The Securities & Exchange Board of India (Sebi) has taken several initiatives to help the retail investor partake in India?s capital markets. It speeded up rights issues and IPOs, increased penalties for promoters who let warrants lapse and removed the entry load on mutual fund schemes. As the New Year has set in, Sebi chairman Chandrashekhar Bhaskar Bhave, the key driver of these changes, discussed their rationale and the road ahead, with Subhomoy Bhattacharjee and Shobhana Subramanian. Excerpts:

The issue of longer trading hours has become a contentious one.

There was a time when Sebi had prescribed the market timings between 10 am and 3.30pm. We received suggestions that there should be some flexibility on timings. We put out a discussion paper and there was opposition to prescribing long hours. So we decided in October that since the currency derivatives market is open between 9 and 5, the stock market too could trade for longer hours if the market so wished. Now the exchanges have decided they want to start trading at 9 am but apparently many brokers are not too keen. When there is a change in the system, some bit of chaos follows but things should settle down. We don?t see any disadvantage to investors here.

Why is the IPO scam taking time to get resolved?

Unfortunately, in the first two years, Sebi spent its time in the ill-advised and misguided attempt to recover money from those who had made no illegal gains. Sebi tried to recover money from the depositories and depository participants (DPs) and in the ensuing legal tangle, SAT overruled Sebi. A lot of noise was made but no disgorgement (of the ill gotten gains) happened. We are now getting after the key operators but that does take time. Still, with our efforts in the last 20 months, we have recovered Rs 26 crore, of these Rs 22 crore out of consent and Rs 4 crore out of contested cases. So the good part is our attempt to recover is succeeding. We will start identifying the people who need to be compensated because we have money in the kitty. The Wadhwa committee has laid down the principles for this.

Sebi has upped the penalty on warrants not subscribed to by promoters, to 25% from 10 , but don?t you think promoters should also be barred from issuing warrants for a certain length of time if they let warrants lapse?

It is not so much penalty but upfront money that is forfeited if warrants are not exercised. We have received various suggestions on the issue and some have gone to the extent of saying that warrants in favour of promoters should be banned altogether. We typically review these suggestions and then take action; the first level of suggestion was to increase the upfront margin. The views are under constant consideration but there are no immediate plans to change the norms.

Turning to the spate of public issues from PSUs, expected soon, could the auction method perhaps be used for IPOs, just as it is used for the follow-on issues, instead of the book-building method?

What the auction method does is that it provides a floor price above which institutions can bid. So, that doesn?t address the issue of whether the baseline price that is fixed is good enough or not. That?s a judgment call the issuer must make. However, the auction method for follow on issues is a qualitative improvement over the book-building method. Because though an issuer may feel to attract retail investors he needs to keep the base price at a certain level, but if some institutions are interested in a big chunk, and are prepared to pay for that, then he (the issuer) will be able to realise that price. What many institutions say is that in the proportionate allotment method they get so little it?s not worth their while to participate. If the institution sees value in it, it can bid higher and get a chunk.

Many of the PSUs that are now listing, will have a float of 10% whereas we?re talking of a minimum float of 25%.

The subject of 25% minimum float proposal is with the government because this needs changes to the Securities Contract Regulation Rules. Those have to be notified by the government. The government had put out a paper on the issue of moving to a 25% float and they will finalise this. But this too will have to be done in phases because we can?t load the market all of a sudden with so much paper.

In the past when large disinvestments, like ONGC, happened, there were complaints by investors, some on refunds. Now we?re about to see issuances in multiples of those amounts so do we need to prepare for this?

What happened last time was that there was a bunching of issues and most of the work went to one registrar and that entity found it difficult to handle the work. Hopefully, the same problems will not arise and the work will be distributed amongst more registrars, but we really have no say in the matter. We have made some system changes. From January, we will be introducing the ASBA mechanism for institutions, corporates and HNIs too. That will, to our mind, bring about a fundamental change in the way the public issues are handled because it will, to a large extent, eliminate the requirement of huge paper processing capacity at the registrar?s end. We?re hoping for substantial progress in this area in the coming year and ultimately get to our target of listing within seven days of the closure of an issue. Our target is the end of 2010.

Is it time to perhaps do away with the quota system of allotment for IPOs?

It has actually served us well and I don?t see any reason why we should bid goodbye to it. In countries where the discretionary allotment by the book runner or the lead manager is allowed, there have been difficulties so we don?t want to jettison what is working well.

When do you see a robust stock lending and borrowing mechanism in place?

Again, this is a market issue we don?t know whether the design of the system is wrong or there?s no demand in the market. We have allowed the exchanges the liberty to change the rules provided there are no systemic risk issues. Nothing has worked so far.

The retail response to many of the recent IPOs has been rather subdued. Also, some of recent listings have been disappointing there have been issues where the price has fallen by over 10% post listing. Is this cause for concern?

The pricing of issues has been left to market forces now for the last 17 years since 1992. These are signals from the market that issuers have to take note of, since pricing is entirely in their hands and the hands of their advisors. So while the issuer may want to maximise the price at which it issues securities, it also has to take into account the fact that if investors are disillusioned, the issuer may not be able to go back to them again. There is no role here for the regulator. The issuers have to judge whether they?re leaving enough on the table for investors. It?s a balancing act between what price the market can fetch and what the promoter wants and the balance can go wrong in some cases, so the issuers must know what the consequences of that are.

How do you view the huge interest in the fund business given that of the current crop of 37 funds, more than half are in the red?

I think this indicates that everybody sees the growth potential of this market but they also realise that the seeding time required is a long one. So you need to have the patience to hang in there, this market will not reward you over the short term.

Sebi has also some key changes in the way the mutual funds industry will move ahead.

We had explained in a discussion paper that the (mutual fund) distributor performs two functions because he is the agent of the scheme and he?s also advising the investor. So the entity that is being serviced should decide how much it wants to pay. We evolved a system by which the mutual fund can pay for the distribution function and investors should be allowed to pay what they want for advice. The argument that people won?t pay at all for any services appears specious to me, after all aren?t they paying brokerage?

Of course, now distributors have to prove that their advice is worth it, which is not a bad thing for the market. I find this argument strange that if a distributor is paid less then the investor will not subscribe to a mutual fund scheme. That means the investor is not investing because he?s convinced about the value of that proposition but because some intermediary is being paid more!

What?s the idea behind allowing mutual funds to be traded on the exchanges?

Allowing brokerages to route orders for mutual funds is an effort to increase the reach of mutual funds. We believed the reach wasn?t good enough and the brokerage community has tremendous reach so we thought why not leverage that. Interestingly, it?s the debt schemes in which the corporates are big investors, the equity schemes are subscribed to, by retail investors. But they?re not there in sufficient numbers. Also, the stock exchange facility will work well for those who already have a demat account but there will be those who don?t have an account. So we need to create a platform for these investors as well. Apprehensions that investors would tend to trade too often now, aren?t justified. Even earlier, investors could always withdraw from schemes. The idea is to provide diversified access.

How long do you think it could be before FIIs can register directly with brokerages and before a Sebi registration could be dispensed with ?

As long as we have restrictions on capital account convertibility and we say that only a certain class of entities are allowed into the market, we need to have a regulating agency. If tomorrow foreign individuals are allowed to invest here freely, then a registration with Sebi would make no sense. All we would need to do is a KYC (Know Your Client).