Sandeep Singh: While the government and RBI have been taking measures to fight the rupee slide, market participants say there is speculative activity happening in the markets.
If you see the statement of the new RBI governor on his first day, he made it very clear that speculation is not a bad thing. Because, if as regulators we start deciding what is good investment and what is bad investment we land in dangerous territory. We should instead decide only the broad parameters. Anything within those broad parameters is right. If you go beyond that, you should be ready for punishment. If we start looking at what is arbitrage or what is speculation, we curb the liquidity and interest in the market. Especially in the context of currency, the outcome of these curbs is that the market goes outside India. I am of the view that regulators should frame the broad parameters and be vigilant in checking if those are being followed seriously. If you start reacting to a temporary stress in the market, you might end up killing the market. We must not have a bad long-term impact because we want to solve a short-term problem.
Shobhana Subramanian: One area Sebi has not been able to do much is mutual funds.
We are not perfect people or a perfect organisation. I would agree that we should have done more. One area where we are trying to do something more is the area of investor education and awareness. We have conducted more than 12,000 courses through our resource persons. We have created three audio-visuals, which have been translated into 14 languages. The important thing is to create awareness about mutual funds. We tend to be very critical even if things go wrong in the short-term. If you look at the three-year and five-year performance, then for the three-year period ending June 30, 2013, about 77% of the equity assets under management (AUM) have over-performed. In any country, this is a very good performance and track record. People confuse this with the number of schemes. They say so many schemes have underperformed. My request is that the correct way to compare is the AUM. The sales practices in India till about 2009 encouraged mutual funds to float more and more schemes as that led to more and more commissions. We are on a separate path of trying to encourage mutual funds to merge their schemes. In my earlier job, I had merged about nine schemes. The regulator should provide a tough and predictable regulatory environment. When problems related to CIS emerged, no one raised questions whether mutual funds have the assets against which they claim they have the money. No one had any doubt. I would like to claim that Sebi has provided a very good environment so that the conduct of mutual funds is assured.
Now, the question is why more money is not coming into mutual funds. This is an area of improvement. In hindsight, it appears one decision we took in 2009 has been a deterrent, but we have moved away. We have tried to rectify that by giving extra incentives to anyone who is raising money from beyond the top-15 cities.
Sandeep Singh: You earlier spoke about non-serious players in the mutual fund industry. They are not expanding beyond the top cities. What is happening on that front? Also, would you be taking action against entities that are not serious?
Our approach in the mutual fund industry has been stage by stage. AMCs had certain difficulties with the revenue model and we tried to correct that. We also asked them to have certain transparency and disclosures. For instance, they have to disclose on a quarterly basis how many new offices have they opened beyond the top 15 cities and also the inflows from group companies and non-group companies. The unfortunate situation is that a large number of mutual funds are getting more than 50-60% of their assets from their own securities company or banking company. This is not healthy if you claim you are an advisor. You are not a distributor. So now we have come out with advisor regulations. Now the next stage is enforcement.
We have a paper before our mutual fund advisory committee on long-term policy. We have said there that this amount of R10 crore, which was provided for setting up an asset management company, is meaningless. If you are raising an insignificant amount of money, that too from two-three cities, then take a licence for a PMS (portfolio management services) provider. My feeling is that in the foreseeable future, you will see a lot of tightening of our mutual fund regulations so far as the obligation on the AMCs is concerned. I do think there are a lot of non-serious players. It is better we provide them some opportunity or avenue to exit.
Sandeep Singh: Do you think raising the minimum capital requirement will help?
Raising the minimum capital is the starting point. Unless there is serious money involved, people do not take interest. It becomes a fashion. Let me also add that there are strong arguments against it. My argument is show me a business model that is going to survive for the next five years without adequate back-up from capital. What is the revenue model? Have you put enough capital to make it run for five years?
Shekhar Gupta: You have held many positions in your long career. Twice as the district magistrate (DM) of districts which generally constitute Wasseypur. Of all the things that you have done in your life in terms of the degree of difficulty, where do you rank Sebi chairman?s job?
It is a very difficult question. but let me attempt to answer it. I think my district posting, especially one of those districts that I handled, and Sebi, are the most difficult jobs in my career. When I am talking in the context of Bihar, where I am from, I was working in a different environment from other parts of the country where you have a police commissioner system. In Bihar, there was no such system. So the DM was also responsible for law and order.
I also worked in a district that closely resembled Wasseypur where there was illegal coal mining. There were very difficult things to do. And one was very young, so, perhaps was prone to doing things which can be called hasty. At Sebi, the important things is that while here too you deal with people who are offenders, by and large I get support from the people of this country and the media.
Subhomoy Bhattacharjee: How do you look at the current rupee slide in the context of foreign inflows. You authored a report on foreign inflows in the country.
If you look at the last three months (June, July, August), $13 billion has gone out of the country. June was the worst month, July was slightly better and August even better. In September things improved. But the developments of the three months, especially of June, were completely unanticipated. There is no comparison to what happened in 2008 or 2009. Also, the money that has gone out mostly has been from debt funds.
In my report for the ministry of finance, our task was to find out whether FIIs as a class have a herd mentality. We found that in 2004, when a new government came, or in 2007, when Sebi announced restrictions on participatory notes, there was no one set of behaviour. I am not sure whether the same can be said for the debt segment. Our medium-term aim should be to provide a wide dispersal in the clients who are investing in the debt market from abroad. It means while you cannot stop people who are doing pure arbitrage, we should put some mechanism in place to encourage long-term investors.
Unni Rajen Shanker: You have worked with many finance ministers.
In my earlier job in the IAS, when I was holding critical positions, I worked with four chief ministers. Perhaps all of them found I was doing a good job and so I continued. The same happened in the finance ministry too. Successive finance ministers found that perhaps I am not doing too bad a job.
Transcribed by Ashish Rukhaiyar
* These are EXIMS students
