A week before he relinquishes charge as chairman of Securities and Exchange Board of India (SEBI), CB Bhave spoke to Hindustan Times about his three controversy-laden years. As always, Bhave took questions with a calm but firm demeanour, in his last interview as the capital markets regulator.
How have the last three years been for you?
Very interesting. I had moved out of the government space in 1996, though I was still in the public service area. Coming back to SEBI was particularly interesting. I had worked for SEBI between 1992 and 1996 when it was in its formative stage.
Do you see a shift in the way SEBI used to be when it was created and is today, in terms of the complexities of the market, the demands on regulators, the increased intellectual requirements, the technology, surveillance demands that have grown?
There was a big difference. One arose out of the fact that the use of technology in capital markets has intensified. It was virtually absent in the 92-96 period. It was also the time of NSE becoming a significant player and BSE computerising…it had just started. By the time I came here again, not only did we have computerised exchanges, we had dematerialisation completed. We also had new products come in the market. Like derivatives didn't exist in 1996. The mergers and acquisition activity had also increased.
What sort of demands did these changes put on you personally? Did you have to play catch-up with the market?
I did have to get briefed about the latest in some areas about which I was fairly familiar, while in some areas where I was not familiar, I needed to be briefed more.
Today, the stocks of Anil Ambani companies have fallen and he has complained to you. What do you plan to do?
As you can see I'm in Delhi. But whenever we receive such complaints, we do investigate and see whether there is any pattern, whether there is anything that's violative of any rules and norms. And if we don't find anything, we say, "It's market forces. It was just a suspicion."
There are accusations that you are helping NSE over MCX. They have been raising issues in public that you are not allowing them to start their exchange.
Actually, if you see the history of what happened, at some stage while the MCX application was under consideration of SEBI, they went to the High Court. And the Bombay High Court directed SEBI to pass an order in a certain period of time. And that order has been passed by SEBI. Once SEBI has passed an order, we don't comment on the issue at all. The order is in the public domain, everybody can see the reasons why we are doing what we are doing. And the orders are subject to judicial scrutiny. So they can be challenged in SAT or Supreme Court.
At some stage it can happen that the aggrieved entity crosses the line and says things that should not be said. I feel that as regulators we must observe restraint and not indulge in charges and counter charges because whatever we had to say on that issue has already been said in the order.
This is part of a larger macro regulatory environment, where many companies under pressure from regulators or environment concerns are going public with their angst. What is happening?
I would make a small distinction between others and SEBI. After a quasi judicial order is passed, the correct course of action will be to challenge that order. Making accusations in the media is not on. If someone decides to do it, it is for them to decide the standard of their behaviour. It is certainly not in SEBI's book to respond to such things.
Two days ago you recommended to the Ministry of Corporate Affairs (MCA) that it should disallow interested shareholders from voting on special resolutions in related party transactions, following the Satyam scam. How do you see this playing out practically, given that independent directors are often not quite independent?
Actually, as far as the directors are concerned the position is clear. A director who is interested must stay away from the discussion as well as voting. What the SEBI Board resolved two days ago was that when the matter goes to the AGM, for shareholders to vote, then if some shareholders are related parties in the transaction, they should stay away from voting. And that part is not covered in the proposed amendments to the Companies Bill. Ultimately, MCA has to take the call in the matter. We have looked at other jurisdictions in the world to see whether elsewhere this exists or not. It does exist. We will supply this information to the MCA.
This ties in well with your reputation of treading in cross-jurisdictional issues! First was IRDA and now this --- of course, this is a suggestion, not a regulation. On hindsight, how do you think your fight with IRDA over ULIPs play out? Do you agree, as many believe, that SEBI was slapped aside?
People are entitled to their views. But this was no fight with IRDA. We believed that ULIP as a product had two components --- investment and insurance. We believed that the investment component squarely came under SEBI's purview. So, we issued some show-cause notices to insurers that were offering these products. After that, there was a/ prolonged period of time during which there were discussions between SEBI, IRDA and the government. And at no point of time was an indication given to SEBI that it is the government's preference that IRDA should regulate this and that government would be amending the necessary legislation. We had given the government adequate notice that we, having given show-cause notices, will have to bring the matter to a conclusion, which we did. What happened subsequently is in the public domain. If the law is changed to say that ULIP regulation should be under IRDA, so be it. Equally if the investors have benefited, then it was just as well that the issue was raised.
The other part of this Ordinance created fears that Ministry of Finance was becoming a super-regulator over RBI, SEBI, IRDA and going forward PFRDA. RBI and SEBI resisted that. Are you comfortable with how the equilibrium is being established?
The government has clearly stated that FSDC will function without prejudice to the autonomy of regulators. How this plays out we will only be able to see in the future. It's too early to say how it will play out.
You've had two meetings of FSDC. What is your first impression about regulatory autonomy?
The initial meetings were really initial in nature. But it was comforting to see that at no point the Ministry was trying to take the autonomy of regulators away through the mechanism of FSDC.
The other controversial decision you took was on removing loads on mutual funds, leading to a big hue and cry. Do you think the industry has come around? Has the investor really benefited?
The industry's complaint was that without entry load schemes can't be sold. Our point was, you pay the distributor whatever you want to from what you are entitled to as he is your agent. The investor will pay for the advice he gets. So, we were not saying that the distributor should work without payment. The average amount coming into equity funds after this restriction is about Rs 5,000 crore per month. This compares well with the earlier years. In the last month, January 2011, more than Rs 7,000 crore was collected. I don't think Rs 5,000 crore can be collected without distributors being there at all. Distributors are working, they have adjusted to the new model. It is also a reality that some distributors have not. So, the asset management companies (AMCs) need to study the distributors who are successful and help the remaining agent in the transition.
The other criticism we saw was that inflows were less than outflows. This was a peculiar argument. To blame the outflow on entry load ban is completely bizarre. The two have nothing to do with each other. We further analysed previous data and found that majority of net inflows used to come into equity mutual fund schemes comes via new schemes. In existing schemes, did not attract similar inflows. Clearly, there was something in the incentive structure that made people manufacture new schemes rather than sell old schemes. This is a problem. Both from the investor's perspective as well as AMC's perspective, it is better to grow an existing scheme than put out its clones as new schemes one after another.
The short answer to your question is that part adjustment has taken place but it still has to play out fully.
And the last point, we see that there are some funds that didn't go into negative accretion at all. It's for AMCs to analyse why they are going into negative when some of their competitors are not. What is it that the competitor is doing something right?
One more criticism against this move was that you were shifting investors from distributors to big banks, which in the guise of transaction cost are actually charging the equivalent of load.
We said let the investor pay whatever he wants to. We are not saying investor should not pay for advice. We are saying that a third party cannot decide what an investor should pay for advice. Nobody forces the investor to go to a bank if he doesn't like the charges.
Earlier, whichever distributor an investor went to, he had to pay 2.5%. Today, there will be competition.
The third problem according to the industry was that investors are not used to paying for advice. Even though 60% of our GDP comes from services, we are averse to paying service tax or service charge. This habit of not paying is more a behavioural aspect of consumers. How do you see this playing out in no-loads?
This is not an issue that has arisen only in this area. This is a transition we have to make. Initially, when there was talk of privatisation of electricity distribution, many investors who were thinking of investing in power plants or distribution were not clear as to what will people be ready to pay for continuous power without fluctuating voltage. I have no doubt in my mind that consumers understand what they want. It is for the entity that sells the service to convince the consumer that the charge is worth it. The important point in this transition is that it empowers the investor that he can make a choice now.
Equally, if you as a distributor want the same customer to come to you again, you get into a relationship business rather than a transaction business. When your commission is assured, you are in a transaction business.
The next step to this is advisor regulation. How do we move towards that? The Swarup Committee had made recommendations that have been totally ignored.
That is still under the purview of Ministry of Finance and this issue is something that all regulators will have to put their heads together because the same distributor will service pensions, insurance, investments, wealth management. Again, if we have four sets of regulations for the same distributor that will create confusion. We really need to take the Swarup Committee forward. I have no idea why the Swarup Committee never saw the light of day. It somewhere got stuck.
Can't the FSDC take it up?
Yes, it can, it should.
How do you see the FII story playing out? On the one side you have the 9% GDP story playing out. On the other, slowdown in the developed markets, where it seems to me that there could be an asset transfer from the developed world to India because of the demographics as well. Rich nations seeking growth will have to come to India, China, Indonesia. How do you see that playing out for India?
It's become a complicated issue because of the global financial crisis. In the process, most countries have moved away from the normal --- excessive deficits, excessively loose monetary policy…all these things had to be done because that was the only medicine available at that time. Everybody recognises that we need to come back to the normal state. But we are not clear as to what that path is going to be. Are you going to raise interest rates first or bring the fisc under control? In what measure? It appears that this is not going to be a synchronous process. Maybe that's a blessing in disguise.
I would say we are lucky to be in that sweet spot of demographics where growth is relatively more assured for us. So we can take some of those shocks much better. But there will always be the issue of how much capacity we have to absorb capital. And when the developed countries start to tighten, how much outflow can be there?
So, as you end your tenure, what is the one thing that you're proud of?
It's difficult to judge oneself. I have always been proud of that fact that I have given 100% to my job.
Any unfinished agenda?
There will always be things to do. There will be things that are in the pipeline, things that need to be thought through, some new things to be done.
Was there tension between you and Ministry of Finance towards the end of your tenure?
I have actually not known what this tension is all about. You have to do your job true to what your legislative mandate is and that is what I tried to do. There is no tension in doing that at all.
So, what next?
I call it a day on the 17th.You don't have to be permanently in one field. You can always be working in some other field. Having served as the chairman of SEBI there are natural restrictions in my mind about what I'll do in the area of capital markets.