MF industry not over-regulated

A regulator’s prime responsibility is to come up with guidelines that will ensure an orderly development of the market and that risks associated with the industry do not become systemic risks.

The journey of Securities and Exchange Board of India (Sebi) with regard to the regulation of the Indian financial markets started in 1996, with a basic regulatory framework. Most industry players had to interpret and apply the regulations according to the situation. Since 1996, with the introduction of various capital market products like derivatives, swaps, etc, regulations have had to keep pace with these developments.

The growth of the financial services industry has attracted retail investors in greater numbers, many of whom invest their life savings in the markets or are saving for their future, retirement, etc. Financial markets are dynamic and it is difficult for anyone to predict the outcome. Hence the need for greater investor awareness and information. In addition, financial literacy among investors about mutual funds is quite low. The regulator has rightly built safeguards, ensuring greater transparency and disclosures from industry players, so that the investor has enough awareness to make an informed decision.

The primary objective of regulation is to encourage greater retail participation in the capital markets, and channelise household savings via mutual funds. Several regulatory measures have been consistently introduced to protect the interests of the small investor. Implementation of Prevention of Money Laundering (PMLA) Rules, Anti Money Laundering (AML) and Combating Financing of Terrorism (CFT), Know Your Customer (KYC), Know Your Distributor (KYD)were some of the key regulations that SEBI has implemented.

Part of the problem in the 2008 financial crisis was also due to the fact that hedge funds were not regulated. I do not believe mutual fund industry is over-regulated. It is a very young industry, with tremendous potential for growth. As the markets mature, so will the participants and regulations. Over time, this will stabilise and balance out. In a growing economy and market, regulations move like a pendulum and at times it may seem that Sebi is trying to ‘micro-manage’ the industry. However, it is doing a commendable job in ensuring that regulations keep pace with the dynamic financial markets. What is required is constructive dialogue between industry stakeholders and the regulator, so that there is ease of implementation of regulations.

The author is CEO, Reliance Capital Asset Management. The views expressed are his own.