Guardrails in place to check fraud: Sebi Chairman Tuhin Kanta Pandey

Independent directors, boards, auditors must step up to rein in greed: Pandey

Corporate misgovernance episodes like the fraud unravelled at Gensol Engineering, or front running by a mutual fund manager, are not systemic issues that require a regulatory reboot but instances of greed and egregious conduct that warrant more pro-active action from independent directors, boards and auditors to rein them in, the chief of India’s stock market watchdog asserted on Wednesday.

 

“The governance standards and guardrails are in place. The board and the independent directors have to function. Material things have to be approved by the shareholder, auditors are there… if the guardrails fail because of certain fraud or greed, which is uncontained by several stakeholders, the violation should be punished… But it is not to say that, for the egregious fault of a few, we should make things more stringent,” Securities and Exchange Board of India (Sebi) chairman Tuhin Kanta Pandey told Business Standard in an interview.

 

Obviously, the regulator cannot be everywhere. We can't practically sit in every board room and run it… and that's going to be ineffective,” he noted, underlining that Sebi can, and does, act promptly to punish bad actors it learns of, either from its own surveillance or based on information it receives. In cases where public investors are likely to get hit, the regulator is aiming to take timely and exemplary action to spur a chilling effect on other potential miscreants.   

 

Normally, we would not do an interim order unless and until we find that there is a serious thing, and if there is a further delay, investors would have a lot of difficulty. So we have to intervene even at an interim stage, although we use it rarely,” explained Pandey.

 

On further measures to curb futures and options (F&O) trading volumes, the Sebi chairman said the feedback from market participants was being weighed and analysed. But, he underlined the need to curb excessive speculation or “casino-type trading activity” that lead to people, particularly the young, losing money.

 

We will work out the most plausible solution to the issue, but we must have a systemic improvement than what it has been obtaining in the past. F&Os are important for liquidity, price discovery, hedging, but options are different from futures, and casino-type trading is not what they are meant for,” Pandey said.  

 

The Sebi chief told Business Standard he will be in the United States next week, where he will meet top foreign portfolio investors (FPIs) and understand the barriers and challenges they face while investing in India. Several facilitation measures have already been taken to ease FPIs’ entry into the market and their registration timelines have been slashed to a month, he pointed out.

 

In its deregulation drive, each of the market regulator’s departments are holding consultations with regulated entities like mutual funds, brokers and other market participants, to remove unnecessary compliances and lower the cost of doing business. However, this won’t be "change for the sake of change", Pandey emphasised.

 

For mutual funds, the Sebi chief felt the need to remove regulations seen as ‘micro-management’ of operations. For example, fund managers have signalled some wariness about purchasing stocks amid declines when FPIs are selling, owing to a rule that stipulates purchase prices must be within a narrow band of the average traded price. This could trigger sharper declines in some stock prices when FPIs exit, as countervailing forces of domestic investors weaken.

 

“I think these are precisely the things we should sit together and sort out…  whether such kind of micro management is needed at all. It could also make people completely risk-averse. Trust can be created in a variety of ways. So how much of documentation we need to do, how much of compliance we need to do…,” Pandey said, noting that the markets are, after all, about risk-taking as per one’s appetite for risk, and not a risk-free mechanism.  

 

“I think broadly, you will find that each division and department of Sebi will engage with the industry and try to find out (how to ease regulations). The idea is that, if we can achieve an objective with less compliance burden, then why not? That's smarter regulation,” Pandey summed up.