A review of organisational structure is being taken up with the help of an external agency
U. K. Sinha is a veteran bureaucrat with a distinguished track record. He has contributed to the financial sector reform, and is credited with pioneering the micro-pension movement. Since taking over as Chairman of the Securities and Exchange Board of India (SEBI) in February last year, Mr. Sinha has been instrumental in bringing in a slew of measures to deepen and expand the capital market. Mr. Sinha, a former head of the Association of Mutual Funds of India, is currently Chairman of the Asia Pacific Regional Committee of International Organization of Securities Commissions (IOSCO) also. In an interview to Oommen A. Ninan, the SEBI chief explains the initiatives taken by the regulator to create awareness, and increase participation of small investors. Excerpts:
It is nearly one-and-half years since you took over as the Chairman of SEBI. How do you view the developments in the securities market in this period?
“Our effort during this period has been to strengthen the trust and confidence of people In the regulatory environment, reduce policy and procedural bottlenecks in dealing with the market and attract investors - both domestic and international. At the same time, the attempt has also been to make the market more efficient and transparent.
Some of the measures taken include revised takeover regulations, governance norms for stock exchanges, transparency in consent mechanism, implementation of Alternative Investment Funds regulations, offer for sale through stock exchange platform and institutional placement programme. Other initiatives are electronic voting made mandatory for all listed companies, uniform KYC norms and regulation of KYC Registration Agencies (KRA), simplification of IPO forms and abridged prospectus, measures to reduce opening day volatility for IPOs and rules for regulating high frequency trading.”
A toll-free helpline in 14 languages, including English, has also been launched for investor assistance and guidance. So, the initiatives were aimed at market development, regulatory reform and, above all, bearing in mind that investors are the focal point. We are also striving for benchmarking SEBI against the best in the world. An international advisory board has been created and a review of our organisational structure and capabilities is being taken up with the help of an external agency.
In the offer for sale process, it is reported that some changes have been made based on market feedback. How do you see these changes? Can we see more divestment of PSUs? Similarly, there is a view that retail investors would be affected by this move. How do you react to that?
“We had announced offer for sale through stock exchange mechanism and institutional placement programme as additional methods for listed companies to achieve minimum level of public shareholding.” Four offers were made under the scheme. After that SEBI received suggestions to make it more effective. Following several rounds of discussions with market participants, we reviewed the offer for sale scheme and brought in some changes. For example, we decided that the dissemination of floor price need not be part of the notice as was earlier. “Now the seller, if he intends to disclose the floor price, may do so after the close of business hours on the previous day prior to the day of OFS.”
This will help mitigate the possible price risk to the seller emanating from disclosure of the price on trading day in advance. Similarly, requirement of 100 per cent margin has been removed so as to attract institutional investors to invest in a manner similar to the secondary market.
The minimum public shareholding norms are applicable to all listed companies — public and private sector. So I am sure that there will be some activity on this front by PSUs also.
This will definitely increase the liquidity, that is, availability of more shares in the market. This will definitely help the retail investor also.
SEBI has announced new alternative investment funds regulations. What is the objective? And what has been the response?
These regulations, notified recently, primarily aim to extend the perimeter of regulation to unregulated funds. So, all alternative investment funds, whether hedge funds, private equity or real estate funds, must register with SEBI.
The new regulations are aimed to encourage the growth of private equity in a structured manner. What we are trying to do is to provide some minimum ground rules for disclosures and governance practices to minimise conflict. Investors will have the comfort that the fund in which they are investing in is regulated. This will encourage more investors. One should be able to see a lot of new investment products, too. The feedback has been encouraging.
Mutual fund penetration is confined only to a few cities. How does SEBI look at it? What further reforms can we expect in the mutual fund sector?
“This is really an issue. We are in talks with the Association of Mutual Funds in India (AMFI) as well as mutual funds to see how the penetration of mutual funds can be increased.” One way is to increase investor awareness. AMFI and mutual funds are taking this in right earnestness, and they have been conducting investor awareness programmes.
At the same time, one question that is asked is: how will a retail investor be able to select a scheme among the thousands that are available? Do we need so many mutual fund schemes?
Mutual funds also have realised this problem and are addressing the issue. There have been merger of schemes. But it has to happen at an increased pace. We are also concerned with certain schemes continuously underperforming the schemes’ benchmarks. So, we hope that trustees and AMCs will take this seriously, understand why certain schemes are underperforming continuously and take remedial measures.
Having said that, it must be noted that more than 75 per cent of the mutual fund schemes has outperformed the benchmarks over a three-year period. This is quite encouraging.
One of the recent initiatives of SEBI has been e-voting. How do you think it will help retail investors?
Electronic voting has been made mandatory for all listed companies in respect of those businesses to be transacted through postal ballot. This would be implemented in a phased manner. This will help investors take part in the decision-making process.
This will also help the investors to vote easily on any number of resolutions of any number of companies whose securities they hold and are eligible to vote. There is ample time to vote till the last day. This is also expected to decrease the number of invalid votes. The companies will benefit from the reduction in administrative costs associated with postal voting. E-voting also helps accurate counting of votes, faster and transparent voting process and immediate declaration of the voting results.
In the consent order process, there are suggestions that the new guidelines are, in fact, old wine in new bottle. What are your views?
I don’t agree with that view. SEBI had issued in 2007 the framework for consent and compounding of enforcement actions. After joining SEBI, one of my priorities has been to have a relook at the consent proceedings guidelines. We did some in-house study. We found that there were some inconsistencies. We did consult some outside experts also. What we have done is to make the process simple and effective. We have said that certain offences like insider trading cannot be compounded. A mathematical formula has been given. Thereby we removed the discretion that SEBI or its officers had earlier. The earlier criticism was that SEBI officers had discretion in deciding the settlement charges.
Another initiative taken recently is regarding the qualified audit reports. What is the rationale behind this decision?
The effort is to enhance transparency and quality of financial reporting done by listed companies. The companies will have to disclose in advance the qualifications made in the books of accounts to the exchanges, and also the audit committee and board have to give reasons for such qualifications. It has been decided to put in place a mechanism to process qualified annual audit reports filed by listed entities with stock exchanges, which would lead to better financial disclosures.