Just a week after India saw its largest insurance company LIC buy Rs. 11,450 crore worth of shares in the country's largest oil exploration company ONGC --- a move described by former finance minister Yashwant Sinha as "daylight robbery" --- right under the nose of capital markets regulator Securities and Exchange Board of India (Sebi), its chairman UK Sinha clears the
regulatory air. In an exclusive interview to Hindustan Times, the former chairman of UTI and former joint secretary (capital markets) said that all rules were followed but if there is a complaint, he will investigate. Excerpts:
Q: There seems to be something amiss in LIC investing in the ONGC share auction at the last minute. Bids not being counted, technical glitches, role of stock exchanges, role of the custodian…and Sebi is in the middle of it all. What's going on?
I don't think Sebi is in the centre. Sebi rules are very clear and we have advised stock exchanges and others to follow these rules strictly. If someone puts the bid towards the end of market hours but without funds or after market hours, it is not as per rules.
Q: The exchanges say they are needlessly being blamed.
When exchanges contacted us, we told them to follow rules. And the rules are that any bid beyond 3.30 pm will not be accepted.
Q: With LIC investing 84% of the total amount in the auction, there is the issue of concentration risk.
Sebi has allowed insurance companies and mutual funds to invest beyond 25%. So, the ceiling doesn't apply to LIC. Now, it is for individual companies, their investment committees, their regulator to find out whether the investment is alright or not. Sebi's role is limited to the timing, whether the bids have come properly, and whether our rules have been followed or not.
Q: The market believes that had such a thing been done by a private company, Sebi and Insurance Regulatory and Development Authority (IRDA) as well as other investigative agencies would have come down very strongly. It is only because ONGC and LIC are government companies that they are being allowed to go scott-free.
Let me assure you and also take a stand that our rules are the same for all companies. Sebi is very clear that the rules framed have to be followed. For example, if any bid came after market hours, Sebi advised the exchanges not to accept them --- whosoever is the issuer. We are not concerned about that. A lot of bids did come after closing hours. But none were accepted. To say that if it were a private company, things would have been different is not correct as far as Sebi is concerned.
Q: Are you absolutely certain that rules have been followed in this case?
Yes. The exchanges consulted us. And we told them that any bid that came after market hours was not valid.
Q: So, Sebi will not be investigating anything here.
Nobody has complained to us. But if there is any complaint, we are ready to look at it. The important thing for us to understand is that Sebi has a larger design, which is how to make the market more efficient.
Q: The issue is with the universality of rules. For instance, you allow government companies to not adhere to the 25% minimum public shareholding.
Yes, that is a requirement. There is a time-frame --- July 2013. Our concern was, and we received a lot of representations from chambers as well as individual companies, that the current rule of follow-on offering through prospectus makes it more time-consuming, uncertain and where prices can fall. So give us a longer window. We examined it and allowed this window. This has been allowed not only for government companies but for all companies.
Q: A lot of government companies fall under this. Will you be able to enforce this rule?
Let me put it this way. Rules are framed by the government. In this case, it is the Securities Contract Regulations Rules. Regulations are framed by regulator, that is, Sebi. Our understanding is that the rules that have been framed, that is, the July 2013 due date, are sacrosanct. Enforcing the rules is Sebi's jurisdiction. Our aim is to encourage companies through various possible legal routes through divestment.
Q: What if the government changes rules mid-way?
That is not our business. Only the enforcement of this rule is within SEBI's jurisdiction. If rules provide that within three years they have to have a minimum 25% public shareholding, any regulation would like to facilitate that decision because at the end if company fails to follow, it will invite certain regulatory actions.
Even in case of minimum public shareholding government companies are being treated different by government. They have 10% ceiling and for other private firms its 25%. This is the decision where government is utilising its own powers. They may have some genuine rationale because government raising money from market process has started very late and because the companies are highly valued, if they want to disinvest 25% holding, it will not be easy. Markets may not be ready to provide that scale of funds within the short period or the issue may not attract the huge anticipated response and may fail in market. Government has framed two different set of rules but they may have framed with good intentions. We have been very cautious in drafting rules and maintaining equality.
Q: That doesn't seem to be the case on the ground. Let's take a related issue of independent directors.
We have always insisted for same number of independent directors as private companies are asked for. But for some companies, at the time of listing it followed the procedure but now they have violated the rule. We are not happy about it. It will invite its own consequences.
Q: Distributors of mutual funds through asset management companies (AMCs) have brought under regulation. So, what happens if they mis-sell a product?
Regulations of distributors have been a serious challenge all over world. In India, despite several attempts, very little has been done till six months back. We have floated a consultation paper about advisors versus regulators, that whether they should be treated in the same manner. And we have received large number of comments against the move that advisors and sellers should be treated and registered separately.
The argument is that such practice is not prevalent anywhere in the world and could be disruptive. But apart from this, we are trying to do that almost 50% of businesses by volume will now be regulated through AMCs. The activities including mis-selling and information in public domain is given will be observed. Sebi has asked AMCs to conduct due diligence on distributors who constitute about 50% of business and any intelligent analyst or may be a journalist will have access to their data which can be analysed.
Q: How will this help investors?
If an AMC is selling 50-70% of its funds by volume only through its group companies, the public has the right to know. The next stage would be the questions from the public. A large number of funds raised are through group companies, but people don't have access to the data. This is a small step but I argue that the step is in right direction and in future, stronger steps could be expected. The due diligence exercise has been opposed by the industry but we have insisted that it must be done.
Q: What about the setting up of a self-regulatory organization (SRO) for distributors? Won't that help?
Yes, going forward the solution is to set up an SRO. Sebi is even willing to seed the SRO so that the initial financing needs can be fulfilled. We are already talking to many agencies. My feeling is unless everybody in the system realises that we are very serious about the issues, including disclosure of the way business is done, mis-selling and so on, the SRO route will not make progress. The response to the setting up of an SRO is very positive in comparison to what it was last year. We need to understand and handle the first step. We need to put pressure on thinking and discipline of manufacturers, product providers and also distributors.
Q: You have allowed AMCs to give commissions to the distributors from own pocket and amortise that as an expense. But this won't change the incentive system that zero-loads brought and seems like a regulatory loophole.
I don't think this is a regulatory loophole. AMCs cannot charge money upfront from investors. Some AMCs are taking risk by amortising it over three to five years. And they run the risk that if money is taken away or redemption happens before that period they run the risk of wasting the money. This is a call the companies take place as per their business sense. As far as Sebi is concerned, we ensure that no extra money will be collected from investors. Management of those companies should worry whether there is any misuse of accounting practices.
Q: Shouldn't Sebi be looking into the numbers to avoid, say, a potential problem?
If it is happening in material way, Sebi may have interest in looking those numbers. We will keep an eye and that is why our team is asking for more disclosures and dissemination of data.
Q: One of the reasons why we don't have too many investors in capital markets is the complex and diverse application forms. What are you doing about that?
We have set a group of experts on improvement in the IPO system. This includes simplification of the application form. But we want a complete review of IPO process so that it can be less costly, more time efficient, and can we attract more retail participation across the country. We are trying to address this task and by next year we will be able to do that.
Q: They know your customer (KYC) norms are different and diverse across products. Any change there to make the life of an ordinary investor simple?
On KYC norms, we have done two things. Within Sebi's operational area there were different requirement for KYC --- for private equity, venture funds, mutual funds, secondary market or primary market and so on. We have made it uniform. Now, we have brought KYC registration agencies (KRA). Two such KRAs have been given licenses. Once you register with any agency, say for mutual fund, and tomorrow you deal with broker you need not to go through new KYC.
The next stage would be to work with other regulators in financial sector so that are they willing to adopt the system including banking or insurance regulators.
Q: As far as RBI goes, I think the problem will also be around money laundering checks.
Whatever rules we have provided are in tune with the government's anti money laundering rules. We have not compromised with rules we have only made them uniform. Question is: are they willing to look at it? We are in dialogue with regulators and the initial response is positive. The task requires lot of discussion. Our aim in the coming year would be to make substantial progress on it. Keeping in mind the small uninformed investor, whether he wants to open a bank account, buy insurance policy or mutual fund, one KYC ideally should be good enough. It should be available electronically. We are designing system where data privacy will be highly maintained.
Q: What are the regulatory back-end moves Sebi has done?
In the last one year, whether it was a matter of taking advantage of certain provisions in ADR-GDR guidelines or it was a question of taking advantage of certain provisions in IPO guidelines or important people taking lightly the insiders trading regulations, Sebi has acted very strongly.
We have strengthened our surveillance capabilities and investigations. We have created a forensic accounting cell which was not in existence. The investigations are concluded within months as against years in past. People have been booked and serious actions have been taken against group of people. We assure and take the stand, in case, we come across violations we will not spare anyone. There has been enough and serious indications from senior management of Sebi team that these things will be done fast and in time efficient manner. We will follow the rule of fair justice but time lag will be compressed.
Q: What are the big reforms Sebi is currently working on?
We are looking at two three areas. Our secondary market infrastructure has proven very efficient and has been able to withstand all the pressures. We are working on entire risk management system afresh. There will be thorough review to strengthen our risk management system. There has been certain learning outside India about what all can go wrong. We are an important member of IOSCO and financial stability board and we are getting inputs from what can be done or what has gone wrong. We are working on proactive basis.