'India's first self-regulatory organisation within a year'
As investors pumped money into the Indian bourses, the regulator’s job has only got tougher.
By TNN |
India’s capital market is today among the largest in market capitalisation. As investors pumped money into the Indian bourses, the regulator’s job only got tougher. But Meleveetil Damodaran, chief of the Securities and Exchange Board of India (SEBI), the market regulator, had already put in place a well-oiled machinery to take up these challenges. “Ten thousand brokers, 30,000 sub-brokers and every other kind of intermediaries, and this number is growing,” says the Sebi boss. In an open house with ET over the last weekend, he explained what it takes to keep pace with the growth in the market. (Mr Damodaran has been in office since February 2005).
Excerpts:
Is capital market regulation in India different from that in similar other markets?
We are among the larger markets in the world. The real story about India is not the growth, but the kind of players in the market and the regulatory landscape. A large number of brokers are not corporatised, which adds to the regulatory burden. Irrespective of a broker's legal status, they have to be regulated on the same plane as an incorporated entity applying the same norms. There is a lot of emphasis on self-regulation in the US, the easiest market to compare our markets with. The US Securities and Exchange Commission (SEC) does not regulate a lot of entities that we do. The regulatory load is higher on Sebi since the element of self-regulation is absent except for what stock ex-changes are doing.
How do you propose to ease the regulatory burden?
I think India would see its first SRO in the next 12 months. In terms of the number of players in the market, we are as large as any other market. Process simplification can address a lot of issues. Every intermediary, for example, is required to renew its registration in three years. We have now told them to file for permanent registration and pay annual fee. They should also file a self-certification on whether they have breached any regulation in the last 12 months. We will cross-check the declaration. If they get to hear from us, then it is bad news. Otherwise, it is taken that the registration is on. This way, we can reduce a lot of workload.
How can you improve Sebi's functioning while making compliance easy for stakeholders?
We are planning to adopt a system of collecting and dealing with information and responding to it quickly. SEC is now developing this system called the 'extended business reporting language (XBRL)'. Another important development is the new corporate filing mechanism that we have introduced. Until recently, a company listed on the Bombay and national stock exchanges had to file time-sensitive information with two of these exchanges in addition to Sebi's electronic data filing system. Now, we have asked companies to file at only one corporate filing platform and three of us will access this.
What is the nature and process of regulatory response to suspicious stock movements?
Excerpts:
Is capital market regulation in India different from that in similar other markets?
We are among the larger markets in the world. The real story about India is not the growth, but the kind of players in the market and the regulatory landscape. A large number of brokers are not corporatised, which adds to the regulatory burden. Irrespective of a broker's legal status, they have to be regulated on the same plane as an incorporated entity applying the same norms. There is a lot of emphasis on self-regulation in the US, the easiest market to compare our markets with. The US Securities and Exchange Commission (SEC) does not regulate a lot of entities that we do. The regulatory load is higher on Sebi since the element of self-regulation is absent except for what stock ex-changes are doing.
How do you propose to ease the regulatory burden?
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The SEC does not regulate brokers as the concept of self-regulatory organisations (SROs) is very much there. We are in the process of persuading people to set up SROs here too. We wrote the SRO regulations some years ago. We are rewriting this and all our other regulations. We are also talking to associations of mutual funds and brokers. Some of these entities can become SROs. I think India would see its first SRO in the next 12 months. In terms of the number of players in the market, we are as large as any other market. Process simplification can address a lot of issues. Every intermediary, for example, is required to renew its registration in three years. We have now told them to file for permanent registration and pay annual fee. They should also file a self-certification on whether they have breached any regulation in the last 12 months. We will cross-check the declaration. If they get to hear from us, then it is bad news. Otherwise, it is taken that the registration is on. This way, we can reduce a lot of workload.
How can you improve Sebi's functioning while making compliance easy for stakeholders?
We are planning to adopt a system of collecting and dealing with information and responding to it quickly. SEC is now developing this system called the 'extended business reporting language (XBRL)'. Another important development is the new corporate filing mechanism that we have introduced. Until recently, a company listed on the Bombay and national stock exchanges had to file time-sensitive information with two of these exchanges in addition to Sebi's electronic data filing system. Now, we have asked companies to file at only one corporate filing platform and three of us will access this.
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What is the nature and process of regulatory response to suspicious stock movements?
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We have a sophisticated tool called 'integrated market surveillance system'. Many regulators in the world do not have this as exchanges use this. But we decided to have one of our own. This tool throws up a large number of alerts on the screen every day indicating areas that need questioning. This could be large-sale orders on stocks that re-mained dormant for a long time. Those at the terminals pass on the information to the surveillance division. They in turn prioritise the investigation by doing patch analysis. If somebody has bought a stock suddenly in huge quantities, then we probe into the conduct of that person in relation to that stock before and after the transaction. The idea is to find if somebody has manipulated the market. There could be a case of insider trading. One interesting case where we could swiftly prevent fraud is of Nissan Copper Ltd. The stock price went up like anything without an explanation on the day of its listing. As soon as we saw that, we checked who all were the players in the market.
Within 24 hours, we could get 23 names and addresses and send notices to them across the country seeking an explanation on the nature of transaction. Before the proceeds of those transactions were moved into those bank accounts, we could identify and freeze them. That then gets into a formal inquiry and adjudication.
There is a concern globally about sovereign wealth funds. What is the thinking of Indian regulators on this?
There are two issues here. Unlike private equity, the source of the funds is clear to everyone. It is state money that is coming in. Sovereign wealth funds have been around for a long time. In this case, you know where the money is coming from. They are investing in a large number of companies.
The issue is whether the national economic policy will be comfortable with a large shareholding in a big company going to another country? That is a larger policy issue which needs to be addressed. Let us look at private equity investment that is coming in large measure to listed as well as unlisted entities.
There were clearly two sets of issues that came up for discussion. In the home country of private equities, the issue was of the nature of protection that could be given to private equities investing in emerging markets. Like hedge funds, PEs are of the view that they do not need protection. In what I call the playfields of private equity or the emerging markets, the concern is whether PE investment would impact the ownership structure of a company. With SWFs, that is a big question. They are not coming with a minuscule investment. The question is whether we should safeguard certain sectors and have additional sectoral caps? The existing caps might take care of that concern.
Policymakers are still looking at whether SWFs would cause problems in industries where there are no sectoral caps. These are clearly big boys. The surpluses of governments are clearly huge that would impact the market. There will be countries where the growth stories cannot be within the countries. For example, Singapore's Temasek and GIC have to go out and buy abroad in order to keep the Singapore economy growing.
Is there any evidence of terror financing through the capital markets?
The National Security Adviser identified 11 possibile means of terror financing in South Asia. Capital market was just one of them. I must emphasise that these were not specific to India, but to South Asia in general. He, however, did not say that there is a lot of evidence to prove that terrorist money is being deployed in our markets or profits made out of capital markets are used to sponsor terror. There is absolutely no evidence of terrorist money being deployed in the capital market.
Within 24 hours, we could get 23 names and addresses and send notices to them across the country seeking an explanation on the nature of transaction. Before the proceeds of those transactions were moved into those bank accounts, we could identify and freeze them. That then gets into a formal inquiry and adjudication.
There is a concern globally about sovereign wealth funds. What is the thinking of Indian regulators on this?
There are two issues here. Unlike private equity, the source of the funds is clear to everyone. It is state money that is coming in. Sovereign wealth funds have been around for a long time. In this case, you know where the money is coming from. They are investing in a large number of companies.
The issue is whether the national economic policy will be comfortable with a large shareholding in a big company going to another country? That is a larger policy issue which needs to be addressed. Let us look at private equity investment that is coming in large measure to listed as well as unlisted entities.
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Nobody is worried about the origin of these investments whereas people are worried about the money coming in to markets. It is only recently that the International Organisation of Securities Commissions came up with a taskforce on whether we need to regulate private equity. If so, what is the kind of regulation needed? There were clearly two sets of issues that came up for discussion. In the home country of private equities, the issue was of the nature of protection that could be given to private equities investing in emerging markets. Like hedge funds, PEs are of the view that they do not need protection. In what I call the playfields of private equity or the emerging markets, the concern is whether PE investment would impact the ownership structure of a company. With SWFs, that is a big question. They are not coming with a minuscule investment. The question is whether we should safeguard certain sectors and have additional sectoral caps? The existing caps might take care of that concern.
Policymakers are still looking at whether SWFs would cause problems in industries where there are no sectoral caps. These are clearly big boys. The surpluses of governments are clearly huge that would impact the market. There will be countries where the growth stories cannot be within the countries. For example, Singapore's Temasek and GIC have to go out and buy abroad in order to keep the Singapore economy growing.
Is there any evidence of terror financing through the capital markets?
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The National Security Adviser identified 11 possibile means of terror financing in South Asia. Capital market was just one of them. I must emphasise that these were not specific to India, but to South Asia in general. He, however, did not say that there is a lot of evidence to prove that terrorist money is being deployed in our markets or profits made out of capital markets are used to sponsor terror. There is absolutely no evidence of terrorist money being deployed in the capital market.
The second possibility of using profits from the market to fund terror is outside our purview as we do not track the end use of funds. The ministry of corporate affairs and Sebi has put in place a mechanism long ago to book those who go underground after raising money from the market. The finance minister had recently said in the House that one suspected case of terror financing was being looked into and no more details could be made available at that point of time. That remains the position even now.
Are there any tax havens which are a matter of concern to Sebi?
A tax haven by itself is not a bad thing. We only look at its implications for the Indian market and economy. The Indian regulatory ecosystem in general is concerned about whether tax evaded money is finding its way back from such jurisdictions (round tripping). We do not have a finite list of tax havens. The International Organization of Securities Commissions (IOSCO) has a finite list of non-cooperative jurisdictions. We will not register a foreign investor domiciled in such a jurisdiction. We have an international obligation to discriminate against them. They are in any case few and far between. IOSCO's taskforce on dealing with these jurisdictions constantly persuades them to come on board. A few have complied in recent months and the list is becoming shorter.
How do you propose to regulate investment advisers?
When many countries talk about having regulated investment advisers, they are talking about asset managers. We are trying to initially deal with those who are professionals in this area. We are providing training for aspiring advisers under the National Institute of Securities Market to create a body of professional investment advisers. Today, we have product pushers who sell products depending on the margins they would get. We want to have advisers who will tell you what share of your investment should go into which instrument depending on your peculiar investment and liquidity requirements.
As a regulator, don't you think you should step in when there is unexplained rise in the prices of some of the shares for no apparent reason?
We cannot have a say in a particular business model. We can monitor investor behavior. In the height of the dotcom boom, shares of companies that were making losses were being lapped up – there is no rational to investor behavior. It is not Sebi, but the larger analyst community that takes a position on certain shares that must look at issues like unexplained price movement. We will closely monitor any variation in trading volumes of a share which is widely different from its earlier record.
Besides regulation Sebi's responsibilities also include development of the market. What is happening in this direction?
Regulation succeeds market; else it would kill the market. If you grow a market in size, one individual will not have a disproportionate influence in the market. There is an element of investor protection in this. We have given more products in the last few months than ever. And the response has been remarkable. We are talking to companies to bring more stocks into the market. We do not see ourselves as mere cops although we have such an image in media. We see ourselves as much in development as much as in regulation.
Are there any tax havens which are a matter of concern to Sebi?
A tax haven by itself is not a bad thing. We only look at its implications for the Indian market and economy. The Indian regulatory ecosystem in general is concerned about whether tax evaded money is finding its way back from such jurisdictions (round tripping). We do not have a finite list of tax havens. The International Organization of Securities Commissions (IOSCO) has a finite list of non-cooperative jurisdictions. We will not register a foreign investor domiciled in such a jurisdiction. We have an international obligation to discriminate against them. They are in any case few and far between. IOSCO's taskforce on dealing with these jurisdictions constantly persuades them to come on board. A few have complied in recent months and the list is becoming shorter.
How do you propose to regulate investment advisers?
When many countries talk about having regulated investment advisers, they are talking about asset managers. We are trying to initially deal with those who are professionals in this area. We are providing training for aspiring advisers under the National Institute of Securities Market to create a body of professional investment advisers. Today, we have product pushers who sell products depending on the margins they would get. We want to have advisers who will tell you what share of your investment should go into which instrument depending on your peculiar investment and liquidity requirements.
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As a regulator, don't you think you should step in when there is unexplained rise in the prices of some of the shares for no apparent reason?
We cannot have a say in a particular business model. We can monitor investor behavior. In the height of the dotcom boom, shares of companies that were making losses were being lapped up – there is no rational to investor behavior. It is not Sebi, but the larger analyst community that takes a position on certain shares that must look at issues like unexplained price movement. We will closely monitor any variation in trading volumes of a share which is widely different from its earlier record.
Besides regulation Sebi's responsibilities also include development of the market. What is happening in this direction?
ADVERTISEMENT
Regulation succeeds market; else it would kill the market. If you grow a market in size, one individual will not have a disproportionate influence in the market. There is an element of investor protection in this. We have given more products in the last few months than ever. And the response has been remarkable. We are talking to companies to bring more stocks into the market. We do not see ourselves as mere cops although we have such an image in media. We see ourselves as much in development as much as in regulation.
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