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The Securities and Exchange Board of India which has completed 25 years of operations has moved a long way from being a regulator of markets which relied on the out-cry system to one which is grappling with co-location and algorithmic trading technologies with the potential to wipe out billions of dollars in seconds.
UK Sinha, the chairman of the Securities and Exchange Board of India, spoke to Nishant Vasudevan and Sachin P. Mamaptta about the challenges posed by algos, the difficulties in supervising collective investment schemes and how Sebi will deal with companies who don’t meet the deadline for meeting public shareholding norms. Edited Excerpts:
What steps will Sebi be taking to address the companies who haven’t met the minimum shareholding norms?
Those who choose not to follow government and Sebi guidelines for increasing the public float within the given time-frame, they are taking a conscious call to face the music. They have no excuse. Enough times has been given. Sebi has been talking about it for at least the last one year. Endlessly we have been talking about it. Not just talking in the media, we have called the individual companies. Some of the companies raised some difficulties. So we have enhanced the avenues to increase the public float.
In spite of that if they choose not to avail of the facilities, then they will face the consequences of the Sebi Act and SCRA (Securities Contracts Regulation Act) and things like that.
How will you act without affecting minority shareholders?
Sebi will be guided by two primary considerations. This is not the fault of the minority shareholders. He should not suffer. Sebi will be conscious of the fact that those who are responsible for this, they should suffer rather than the minority shareholders.
The second is that we will make a distinction between intent and action. Between mens rea and lack of mens rea. If some company has made an effort, and he has for example moved from 5% to 15% or 20%, he may still be short of 25%. But he has made an effort. Consider another company which has made no effort at all. Then the two will be treated differently.
So we will give some consideration to those who have actually made an honest attempt. Even though they are still noncompliant technically, but if they have made an attempt, they have made some progress; then we will give some consideration. These are the two broad principles we are going to follow.
Sebi’s recent paper on co-location has asked that such orders follow a queue system. Some argue that this defeats the purpose of the lightning-fast trading at which co-location aims. What are Sebi’s thoughts behind the same?
If you are the one who has spent time, money and resources in developing that co-location algo, you will be disappointed with Sebi. But our challenge is and always remains how to deal with contradictory interests. There are instances globally that in case of a crises situation; algorithmic trading, instead of containing it, at times speeds up the market collapse. So it is Sebi’s job to ensure that this does not happen here.
It is a very dynamic area. Whatever we do, there will be young boys and girls in their twenties who are so smart that they will try to outsmart us. So this is a challenge.
Would it be fair to say that the markets Sebi is in favour of slowing down the market’s need for speed?
What we want to ensure is that we don’t to curb innovation. But we would like to manage the risk. This will acquire several dimensions as we apply this principle to various situations.
What are the recommendations that Sebi has made to the government for strengthening Sebi and for better supervision of Collective investment schemes?
What Sebi has recommended to the government is have one 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, under the Competition Commission of India Act, they have been given power to recover. So we have asked for similar powers. People have refused to pay more than Rs.100-150 crores of penalties we that have imposed…we think we have done a great job but the money is not coming. That fellow is merrily avoiding Sebi.
Secondly we have asked for call data records to be made available to us. If two people are having a phone conversation, I don’t want to intercept and hear what they are talking about, but at least the call data record is given to me. Globally it is available.
Thirdly we have said that we should have power to demand production of documents and materials, which we do not have today.
Is lack of co-ordination or co-operation amongst regulators a problem in dealing with CIS?
This is a problem. I concede it is a problem. I would only like to qualify that so far as the financial sector regulators of the central government are concerned there a mechanism called the FSDC(Financial Stability and Development Council). Any matter which comes before that forum, there is now a legal mechanism to deal with it. The problem comes when the subject-matter goes beyond the financial sector regulators of the central government or also involves the state governments.
Then the mechanism is very weak. Wherever we have to involve the state government and the central government; within the central government we have to involve regulators other than financial sector regulators, then there is a problem.
