Retail investors are losing interest on Indian market. Over
the last few quarters, retail participation has only been 10% in the market and
90% in futures and options (F&O). This is definitely a matter of worry for
Securities and Exchange Board of India (SEBI).
In his first TV appearance after taking over as chairman of
SEBI, Sinha told CNBC-TV18’s Udayan Mukherjee that his top priority is to
increase market participation and penetration-- be it for retail investors,
pension funds, domestic institutions or mutual funds.
Sinha said that he is setting up committees to look into
these matters and take concrete steps.
Noting that the low retail participation is worrisome, Sinha
said that SEBI is planning to hike retail participation and penetration by
employing technology and creating massive investor awareness programmes.
Stressing on the need to promote domestic institutional
investors, Sinha said that SEBI wants to increase competition in market.
IPOs: disclosure issues
Sinha said that SEBI has set up a committee to look into IPO
market. He emphasised on the need to prioritise information and
disclosures required for companies to go public. He also informed that SEBI is
investigating IPOs where issue may have been manipulated.
Meanwhile, Sinha has set up a panel of six to seven experts
to look into the issues faced by mutual fund industry. will make
recommendations by mid june and in two to three months, a significant
chunk of problems of the industry will be resolved.
Here is a transcript of the exclusive interview on
CNBC-TV18. Also watch the accompanying videos.
Q: Over the last few months and quarters, there has been
very-very poor retail participation that has characterised the market. Overall,
delivery volumes in the market are 10%, 90% is futures and options, does this
worry you that it has become too much of a gambling or trading kind of a market
with not adequate depth?
A: I won’t use the word gambling. But it is a matter of
concern for us in SEBI that why retail participation is going down, especially
from the past trends. Our effort will be to increase that participation. We, in
SEBI, would like to create the right environment for retail to participate in a
big way, not only in big cities, but also in small towns and districts.
Unfortunately, while we have seen a lot of progress in
growth in the market, lack of penetration, lack of retail participation is a
matter which has not yet been addressed properly. We are doing number of things
to remove this anomaly.
Q: Why do you think this is the case? If you just look back
three years, there was a fair amount of retail participation. But right now
it’s just futures and options. It seems a set of few thousands or a few lakh
people are engaged in the market and the broader investor participation is
completely lacking.
A: There are many reasons for it. One, a decision was taken
about taxation on options, now on the premium amount only, you have to pay the
securities transaction tax (STT). So, that has encouraged a lot of people to go
to options. If you look in F&O, the earlier trend of singular stock futures
has gone down and options have increased. So, to some extent, I would agree
with you that it has become more trading oriented rather than investment
oriented.
One larger issue is that why institutional money is not
coming, why retail money is not coming through the institutions. There you have
an issue that mutual fund penetration has also not been good, in fact there
have been reduction in folios, there have been net outflow in the equity money.
Cities, areas, geographies, from which the money is coming in the mutual fund
industry, are also going down. By same region, the retail participation is also
coming down.
How are we going to tackle this? One, encourage people to
use technology to participate in the market from a smaller place. There are
some bottlenecks with regards to how transactions are being done.
The second area is to create a massive programme of investor
awareness and financial literacy. These are two areas which we will take up
right now. Third is we would like to encourage competition.
If we are able to get all these three things together, I
think some of these trades will be reversed. So, we are worried, we are
concerned that retail participation is showing a decline. We are worried that
people are getting into all sorts of speculative activities instead of
investing.
Q: Do you think it is also because of lack of adequate
vehicles to participate through? You mentioned mutual funds where there has
been a clear dwindling. Unit-linked insurance plan (ULIP) as a product has also
taken a bit of a back seat. So, is it because some of the retail channels for
long-term investment money getting into the market have also dried up?
A: Yes. But the most important of them is the pension money.
Unfortunately, in India, pension money is not allowed to be invested in the
market. There was a decision taken by the Ministry of Finance as back as 2005,
the same has not been implemented. People are talking of government providing a
guarantee or somebody providing a guarantee for the returns on the equity. As
such the large chunk of money, which fueled the growth of retail participation
in other parts of the world, is missing in the Indian market.
There is also another dimension. While you talked about
trading versus investing, there is another dimension of foreign investors
versus domestic institutional investors. There also our current trend is not
very favourable. We plan to act on this also from the point of view of
providing a counter balance. Not that FIIs are not welcome, but in a country of
our size with growing economy, there is need to promote domestic institutional
investors.
Q: Is it creating imbalances in the market? Our market is
driven so much by relatively small dollops of FIIs money, relatively small
pileups of futures and options positions because these two seems to be the
dominant players in the market. The domestic institutional money or retail
money does not seem to be playing that counter balancing role. Is it creating
potential for distortion or not perfect price discovery in the market,
according to you?
A: I have studied this question rather deeply, especially
when I was chairing that committee on foreign capital flows for the government.
I would not subscribe to the view that FIIs as a class are conspirators against
India. The right way to appreciate it is that domestic institutions can provide
a counter balance. One of the main reason is that their investment horizon is
limited. By and large, subject to some of the small exceptions, they are
allowed to invest only in Indian market, whereas a foreigner can invest in any
part of the world. So, he has more options and opportunities.
We examine various data points. For example, whenever there
was a major volatility in the Indian market, we found the data showing that a
good amount of money went out of India, another large chunk came to India. So,
it’s not that they are working in unison as conspiring to go out of India. So,
if they see value in any particular stock at a particular time, at a particular
price, they would invest. Let us not forget that same is the view or approach
or domestic investors also. There have been periods when the market has been
going down and the domestic institutions have been selling. But there have been
periods when FIIs have been selling and domestic institutions have been buying.
So, the better part is to have large number of players in the market having
different views. That provides comfort and the strength to the market.
Q: Foreign investors are clearly not conspirators. Even
there, would you concede that very good quality long-term foreign money through
pension funds, university endowments, that kind of money we fallen a bit short
of attracting in India, a large number of those players have not walked in yet?
A: I have been talking to a large number of industry
experts. They have been telling me that if they go and talk to a potential
pension fund out of India, the first question they have to answer is, is the
pension fund in India investing. And they a have to say no, they are
prohibited. So, that provides a very negative first impact about whether a
sovereign wealth fund or a pension fund could be investing in India.
Q: That is not the only the only reason surely.
A: That is not the only reason. But I would say that it
vitiates the entire industry. If you can go out and say that pension funds in
India have invested ‘x’ amount and they have made ‘y’ amount of gain, it would
create a different environment.
So, how to attract large pension funds and others? SEBI has
been encouraging the market participants to go out on road shows. In the past,
Sebi has also gone along with them on road shows. We have no objection in
helping in that direction. If there are any bottlenecks in the minds of FIIs,
we have no hesitation in removing those bottlenecks. But I do concede that
large pension funds have still been coming in a very small measure in India.
Q: Is it recognition of that that recently there has been
some talks of getting sovereign wealth funds to own upto 20% of a stock? Is it
your small step towards, if indeed that is action, a small step towards
addressing that problem where long-term holders from the foreign capital basket
are allowed and encouraged to buy more of Indian stocks?
A: No, I won’t subscribe to this view. Based on a particular
agreement signed at the highest level between two governments, SEBI has tried
to find out a solution how to operationalise it. The regulations within SEBI
were not in conformity with what has especially been recognised by the two
sovereign governments. We have only facilitated that part. The intention is
definitely not to allow people to go beyond the current FII regulation
ceilings. This is an exception.
Q: So beyond that specific example, you are not going to
allow any foreign owner to own more than 10% of a listed entity?
A: The way the regulations have been amended, it says that
if there is an existing sovereign agreement between two countries then in order
to facilitate that SEBI can take a view accordingly. That means there has to be
an existing and subsisting agreement between two governments. To the best of my
information, there is only one agreement so far of this type.
Q: With Singapore?
A: Yes.
Q: So, other sovereign wealth funds are not privy to this
20% relaxation?
A: I don’t think so. The regulation has been made only to
account for the agreement signed by the two governments at the highest level.
Q: You have done a lot of work yourself on making it simpler
for foreign investors to come in by thinking of issues like giving them
qualified foreign investor (QFI) status, a single window. When can all of that
become a reality?
A: Government has partially accepted the recommendation of
the working group on foreign capital flows. In the budget, this year, an
announcement has been made that individuals as well can invest in Indian equity
market for the mutual fund route. In pursuance of that budget announcement,
SEBI has formulated a scheme. That scheme has been sent to government and
Reserve Bank of India. We are in consultation with them. It will be difficult
for me to give an exact timeframe. But this is an important budget
announcement. I see no major obstacles in it. So, we will be able to do it
soon. But don’t ask me for a specific timeframe.
Q: Not time frame, but the modality in terms of the KYC
(know your customer) or whatever is required to get that money in? A lot of
people perceive that KYC to be a stumbling block between the money actually
coming in, though the permission has been granted in principal.
A: We understood that the current FII regulations prescribe
and allow for a very high degree of KYC compliance. We discovered that that is
not the case. Our assumption was not right. So, what the working group had
recommended was to be very strict on KYC requirements. So, on the operational
part of this decision the suggestion by the group was that depositaries,
participants, which are licensed by SEBI, can be encouraged to open foreign
branches or have any tie-up abroad and they would have to qualify with the
stringent KYC requirements. So, KYC will be taken care of in the sense that
people won’t have to travel to India to make a small investment here. Whichever
city or part of the world they are, KYC can be done there. The whole idea is to
simplify the process.
Q: Let me ask you about mutual funds now, you come from that
industry. Is there a solution to the problems of distribution that has plagued
this industry for the last one year?
A: There has to be a solution. There are two-three
approaches to this. There is a feeling that the incentive to the distributor,
which was discontinued in a particular manner in 2009, has led to the decline
of the industry or increase in the folios. There were also some issues with
regard to the exit load of schemes not being allowed.
The second part we have already addressed. I am told the
industry had gained because of that in a very small way. We have set up a small
group of six or seven people. They are looking at entire gamut of suggestions
that have been received from various quarters. The group has already started
working. Our idea is to complete the recommendations by middle of June. So, it
won't take very long time.
Q: Can entry loads come back in any form? Can it come back
in any form or is it a closed chapter?
A: I would say that I would like to wait for the
recommendations of the group on this. But undoing something completely is also
something which we need to look at every serious. So, I won't be able to tell
you whether entry load will be reintroduced or it is a closed chapter. I would
go by the advice received from many of the experts. However, we will definitely
take care of the issues of the distribution industry because we do feel that
reasonable amount of incentive is required for the penetration of this market.
Q: But how can it be worked? If there is no load, what is a
feasible distribution format between the AMC and the distributor?
A: I don’t want to prejudge or guide the committee on what
they think is right. But let me tell you that other than entry load, there are
methods. There are other methods also to incentivise the industry and the
participants. It is not that entry load is the only thing.
In the last two years, almost two years that have gone
through, industry has also moved on. I have been talking to people in the
industry, I have been talking to other participants. So, the problem is there.
The solution is not only reintroduction of entry load. One can argue that while
it was there, at that time also the growth was not at the optimum level. So, we
are trying to look at a solution which will be workable.
We also feel that other than this aspect use of technology
is going to be a very major driver. For example, a growing number of people,
who have disposable surplus for investment and who are tech savvy, they would
not like to go to any adviser. They would like to do their transactions on
their own. Then there are people, who are in smaller towns, who are not so
savvy, would like to work with some of the distributors or advisors and use
technology. So, these are issues on which some half hearted measures have been
taken. May be we are not convinced, so it was more by way of a pilot or an
experiment. What I would like to do is to take this thing forward in a big way.
Coupled with our focus on investor education, I think it will lead towards
better participation.
Q: So, are you saying by end of June or say early July, you
will have a format where the distribution fraternity will not feel completely
miffed as they have been for the last one year and that will resolve this issue
of distributors actually selling mutual funds?
A: The way you have framed the question gives the impression
that in two months all the problems of mutual fund industry and of the
distribution industry will solved. Some of them will be solved, a major portion
of them, not some, a major portion of them.
Q: Can you give me a hypothetical example of how the
distributor problem can be addressed? We are not going to hold you to it as the
final solution, which will come in July, just give me a hypothetical example,
just for my knowledge.
A: I would say that there are multiple ways to do it. If I
give you another example, you will get the impression that we are moving in
that direction.
Q: I will not, since the board has not met, your advisory
committee has not met yet.
A: One of the suggestions, which AMFI has made to us, for
example, is why not allow a transaction cost. In the smaller towns, it is
common knowledge that Individual Financial Advisors (IFAs) have to go out to the place
of the investor, help him in filling up of the form, help him in completing the
transaction. Now, his incentive for this has got substantially reduced. So, we
will have to look into details, but allowing him to charge some transaction
cost perhaps could be one idea.
Q: What kind of transaction cost, quantum?
A: I can’t comment on quantum as if some decisions have been
taken. But AMFI has come out with a recommendation that this could be one
solution. There are many other solutions or suggestions that are on the plate.
What we will like to do is, for example, empower the
investor to make a good assessment of the scheme in which he is investing. The
disclosures and disclaimers are there, but it is very difficult for a potential
investor to assess how their scheme has performed with regards to other schemes
or how it has performed with regard to any benchmark index. One suggestion, for
example, is why can’t we disclose that if you had ‘x’ amount of money invested
in a particular scheme, so many years back, what would be the amount today.
Right now, the advertisement requirements from SEBI do not allow that sort of a
thing. So, the committee is looking into this, whether we can permit this sort
of a thing. So, for the retail investor, he will have a very important
benchmark for comparison.
There are a lot of other things. For example, a mutual fund
or an asset management company, how many branches it has, in how many cities it
has, what is the equity AUM it has, these things are not disclosed. We are
working towards making more and more disclosure, so that an investor finds out
that whether this particular AMC has a presence or not, whether it is thriving
only on short-term liquid money or it has also got some track record of working
in equity or in balanced schemes. So, all those disclosures can help in people
coming to a better decision.
Q: Should distributors or private wealth advisors be
regulated by SEBI?
A: They should be regulated, there is no dispute about it.
Q: Why not by SEBI? Who is in a better position to regulate
them?
A: We have a working paper on this. This matter is under
discussion in the sub committee of FSDC. May be the final consensus will be
towards SEBI regulating it and we are preparing ourselves for that. Since
majority of the participants in this industry are regulated industries of other
regulators, we need to take them on board. May be the final solution could be
towards SEBI doing it. But as of now that decision has not been taken. But we
are working towards it. But that they need to be regulated has been established
again and again.
Also, we are running a risk by not regulating them because
some of the example, which we have seen, of certain type of misconduct, nobody
was asking them any question, nobody was regulating them. So, there is a
realisation of the need to regulate them.
Q: Also for private wealth managers?
A: Yes.
Q: On this subject of regulation, do you get the sense that
people are stepping on each others toes? There was this issue with IRDA a while
back. Also with FMC on Silver futures, which is pending now, which has not got
started off, may be in the future with interest rate futures SEBI and RBI will
have some common ground. How do you resolve these issues? You were not there
then, but the IRDA thing became an ugly spat and it was all over the media.
Surely we want to avoid issues like that.
A: I would say that what happened in 2010 has been a great
leveler. So, today I find that regulators are more willing to co-operate and
more willing to understand each other. There is a general realisation. You
might have seen the debates inside the Parliament or the statement of members
of Parliament around that time, so there is a general realisation that these
are matters which are better resolved within the community rather than they are
taken outside.
There are areas where coordination is required. There are
areas where clarity is still missing. Some of that clarity can come, only when
certain new acts are passed or certain existing acts are amended. As you know
that is a time taking process.
In any case, government has decided to set up a commission
for review of all the financial sector laws. That will take its own time. But
my feeling is that the regulators are cooperating, trying to understand each
other. I hope that we will not have any repeat of these things in future.
Q: Let me ask you about the initial public offering (IPO)
market. I was in Jaipur recently and I met a lot of investors for an investor
camp. There seems to be a lot of anguish about the quality of IPOs which have
come in, quality of disclosures, people have lost money in many of these small
IPOs. I don’t know whether you agree with that assessment or not, but the
feedback from the ground is that this whole IPO process is not what it should
be, with the exception of a few large ones like Coal India etc where people
have made money. What is going on? Do you sense there is a lot of manipulation,
lack of disclosure in this whole primary market process?
A: I won’t subscribe to the view of manipulation.
Disclosures, obviously there are serious issues. I myself hold the view that
the way the disclosures are being made today, it is very difficult for anybody
to make out any meaningful information.
I have been telling some people that there is too much of
disclosure in unstructured manner. Again here I have set up a group and that
group has started working. The idea is that how do we prioritise the
information that is required or the disclosure that is required. For example,
if there are criminal cases or other risk factors, they are today coming in
various places. Why can’t we tell them right in the beginning?
Another thought, which the committee is looking at, again by
way of illustration, is what has been the track record of the merchant bankers
so far as price is concerned. It doesn’t mean that if you are a first time
merchant banker, you will not be allowed. But if you have done ten issues, five
issues in last one year at any given price, what has been the trend and how
does it compare with the index against which it should be benchmarked. This
type of information would perhaps help the retail investors come to some better
understanding.
Third point, which the committee is looking at, is at any
given point, what is the PE ratio based on the last years performance and how
does it compare with the peers. So, basically what we are looking at is to
provide him some meaningful information which will help him in taking a better
decision.
However, I must clarify that we are not looking at going
back to the old system where the merit of an issue is decided by SEBI or by
CCI. So, the basic point is that the disclosure based regime will continue. We
are not going to make any change from disclosure based system. However, the
quality, prioritisation of the information, making the forms easy, making the
prospectus easy, that is the area we are working on.
Q: On this point of manipulation, which you disagree, there
has been at least a dozen of very small issues over the last six months, which
attract a lot of HNI interest, allotment patterns are very suspicious because a
large part of the issues are allotted to six-seven entities. Post listing, in
three days, the stock becomes three times the price and then in subsequent one
week it becomes half the issue price. If that is not a sign of an issue getting
manipulated, what is?
A: I can only disclose to you that any issue where this sort
of a thing has happened is under your radar. Our surveillance and investigation
people are looking into it. But these things before they become actionable they
need some probing and they need some time. All these issues, all these cases are
being looked at.
Q: But nothing concrete has been found at all over issues
which were six months old even where such instances happened.
A: I will have to check up and my information is these are
work in progress.
Q: The retail IPO level got lifted from 1 lakh to 2 lakh, do
you see merit in raising it further to say 5 lakh? What is your personal
opinion?
A: We must understand why we want to raise it, what we want
to achieve by this. There are people who say, for example, that even raising it
from 1 lakh to 2 lakh was not a good idea because ultimately in HNI who was
earlier in HNI qualifies as a retail and gets into it.
The whole system should be looked into the perspective that
one, we want retail to participate. But at the same time, we are not holding
out any brief for an issue to be making money for him or making loss for him.
So, if an issue is successful and the retail quota is several times
oversubscribed, people complain. If an issue is not successful, retail quota is
not made then the issuers complain. So, I think we have reached a reasonable
amount of balance about what should be the mechanism of allotment for various
categories of people.
There are arguments, for example, that leave everything to
the qualified institutional bidders and once the issue is getting listed, they
will sell it to retail. We are not getting into all this. But let us not look
at retail qualification or retail quota only from the point of view of missing
out a possible opportunity because IPOs can go either way.
Q: This morning there has been a report suggesting that you
have gone back on your earlier stance with the NSDL case and have refused to
give them a clean sheet as earlier. Is that a fair, an accurate assessment of
the facts?
A: No. It is not a fair and accurate assessment. But let me
also qualify by saying that this is a matter before the Honourable Supreme
Court. The matter came up yesterday. We are still awaiting the final orders
because it has not yet been communicated to us. But what we have seen in the
print media today is not a correct and complete reflection of what SEBI Board
has decided or what SEBI has filed in the affidavit.
The legal position as we understand in India today is that
SEBI doesn't have power to review its own orders. In this particular case, the
dilemma was that there were certain observations and findings against the
working of SEBI itself. So, in their wisdom the then board decided to declare
it as ‘non-est’. Since we were asked to communicate our view whether we are
willing to reconsider this, what we have communicated to the Honorable Supreme
Court is that, yes, we are willing to reconsider. But we have also said that
since we do not have a power of review, this matter can be done with the
directions of the Supreme Court and also the observations against SEBI need to
be expunged. So, we have said these two things.
Unfortunately, the last two points have not come out in the
print media today giving the impression, people like you have, that there is a
complete change. So, our position remains that the observations against the
SEBI need to be looked in. But since we can't review, we have sought Supreme
Court's permission in this.
Source: Money Control
