We have been fair, says Sebi chief

UK Sinha, Chairman of the Securities and Exchange Board of India, faces a host of contentious issues as he settles down in his new job. He discusses some of them with Puja Mehra and Rajiv Bhuva. Excerpts:

Is a change of decision likely on the norms pertaining to mutual funds' entry load?
For the country of our size, the total number of mutual fund participants is very meagre. We have also found that over the period of two years, the number of investor folios has gone down. And there is a huge geographical concentration of retail investors coming to equity market through mutual funds. We have also found that the share of Independent Financial Advisors (IFAs), who basically cater to small investors, and in remote locations, is coming down. And the share of banks, as distributors of mutual funds, is increasing, wherein sales of mutual funds of banks' affiliated mutual fund is very high.

This is the current situation. Sebi's desire is to enhance the reach of mutual fund. We want to increase the penetration of mutual funds across the country. And we feel that it is a good instrument for investors to come in the market rather than coming directly through the secondary market, especially for uninformed retail investors. From that point of view, we have set up a group which has representation from different areas and it has been asked to submit a report. My belief is that the group has met on more than one occasions; they are yet to submit the report. But the broad contours are to tackle the issues I highlighted and as the way forward look at how we can increase the retail participation in mutual fund industry.

You have been accused of killing the IDR market in India through your guideline for its conversion into the underlying shares?
Foreign institutional investors had around the time probably expected that there could be a possible change in policy and the FII holding in the Standard Chartered IDR rose from 30 per cent on the day of listing to around 75 per cent in March. If you are an FII and want to take a bet on a foreign company the easiest route is for you to buy that share which is listed in your domain. Why are you coming through this circuitous route? Coming to Indian market and then getting it converted. This position was built up in anticipation of a policy change or clarification which could have helped them. It has not helped them so they are unhappy. But two way fungibility or one way fungibility are all matters which have to be discussed between SEBI and the Reserve Bank of India. This decision was taken in consultation with both the regulators and also with the issuer company (Standard Chartered Bank). It was not that the issuer company was not consulted.  

The allegation against that decision is that liquidity in the IDR market will dry up and it will die. India cannot allow a new product and at the same time kill it just because some people have to take away some fast money.

But what about the predictability of policy for potential issuer companies?
The point is about expectation about future policy and taking position around that. If a foreign company is raising money through an IDR it is because the cost here is cheaper. The fact that they can raise capital at a discount should encourage them to come here rather than discourage.

Small investors in Satyam are disappointed that there is no move to compensate them for the losses they suffered due to the corporate governance fraud in the company even though those in PwC, Satyam's accounting firm and a co-accused, in the United States are receiving compensations.
Our laws don't provide for compensating investors in such instances as it happens in the United States. I wish the laws provide for the same so that it becomes deterrents for future offenders. This has not come up for discussion yet but I guess the FSLRC will be the right forum for such policies.

What in your view is the right quantum of an offer a hostile acquirer must make under the Takeover Code? The Achuthan committee recommended 100 per cent so that all investors get the option to exit the acquired company if they do not like the acquirer and the government has said between 50 per cent and 75 per cent is fine.
This matter, along with Achutan committee report, was placed before the board. And board members felt that they need to consult this more deeply before they take a view. The Sebi board has not taken a decision on the quantum of an offer required to be made by an acquirer. Consultations have begun in the board and also at the government level. Based on all the different points of view, the board will take a final view in its next meeting.

The public debate on the recommendations of the Bimal Jalan committee report on ownership and management of stock exchanges often veers towards greater competition amongst them, which is a good. But isn't the argument so dressed-up just to make a case for MCX?
Globally, one important yardstick in financial sector is how you diversify risk and reduce concentration. The fact is 100 per cent or 99.9 per cent of derivatives trading is in one exchange. But we can't blame them. May be they have done it by being efficient. At the same time, as a regulator we have to worry, that the trading volumes now or in future are also dispersed.

In the last three-four months we have taken measures like permitting and institutionalizing market-making in certain securities. Exchanges can avail Liquidity Enhancement Scheme provided by SEBI. If you see the circular and the instructions, you will be convinced that not only we have been fair across possible exchanges, now or in future, but we have also ensured that everybody is at same footing.

We have also approved schemes for having separate SME segment in exchanges. Introduction of new products in the derivatives markets, subject to risk management being taken care of, has been allowed by us now. Our effort is to remove the perceived discrimination and create a competitive environment. The Bimal Jalan committee report has evoked very strong public comments in favor of some of its points and equally strong opposition against others. We will take some time before we reach a final call on this. Nothing will be done to encourage competition at the cost of well-functioning institutions and risk management. We will take a call on the Bimal Jalan Committee report. There is no reference to the government in this particular case.

Your take on the order from Competition Commission of India around MCX Stock Exchange and National Stock Exchange, where the latter is pointed as anti-competitive.
I would not want to comment on this as it has another regulator involved here. But Sebi's approach will be to bring in more competition but in a transparent way. And in a manner that we are not compromising the risk management system so that there are no unintended surprises. We will allow new products and competition but in a fair manner, keeping in mind the risk containment measures.

So there is no favoritism within SEBI for any particular institution?
If there is favoritism in this institution then that is very bad for the nation. We have been extremely fair and we have already introduced products in the last three months.

Going back to the takeover code, what are the points in favor and against sticking with the Achuthan committee's report on abolishing the non-compete fee in takeovers?
On the abolishment of non-compete fees there are two views. Why additional price be given to a promoter by an acquirer over and above the fixed price paid to the ordinary shareholder arrived at after the valuation.

But in cases where there is a technical person, an innovator might get into similar competing activity if he is not compensated for the expertise by payment of non-compete fees. That could affect the business of the company after it is acquired. We will take a decision in the next board meeting on these.

As there is no new information available to Sebi on the findings of the two-member committee on the NSDL's role in the IPO scam of 2003-04, how will you 'reconsider' your position on them in accordance with your submission to the Supreme Court? 
The board of Sebi had felt at that time that the two-member committee had gone beyond their brief and it was a quasi-judicial order that the committee passed. And within the Sebi law, as it stands today, and an order passed by a member or even an adjudication officer cannot be reviewed by Sebi. So the dilemma before the board at that time was that here is a quasi-judicial finding of a two-member committee and they have passed certain aspersions and strictures against Sebi, so how does Sebi deal with it. So they took advice from ministry of law and elsewhere and they came to the finding that this whole order should be declared as non-existent. Somebody went to the high court but the appeal was dismissed. The honorable Supreme Court has asked us whether we are willing to reconsider our decision. And we consulted the legal people and also deliberated on the same. The view of the Sebi board was that if the strictures or aspersion casted against Sebi are dropped or expunged, then we have no other issues and we are willing to implement the order. The honorable Supreme Court has said that in their judgment the report is only a recommendation and suggestion for improving Sebi's working and it is not a stricture. The board in its next meeting will take up the order against NSDL which does not amount to any reversal of position.

Below are some excerpts from the chat: