The Securities and Exchange Board of India (Sebi) has lately taken several steps to revive the primary market. As part of these, it has put the onus on investment bankers to price an issue fairly to bring retail investors back. In an interview with Nishanth Vasudevan & Santosh Tiwari, Sebi Chairman U K Sinha discusses investment advisory rules and how regulators are coming together to resolve issues. Edited excerpts:
How do you look back at 2012?
We took some important and far-reaching steps this year. We have incentivised mutual funds if money is collected beyond 15 cities. Sebi is also one of the few regulators worldwide to have put in place a regulatory framework for algo and high-frequency trading. In the primary market, we are aiming at access to a large number of investors across the country. Second, there is a need for some pressure on pricing. If an investment banker is not putting pressure on the promoters and the stock tanks because of the high issue price, his past track record should be known.
But should the regulator get into pricing of IPOs?
Anybody who says Sebi is deciding on pricing is wrong. We are saying the track record of merchant bankers should be disclosed. If somebody is coming out with a Rs 10 issue for Rs 500, there should be explanations for that. And that information should be known to the market. Between 2008-09 and 2011-12, only 45 of the 127 issues are trading above the issue price, while 72 have been continuously trading below it. These 72, even if adjusted with the general decline in the Sensex, are trading below the market. So, don’t you agree something is wrong? All I am trying to bring in is some self-discipline.
The ‘safety net’ for retail investors is against the basic tenets of stock market investing...
I would like to see a very vibrant IPO market in the country. For that, we need a fair amount of retail investor participation. If retail investors have to be attracted to markets, we need to put in place certain mechanisms through which they begin to trust the market. If 72 of the 127 issues are not doing well, nobody will come to the market. The paper on safety net is still under debate, primarily because there are two arguments. One argument is that it’s not our job to fix the price. Agreed, but then people will desert the market. So, a debate is going on the form. We would like to bring in at least a mild form of safety net.
The biggest churn of mutual fund products is happening at foreign banks, which are out of Sebi’s purview. How do you plan to address this?
We are coming out with an investor advisor regulation that will look into these problems. We have been successful in bringing together all the regulators to the table and they have agreed that Sebi should come out with an investment advisor regulation. That regulation will cover banks also. It is in a very advanced stage. The good news is that RBI has also agreed. It is not that we are getting into friction with others.
The government’s move to allow LIC to invest up to 30 per cent in listed companies will trigger open offers. Will Sebi make an exception for LIC?
We are not going to give any exemption to any company because the open offer gets triggered at 26 per cent. So, there is no case for any exemption.
The feeling in the market is that the Sebi crackdown on errant companies and merchant bankers, has been the reason for the flow of good issues in 2012 rather than anything else. What is your take on that?
Everybody wants to see somebody is in the cage and punished. Punishment is the last resort for me. It is my failure if I sit in this office and allow people to commit mischief and then punish all of them. My job is to provide deterrence and not to punish people. I would like Sebi to be a policeman, in whose area people are afraid to commit any mistakes rather than wait for them to commit an offence and punish them later. So, by the same logic, if I find somebody has made a mistake, we have to punish them. We have taken action against investment bankers. In one case, a company gave completely false information that it has a facility in Hyderabad. When I sent my people, we found that there was no plant or machinery.
How long can the onus of a successful listing be put on an investment banker only?
What do you mean by only? Who is the other party?
The other party is the company and market conditions, too.
I have no control over the company. The only person, responsible for bringing in the issue under any law is the investment banker. He is the licensee who is responsible. We are not asking for a long period. We are only asking for their track record for one year. And the disclosure is just a minimum requirement. If an investment banker is unhappy with this, then he and Sebi are not on the same page. On the contrary, if he is an honest investment banker, I am empowering him to force companies to disclose because Sebi is asking. The investment banker has to keep a document of it which Sebi can inspect over the next three years. That’s what I told them in their AGM that they should be grateful that Sebi has empowered them. I hope you are aware that bankers make all sorts of promises to promoters to get the business. I hope media understands it because some of you start arguing that Sebi is against free markets. I am sorry, that is not the intention.
Sebi has intensified its crackdown on Collective Investment Schemes (CIS). What has been the progress so far?
In Bengal, we had some very good success despite tremendous provocation and resistance. In one case, five district judges have issued injunctions against Sebi. Now, under Sebi Act, even the high court doesn’t have the power for this. We get the injunction vacated in one place, another judge issues it. Unfortunately for me, people don’t appreciate the difficulties we are facing. Imagine if you are a Sebi officer, how happy you would feel to go to Barasat and Hooghly and fight cases in the court there where you have fears about your own safety because those people are very powerful. But, we have succeeded and will continue to do that. However, there is need to strengthen the rules further and we have taken up with the government that we need to strengthen our act or we have to have a separate regulator. Obviously, the government will take some time and we are not sitting idle till then. But the ideal situation would be we have a separate regulator. CIS comes under the Sebi Act, but there are exceptions, too.
SAT has been overruling Sebi’s decisions at regular intervals..
No. Your assumption is wrong. I object to this and your understanding is not correct. Over a period of time, especially in the last three years, our success rate in SAT has been extremely high and we are seeing improvement year after year. We are seeing this improvement because we are putting lot of importance on training our adjudication officers. Secondly, we are bringing about consistency. There are many adjudication officers working in Sebi and if one officer passes an order, the other is not aware. He would take an entirely different position by his own application of mind. But, to a media person or to an outsider, it might appear that is what Sebi is doing. So, what we have done is every order that we are passing, we ensure that order is available intra net. And they are trained how to bring about consistency.
Let me give you another example. We had a system called consent mechanism. In this mechanism, there was criticism, and rightly so, that it used to take a lot of time. Also, it was not known which would be consented and which would be rejected. Again, there was no consistency about the consented amount. For similar mistakes, somebody could be paying Rs 50 lakh, while somebody else could be paying Rs 5 lakh. And, I would like to protest that media has neither taken this very seriously nor tried to understand what we have done. What we have done is, for the first time anywhere in the world, certain offences will not be consented. These are for offences such as insider trading and front-running. The impact of this would be if somebody wants to do consent in the future, he will not be able to get away with it. It has been working extremely well. At the end of the year, we will inform the general public about the results.
How has Sebi managed to stay away from any sort of dispute with the finance ministry in 2012 unlike the other two regulators (RBI, Irda)?
I will illustrate this with an example. Sebi has come out with very strict timeframe and guidelines that listed companies should have minimum public shareholding by June and August 2013. This is also applicable to PSUs. I have written to the cabinet secretary; we have had meetings with the finance minister on this matter. All of them have assured us this is a good move and Sebi is right. So, it’s not just the private sector but the public sector too, that has to comply with the rules. Two of them have already complied.