Those not following public float norms will face music: U K Sinha

Interview with Chairman, Sebi

As it completes 25 years of operations, the Securities and Exchange Board of India (Sebi) has come a long way - from being the regulator of a market relying on an outcry system to one grappling with co-location and algorithmic trading technologies that can wipe out billions of dollars in seconds. Chairman U K Sinha, in an interview with Nishant Vasudevan and Sachin P Mampatta, talks about the challenges posed by algos, the difficulties in supervising collective investment schemes and how Sebi would deal with companies that don't meet the deadline for adhering to public shareholding norms. Edited excerpts:

What steps would Sebi take towards companies that don't meet the minimum public shareholding norms?

Those who choose not to follow the government's as well as Sebi's guidelines to increase the public float within the given time-frame are taking a conscious call to face the music. They have no excuse; enough time has been given. Sebi has been talking about it for at least one year---not just in the media; we have called individual companies, too. Some companies raised a few difficulties. So, we have enhanced the avenues to increase the public float. Despite that, if they choose not to avail of the facilities, they will face the consequences of the Sebi Act, SCRA (Securities Contracts Regulation Act), etc.

How would you act without affecting minority shareholders?

Sebi would be guided by two primary considerations. First, this is not the fault of minority shareholders; they should not suffer. Sebi will be conscious of the fact that those who are responsible for this should suffer, rather than minority shareholders.

Second, we will make a distinction between intent and action - between mens rea and the lack of mens rea. If some company has made an effort and has, for example, moved from five per cent to 15 per cent or 20 per cent, it might still be short of the 25 per cent norm. However, it has made an effort. Consider another company which makes no effort at all. The two would be treated differently.

We will give some consideration to those who make an honest attempt. Even if they are technically non-compliant, if they have made an attempt and some progress, we will give some consideration. These are the two broad principles we would follow.

Sebi's recent paper on co-location had said such orders should follow a queue system. Some argue this defeats the purpose of the lightning-fast trading co-location aims to achieve. What is Sebi's view?
If you have spent time, money and resources in developing that co-location algo, you would be disappointed with Sebi. But our challenge is, and always remains, dealing with contradictory interests. Globally, there have been instances when, during a crisis situation, algorithmic trading, instead of containing it, hastened market collapse. So, it is Sebi's job to ensure this does not happen here.

It is a very dynamic area. Irrespective of what we do, there will be young boys and girls - in their twenties -smart enough to try to outsmart us. So, this is a challenge.

Would it be fair to say Sebi favours slowing the market's need for speed?
We want to ensure we don't curb innovation, but we would like to manage the risk. As we apply this principle to various situations, it would acquire several dimensions.

What steps have Sebi recommended to the government to strengthen itself and to better supervise collective investment schemes?
Sebi has recommended a single regulator for all deposit-taking activities, under whatever name those deposits are being taken. The multiplicity of agencies is adding to the confusion and people are able to take advantage of that. Under the Income Tax Act and the Competition Commission of India Act, they have been given powers to recover. So, we have asked for similar powers. People have refused to pay more than Rs 100-150 crore of the penalties we have imposed…we think we have done a great job, but the money is not coming. Some are merrily avoiding Sebi. Second, we have asked for call data records to be made available to us. If two people are conversing on the phone, I don't want to intercept and hear what they are talking about. However, at least the call data record should be given to me; globally, it is available. Third, we have said we should have the power to demand documents and material be produced.

Is the lack of coordination and cooperation among regulators a problem in dealing with collective investment schemes?
I concede it is a problem. I would only like to add as far as the financial sector regulators of the central government are concerned, there is a mechanism called FSDC (Financial Stability and Development Council). There is a legal mechanism to deal with any matter that comes before that forum. The problem is when the matter goes beyond the financial sector regulators of the central government, or it also involves state governments. Then, the mechanism is very weak. Whenever we have to involve state governments and the Centre or regulators other than financial sector regulators, there is a problem.