Beware: Market regulator is on the prowl

The Securities and Exchange Board of India’s (Sebi) new Chairman U K Sinha is a soft spoken person and known for his gentle personality. But the hot seat of the capital market regulator he has recently occupied will need him to make many tough and difficult calls. He has taken up the job at a time when retail investors are losing interest in the capital market resulting in lower participation rate.

Though people in the metros still have better participation, those from small towns and rural areas seem to have lost total interest. Naturally, making capital markets attractive to retail investors is Sinha's top priority.

Yet Sinha does not believe that investors’ protection should not deprive the market of its natural growth. As he recently said, “There has to be a market first and only then you can protect the investors.” His plate is full too. A number of critical issues including the new takeover code, the ownership and capital issue norms for market infrastructure institutions such as exchanges, depositories and clearing houses are some of the pressing issues he has to deal with quickly.

He is also of the view that lack of institutional investments, which normally come for long-term, stock markets in the country are becoming more of gambling zones rather than facilitator of investments. He is concerned that a large chunk of pension funds – which fuelled the growth of retail participation elsewhere in the world – is missing in the Indian market and penetration of mutual funds among investors is very low.  

Encouraging retail investors

Sebi, under Sinha, now wants to create right environment for retail investors to participate in a big way.  He recently paved the way for retail investors to apply for more shares in IPOs without breaching the Rs 2 lakh limit needed to qualify under retail investor norms, which would enable them to target an extra 5 per cent in such issues. 

Merchant bankers were asked to allow retail investors apply at the discounted price in all IPOs and follow-on public offerings (FPOs). This would fetch retail investors a sizeable number of additional shares for the same amount. To encourage people of small towns to invest in shares and MFs, Sinha wants to enable easier technology-driven system.

Investor awareness and financial literacy are his two main objectives. His aim is to stop people getting into all sorts of speculative activities instead of investment.

Making IPOs work

Investors these days are quite irked over the quality of IPOs (initial public offering) as most of them, except a few exceptions like Coal India, have given negative return making people lose huge amount of money. Sinha thinks disclosures in IPO prospectus are serious issues. “It is very difficult for anybody to make out any meaningful information from the way disclosures are being made today,” he said.

To tackle this issue an expert group has been formed to prioritise information that is crucial for investors. It is also looking at how to make merchant bankers more accountable on pricing an IPO or FPO, by taking into account their track record. But merchant bankers feel that it will be wrong to judge them on the basis of price performance of a scrip post IPO because price depends on several factors beyond a company’s control. Also on the agenda is to simplify the cumbersome procedure for opening demat accounts for share investments.

Mutual Funds

It is interesting to note that the Rs 7 trillion mutual fund industry rejoiced a bit more than others when Sinha was appointed the new chief at SEBI since his last job was the boss at India’s 4th largest asset management firm UTI Asset Management Company. The MF industry knows that he is in a better position to understand its problems. Though Sinha has not committed anything on the reversal of entry-load-ban, a major dampener of MF business, he has set up an expert group to recommend changes, if needed. “Our aim is to see how to the growth of the industry can be accelerated and decline arrested,” he recently said.

Though he agrees that MF agents need some incentive to sell MF products, “It is not that entry load is the only thing. There are multiple ways of addressing the distribution problems.” Eventually, Sebi wants to empower investors to make a good assessment of the scheme in which they are investing. In spite of disclosures and disclaimers, it is very difficult now for a potential investor to assess how a scheme has performed with others or how it fared with regard to some benchmark index.

Sebi also wants MFs to act as conscience-keeper of listed firms where they invest and inform investors on an urgent basis of their support or opposition to some key business decisions of the firms. Such an act would force companies to follow best corporate governance practises in their businesses benefiting entire investors class. Effectively, Sebi moots investor activism for MFs, which at present is an exception than rule.

In this context, Value Research CEO Dhirendra Kumar pointed out that funds are passive shareholders who basically don’t believe in asking uncomfortable questions.  It is true not only of MFs but other similar class of investors like insurance companies and even FIIs.  The reason is that financial investors believe in ‘voting with their feet’ – if they find something questionable about the way a company is being run, they would rather dump the stock and walk away.  This is what happened in the case of Satyam fraud.

Attack insider trading

Sebi under Sinha is making clear that promoters and senior management team members will be punished severely if found guilty of insider trading, an act where gains are made with privileged information. “I would like people to know that they be careful, as Sebi is watching, all the time,” he pointed out. Earlier firms could get away saying a broker was the culprit and they are not responsible, but now Sebi will be able to track whether somebody in the company leaked out the information.

Sebi hopes to finalise the new Takeover Code submitted by Bimal Jalan committee a year ago. The new code wants 100 per cent mandatory public offer in case of a takeover of a company. Sinha is also for regulating private wealth managers/ advisers and distributors. To bring in accountability and discipline in the management of stock market Sinha wants the National Stock Exchange (NSE) to reconsider the proposal to include brokers on its board. NSE wants to allow trading members to hold 25 per cent board seats. “Technically it is not a violation though, it is not a step in the right direction,” he said.

Large investors

Just as Sebi is trying to protect the interest of small investors, it also wants to encourage large investors like Foreign Institutional Investors (FIIs) and domestic Financial Institutions (FIs). Sinha is of the view that though due to market volatility many FIIs do pull out money, there are many who jump in with money bags. “There is no conspiracy by them (FIIs) to go out of India. They would invest only if they see value in any stock at a particular time, in any market for that matter,” he said. FIs also play their role by acting as counter-balancing factor in volatile markets, he thinks. Sebi even wanted foreign funds to invest directly in Indian mutual fund schemes. Summing up, one could say convincingly that Sebi under the helm of new chairman has started a dialogue in all areas of activities with all the participants. In his own words “We have started with a fresh thinking and a fresh challenge to ourselves.” Let’s hope for the best.