Sebi won't interfere with IPO valuations, says chairman Ajay Tyagi

'Adequate time has already been given for separation of the CMD post. We urge them (companies) to comply before the deadline', said Tyagi

Ajay Tyagi’s four-year-and-nine-month stint as chairman of market watchdog Securities and Exchange Board of India (Sebi) has been largely successful. He helped the market ecosystem ride through the pandemic, oversaw record IPO mobilisation, brought technology advancement for crackdown on insider trading, and introduced a new risk-mitigation framework to protect millions of new investors entering the markets. In an exclusive interview with Samie Modak, Tyagi shares his views on various issues concerning the markets. Edited excerpts:

There are concerns around pricing of start-up IPOs. Does Sebi want to get in?

Sebi as regulator doesn't — and should not — get into valuations. Worldwide, IPOs (initial public offerings) follow a disclosure-based regime. As far as growth companies are concerned, they are loss-making but investors invest considering their growth potential. Start-up IPOs have only started happening recently. It is a new type of investment and investors are getting used to it. Earlier, many of these tech companies were eyeing overseas listings. Getting listed here provides an opportunity for domestic investors to participate. As we go ahead, there will be learnings. We issued a consultation paper recently in this regard.

The discussion paper signals that Sebi has some concerns about anchor lock-in, secondary sales, and the use of fresh proceeds?

As I said earlier, based on experience gained and feedback received from various stakeholders, there are bound to be learnings going forward. The challenge before Sebi is to find the right balance in regulatory architecture. It (Sebi) has to make sure that investor interests are protected and at the same time, there isn’t over-regulation so that companies don't get discouraged to list here.

We have a record Rs 1-trillion mop-up via IPOs this year. How has Sebi managed to handle such a load of vetting and clearing IPO documents?

Sebi staff has managed the work well. In fact, despite the rise in filings this year, the average number of days taken for issuance of the letter of observations has come down. For a company that is not right for the markets, there are sufficient barriers to entry. Sebi treats such challenges as an opportunity to further improve the system.

What is your view on regulating cryptocurrencies?

It is for the government to take a view. We have given our views to the government. What our views are is between us and the government.

There are mutual fund ETFs that give an indirect exposure to the crypto world. Is Sebi comfortable with that?

The right way would be to wait for government policy on the matter.

Market infrastructure institutions (MIIs) have talked about the benefits of blockchain technology. What’s the progress on that?
 

MIIs have taken initiatives at this front. As an example, depository firms NSDL and CDSL are developing a project on blockchain and distributed ledger technology (DLT) in the area of debenture issuance. The system will be used for recording and monitoring of security created and monitoring of covenants of non-convertible securities. There is a lot of potential usage of blockchain tech in the securities market, including for stock exchanges, depositories, and clearing corporations. We are encouraging them to use this technology.

Sebi has given a long runway for T+1 implementation. Is it due to FPI (foreign portfolio investor) pressure?

There is no pressure. But you should remember that we are the first major jurisdiction in the world to shift to T+1. Even the US is still in the discussion stage. We want an implementation that is smooth and acceptable to everyone. T+1 implementation would start in a phased manner, beginning February 2022. We have taken everyone on board. T+1 settlement is in everyone’s interest.

Are there any worries around FPI flows at the moment?

 So far this financial year, net FPI flows in the secondary market are negative. Despite that, the Indian market continues to be resilient because of the relatively larger participation of individual and domestic institutional investors (DIIs). As of now, there doesn’t seem to be any cause of worry on account of movements in FPI investment in equities.

The deadline for separation of the chairman and MD post (of companies) is approaching. Will there be another extension?

 Regulations on the subject were firmed up after considering an expert committee report and after due consultations and deliberations. Adequate time has already been given to the companies covered under this regulation. We urge them to comply before the deadline.

The mutual fund (MF) industry says Sebi has done excessive regulatory tightening?

 Mutual funds are a very good story. We want to nurture it. Among other things, they have helped stabilise our market by acting as a counterbalance to foreign funds. The steps that we have taken will help the industry over the medium to long term. Today, the industry handles Rs 37 trillion of assets. Around 40 per cent are into open-ended debt funds where unit-holders could seek redemption (any time). However, the securities they are holding include corporate bonds. The market for corporate bonds in India has a problem of illiquidity. The MF business is all about trust and faith. To feel that any regulation aimed at investor protection is bad for the industry is not correct.

Sebi has also made the broking industry pop a lot of bitter pills...

 Some of the regulatory changes that we have done are in the areas of share pledging, margin norms, and segregation of client collateral. All the new rules are logical. I don’t see how anyone can complain. They have made the system more robust; chances of people getting cheated have reduced and volumes have improved.

Would you like to give us an update on the NSE’s IPO?

I will not comment on case-specific issues.

There is some criticism over how Sebi uses social media to establish insider trading…

We have started using a lot of technological tools, such as big data, artificial intelligence, and machine learning. Our ambition is to use them more. As the market develops, unethical people will use all types of different tricks, and as regulators, we have to stay one step ahead. When it comes to insider trading, the critical part is establishing a link between the tipper and the tippee. You come across cases where someone, who has never traded in the past, suddenly gets lucky and starts making a lot of money. Our surveillance department analyses such behaviours. We then try to find links. For that, we may also make use of social media platforms. I think there is nothing wrong with analysing or depending on that. In insider trading cases, it will never be that someone will give in writing to the other party that this is the information, let’s use it.

Is this a big menace?

I don't know to what extent but let me say among all the violations, we treat insider trading as the most serious one. It goes against the very basics of trust in the securities market. With all these millions of new investors entering the market, this trust of investors needs to be maintained.

Are there concerns around opaque public holdings in some listed firms?

Any shareholder in a listed entity can be classified as a public shareholder if such a shareholder is not related to promoters. The minimum public shareholding norms are introduced to ensure liquidity and better price discovery. Their compliance is monitored by Sebi and exchanges on a continuous basis. Any listed entity wrongly classifying shareholders would be in violation of the applicable law and would attract appropriate legal action.

Sebi, over the years, has gained more teeth. Are they adequate or have you sought more?

Broadly speaking, the powers we have are adequate to carry out our enforcement function. But we have made some suggestions to the government. We are also looking forward to the formulation of the Unified Security Code, which was announced in the Budget.

Is there scope for Sebi to move away from a rule-based approach and towards a principle-based approach?

In a mature market, everybody would prefer a principle-based approach. This debate keeps coming back all the time as it is also linked with ease of doing business. But we have seen cases where people have tried to misuse or game the system by saying where is it mentioned in the rulebook. That is something any regulator will not want. We favour a principle-based approach but you need the maturity and ethics to follow it. But often that doesn't happen and then we are forced to make rules. Rulemaking is a cumbersome task.

How did Sebi manage to function during the pandemic?

Immediately following the declaration of the pandemic in March 2020, the markets reacted adversely. The lower circuit was triggered on two occasions within a span of just two weeks -- an occurrence which had never happened in the past. During those times, various suggestions were received from different quarters, including on suspension of trading and shortening of market hours. However, it was decided to keep the markets open with normal timings, keeping in mind likely economic hardships that could have been faced by investors, including difficulty in MF redemptions. To stabilise the market and enable smooth functioning, Sebi took several measures. 

A lot of first-time investors have not witnessed a major correction. What is your message to them?

A large number of individual investors have been drawn towards the equity market due to low interest rates, excess liquidity, and lack of alternative investment opportunities. As far as the risk management systems in the securities market are concerned, they are robust. In that sense, we have given a lot of comfort and convenience to investors. But at the end of the day, all the new investors have to realise that any investment is prone to risk. The markets haven’t corrected (sharply), that doesn’t mean that they will only go up and up.

Are the vacancies at the SAT and Sebi hampering your functioning?

The government has already initiated the process. We wish that the vacancies are filled as quickly as possible. There is a lot of activity and work to do in the capital markets right now.

Why hasn’t the concept of regulatory sandbox taken off?
 

If it has to really take off, we will need the legal authority to provide for certain relaxations. Regulatory sandbox means that you are giving certain relaxations for experimentation. For this, the Sebi Act needs to be amended. The regulation can’t provide for relaxations if the Act doesn’t allow it. We have taken this up with the government.

Why did Sebi clamp down on brokers dealing in digital gold and what is the way forward?

Brokers are regulated under the SCRA and the SEBI Act. They are not allowed to mix their activities with other activities that are not regulated. For gold, we have come out with the gold exchange framework. Once the proposed electronic gold receipts (EGR) start to trade, brokers would be allowed to deal in them. Directly dealing with digital gold schemes, which are not regulated by us, isn’t allowed.