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"Need Pension Funds"

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He wears the suit of high expectations lightly (and his charcoal grey business suit well). U.K. Sinha, chairman of Securities and Exchange Board  of India (Sebi), has held that position for just over 15 months — a period during which things haven't gone too well for Indian capital markets due to the global economic slowdown and a looming crisis in Europe. Assets under management in mutual funds have fallen, initial public offerings are trading well below listing prices, and many stockbroking firms are on the verge of closure. Shouldn't the regulator be showing leadership in these times? BW's Srikanth Srinivas and Mahesh Nayak met Sinha to talk about this and other issues. Excerpts:

The preamble to the Sebi Act says that Sebi's responsibility is not just to regulate the market, but also to help develop it. What has Sebi done on this front?

If you look at the stage of growth of our economy and major legal and constitutional provisions, I think we have done a good job. Look at retail participation: the first impression is that it should have been much higher. But historically, we have grown; a survey conducted by NCAER shows that in 2001, 6-6.5 per cent of households held equities; in 2011, that number went up to 14.5 per cent. Sure, we can increase this even further. And one area in which progress can change things is that of pension reforms.

 Globally, the market has developed on the strength of voluntary, not mandatory, pension money coming in. But in India, unfortunately, pension fund (PF) monies can only be invested mostly in fixed income and that too in high-quality fixed income securities at that – ie, government bonds. Workers do not have a choice to decide their individual retirement plans. I do not mind if a PF trustee decides where that money should go, based on the priorities between safety and risk taking ability. My problem is that the focus and approach is guided by the comfort that there is a government to back it up.

The Employees Provident Fund Office (EPFO), for example, puts most of its money into Government Bonds and that too in special bonds issued by the government of India, which carry a higher rate of interest. Besides, we have to be sure that transparent accounting practices exist whereby the annual interest paid to the workers, is actually based on earnings and not on the basis of money left over in the suspense account of workers who have migrated from one company to another?

On the other hand, the Pension Fund Regulation and Development Authority (PFRDA) allows contributors to the New Pension Scheme various options: you can put 100 of your money in government bonds, or government plus corporate bonds and add equities too. You can have a mix of 10 per cent, 20 per cent or 50 per cent or other combinations. That fund now has a track record of 4 years, and you can compare the returns of those schemes to the standard PF return. You will see what we are missing. 


Many market participants believe that in the balance between market development and investor protection, the bias is on the latter. What about a greater range of products, for instance?

Investor protection has to be a paramount consideration. The first thing in developing the market is to generate a trust in the products that are brought out. Our first priority: is to create that environment of trust, by building in an infrastructure for investor protection that is strong and robust At Sebi, we are sincerely trying for this, and so far, we have made a good job of it.

If you talk to any intermediary, say a mutual fund, you will hear a refrain that Sebi is asking too many questions, putting too many restrictions. But there should be rules on how they can invest, what sort of concentration in a particular company or group of companies they can hold and how they can trade or sell those products. Even the dealing room conversation is taped and it has to be available to Sebi inspectors. Front running is frowned upon. We have recently put similar requirements for broking firms. They also have to have those things. For example, have to have a compliance officer.

To an individual who may be a buyer or a seller in the market we give the comfort that here are the rules of the game, and their implementation is being supervised. That trust we have to provide. Then we can go ahead and have more products. Our task also is to see that the products are simple, suitable to the need of investors and are not mis-sold. We have to make them available not in 1 or 2 or 10 cities but across the country. There are broker terminals in 9,000 places. If you ask can we do better, yes we could have done better. We are trying. But I would not like you to have an impression that Sebi has not done enough on market development. 

2 March 1952

Sebi chairman,
since February 2011

Chairman and managing director,
UTI Mutual Fund; IAS officer

Achievements at Sebi
Revamped consent orders; streamlined ‘Know Your Client' norms; introduced new rules for alternative investment funds; introduced call auction to curb listing day price volatility; introduced new norms for institutional placement programme to help promoters reduce their stake through private placement

Why is it that the retail investor population has not grown then, or has even shrunk, as some market participants appear to suggest?

There are a large number of factors; one is that which I referred to earlier: pension funds, which are actually retail investor savings, which is not coming to the market. Let us look at the rest of the world. In China, pension savings are coming to market; in India, at the policy-making level – and amongst the trustees – the suspicion of the market as a bad place to be runs high. That is a major mindset issue.

There are directives from the Ministry of Finance that 15 per cent of the corpus can be invested in the equity market. But PF trustees have not followed them. Can you imagine what a difference it would make if 15 per cent of the corpus of about Rs 2 lakh crore is invested? Even the annual accretion to the EPFO is substantial, about Rs 25,000 crore. Imagine Rs 4,000 crore each year coming to market, the impact it can have and how many more people will be in the market.

I have a complaint against the members of your profession who have chosen to gloss over this. On a 5- to 10-year basis – the long term – global equity markets have returned around 3-4 per cent more than fixed income investments. In India, that premium is much more. Over the last two decades – incidentally, that is how long Sebi has been around – the Sensex has returned 13.5-13.75 per cent year on year, a compounded return. In the best period for fixed income, returns were around 11 per cent; over the long term, it has averaged around 8 per cent.

This is a huge differential and if you use the principal of compounding, the saving that the worker gets for his retirement over a 30-year period with a 4 to 5 per cent differential can be enormous. Unfortunately, this point is not being appreciated anywhere. Number two, almost all the countries in the world including China are investing a portion of their money into equities and we are not doing that. Number three, Indian market's advantage or the growth of the Indian market that is being utilised by workers money from across the world, but Indian workers are deprived. Now what type of approach is this? It is not a small point but a major point.

Sebi can facilitate and create a secure environment and demonstrate its effectiveness through supervision. One area we are lacking, I have to admit, is investor education and awareness. That has been a weakness and we will overcome the weakness in the next 4-6 months. We will have a sustained program. 

Let us talk about that part of the industry you came from (mutual funds) that seems to be having a hard time. Your take on why they seem to be doing badly?

Large mutual fund equity schemes have done better than the benchmark indices. They have given a return over a long term, which is perhaps 2 to 3 per cent more than the comparable index. So, active fund management has helped. It will be wrong to say performance has not been good. But the impression on performance gets formed because we have a large number of schemes; most of them are of small AUMs or sectorally focused. But if you look at the total equity AUM, a predominant portion of that money has been managed very well. Sebi has been encouraging AMCs over the last two years to merge their schemes so that you have fewer, simpler but large schemes for investors.

Secondly, the feeling in Sebi is that schemes may not necessarily reflect investor needs, but are driven by sales and marketing; mutual funds are constantly inventing a new theme, because they can call it a New Fund Offer and could compensate the distributor more. That has been addressed by capping distribution fees. I think an ordinary retail investor who can invest Rs 50,000 or Rs 1 lakh needs simple products; he does not need some very complex products, such as those where derivative bets are predominant strategy.

For example, two mutual funds – UTI and Fidelity – have retirement plans, and you will be surprised that those schemes are doing well, performance is good, but their size is small. In 2010 and 2011, Indian equity schemes had a net outflow of around Rs 13,000 crore. In 2011 and 2012, they have a net inflow of Rs 600 crore. Not a great number, but if you look and compare with the past there has been a positive development.

The worry is that the shrinkage is in smaller towns and closure or reduction of folios last year. The business of independent financial advisors (IFAs) has been impacted. Banks and large national distributors are getting more and more dominant at their cost. Recently, about one month ago, we started consultations with all stakeholders and we plan to take up some new measures to help augment the MF reach. But we also have to keep in mind that the current market trend is also guiding people behaviour.

A TALL ORDER: Sinha says Sebi can only facilitate and create a secure environment for investors (BW Pic Subhabrata Das)

You have talked at length about what is essentially risk management. What else have you been focusing on?

Know your customer (KYC) norms are very important, it is an international obligation. When I came here, I found that for various activities within Sebi's areas of operation there were different KYC requirements. If you wanted to open mutual fund account, you have to give a separate set of documents; if you have to go to a broker, you have to give a separate set of documents, for a depository participant a separate third set of documents, and so on. That does not make sense.

So we conceptualised a KYC Registration Agency (KRA). You can get logged on to the KRA, and whomever you deal with can access the records to see if you are compliant or not. The number in the KRA registry is quite substantial now, and I think by July or August, this number will exceed 5 million. We started in the beginning of the year and in the four-five months, the number has already crossed 2 million.

Besides, we are working on communication. Investor education and communication are the areas where I must admit we have to do a lot. In the latter half of this year, you will see that a well-planned and coordinated activity is going to take off, maybe in the next 3-4 months.

Last but not least, we have also set-up a mechanism for generating computerised investor grievance redressals. More than two-thirds of complaints are getting redressed within 30 days. Each complaint has one owner inside Sebi, instead of being a post office of sorts, where once the complaint is forwarded to the appropriate person, it was presumed to have been redressed. Ownership stays until it is actually redressed. These things may not generate any major news item or headlines. But our feeling is that these are buildings blocks for generating investor confidence.

In recent months, we have seen reports about how regulators of financial services have been at loggerheads. Do differences of opinion between regulators hamper capital market development?

For the regulatory environment in the financial market, there is no one model: it varies from country to country. In India, we follow activity-based regulation. You may be a bank, but if you are going to do broking or depository work, you will have to get a license from Sebi. If you have floated an insurance firm, you will have to take license from IRDA.

Having multiple regulators requires an effective coordination mechanism. The Financial Stability and Development Council is that mechanism. Since I have been participating in it, and when I compare it to with the past, I find that everybody is working in a co-operative and looking in more responsible manner, at the larger picture rather than sectoral perspective. I think issues are getting redressed in the forum, much better than that in the past.

But there are areas even today wherein clarity is lacking. Take collective investment schemes. People are raising money, to you they will say that they are an NBFC, to me they will say they are a chit fund, to somebody else they will claim to be a Sebi regulated entity. The fact is they are raising money from large number of citizens, but somebody has to see how is the money going to be returned and the interest of the investors safeguarded. There are multiple agencies in this example which are in the picture.

It requires, in my opinion, a fresh legislation. The dimension of the problem may not be too big at this stage, but it is not insignificant either. Yes, regulatory coordination has improved over time; but there are still areas where legislative intervention will perhaps be required.

(This story was published in Businessworld Issue Dated 11-06-2012)