In the second part of an interview with Ashish Rukhaiyar, Sebi chairman UK Sinha discusses issues as varied as investor activism and initiatives in the secondary market to the importance of investor education. Excerpts:

Investor activism seems to have increased. We find that a few investor advisory firms becoming quite active. How do you view this?

I am happy that some of the investor advisory firms are really doing a good job. They are asking questions to the corporates on behalf of the investors. This is a good trend. I would also like to add the initiative Sebi has taken, in helping investors to participate in the voting for certain decisions. We have introduced e-voting facility for investors. The Companies Act and Rules provide for listed companies to conduct certain business only by way of postal ballot, instead of transacting it in their general meetings. Sebi regulations also require listed companies to pass certain resolutions through postal ballot. The postal ballot is defined as voting by shareholders by postal or electronic mode instead of voting personally in a general meeting of the company. The Union finance minister had in his Budget speech for 2012, inter alia, announced to make e-voting mandatory initially for top listed companies. Sebi has implemented this decision.

E-voting will help larger participation of shareholders in the decision-making process of listed companies and will reduce the cost borne by the shareholders to attend general meetings. Shareholders can participate in the decision-making process in the comfort of their homes or offices, can vote in any number of resolutions of any number of companies, there is ample time to vote till the last day and the scope for invalid votes is less. For the companies it will reduce administrative costs associated with postal voting. It also enables accurate counting of votes, faster and transparent voting process and immediate declaration of voting results. Thus it is helpful for both the corporates and the shareholders. Presently Sebi has mandated it for top 500 listed companies at BSE and NSE based on market capitalisation.

Sebi move to reject offer documents has met with some criticism. How do you react to that?

You should appreciate the context in which this move has been introduced. We found that in some offer documents, the disclosures were inadequate and sometimes sketchy, raising concerns about the credentials of such issuers. There have been instances wherein transactions involving the issuer have been carried out typically prior to DRHP, merely for a technical compliance with the regulatory requirements rather than a compliance with the spirit of the law. Such cases have often been supplemented by vague and circuitous responses from BRLMs to the queries raised, raising doubts on permissibility of such issuers to the public issuances market. In such a situation, investors may not be in a position to assess the risks associated with a business model due to complexities involved. Sebi?s responsibility is to protect the interests of investors. The Primary Market Advisory Committee (PMAC) recommended that where disclosures are significantly deficient, Sebi should adopt the practice of rejecting the DRHP. Subsequently, we issued a general order by which the criteria for rejection of offer documents were stipulated. We have also stipulated that those offer documents which are rejected, such entities will not be allowed access to capital markets for at least one year from the date of such rejection. Now the issuer, the merchant banker and others involved in the process are aware about the conditions in which Sebi might reject an offer document.

The intention is to improve the quality of disclosures and put onus on merchant banker to do the due diligence properly.

On the secondary market front, what do you think have been major initiatives?

I feel the most important decision was to implement the Bimal Jalan Committee Report. A framework for governance of Market Infrastructure Institutions was established. I am not going into the details as these have already been discussed in public domain. However, I would like to add the guiding principle has been to ensure a more, broad based, efficient and functional ownership structure for stock exchanges, clearing corporations etc. These are basically institutions of public good. Questions were also raised regarding the future of regional stock exchanges (RSE). We have addressed the issue of RSEs in the published policy.

Regulations for Algorithmic Trading or High Frequency Trading were another important measure. There are many other jurisdictions which are trying to study the regulations put in by Sebi, so that they can also put similar regulations in their respective jurisdictions. We have put in guidelines to be implemented both by the stock exchanges as well as stock brokers.

Recently we had an incident of an erroneous order being put during trading. Sebi has decided to prescribe a framework of dynamic trade-based price checks to prevent aberrant orders or uncontrolled trades. These would be implemented in phases. Meanwhile Sebi has told stock exchanges to take pre-trade risk controls for all categories of orders placed on Stocks, ETFs, Index futures and stock futures.

Another important initiative has been registration of KYC Registration Agencies (KRAs). So far, five KRAs have registered with Sebi. This is a very significant initiative as it has far-reaching advantages for the financial sector as a whole. KRAs register KYCs of investors. The intermediaries will take data from the KRAs. Investors need not have to do the same KYC again and again.

In the area of dematerialisation, we have introduced the Basic Services Demat Account which will help those investors who don?t have many transactions in their demat account and hold their securities for a long term. About 7800 Basic Services Demat accounts have been opened in NSDL and CDSL together in last four months, since we announced BSDAs.

There have been demands for dematerialisation of assets or records other than securities like warehouse receipts, fixed deposits, insurance policies etc. Depositories are permitted to take up activities assigned by the central government or by a regulator in the financial sector, through a Strategic Business Unit (SBU). Sebi has permitted the depositories to share the necessary information with its SBU with respect to the assets or instruments held by them for the purpose of generation of consolidated statement. This will help the investor to view the details of holdings and transactions across all asset classes through a single consolidated statement.

Sebi has also empowered the depositories to take appropriate actions against companies that do not comply with their obligations like lack of reconciliation of issued capital and actual share capital.

Investor education is an issue very close to your heart. What are the recent initiatives?

Investor education is an activity to which Sebi has attached a lot of importance. Senior Sebi officials participate in investor education programmes in various Tier II and Tier III cities. I have myself participated in many of these programmes. This also helps us to meet investors from various backgrounds, in various cities and understand their concerns and problems.

Recently, we started multi media investor awareness campaign. We have an expert creative agency, selected through a transparent and objective process, helping us in this campaign. This campaign will be through newspapers, television and radio in 13 languages across the country. Various investor education topics would be covered.

Sebi also takes financial literacy in right earnestness. Our resource person model is working very well. Presently, we have over 500 resource persons and our programmes have covered more than 330 districts. Until recently, we had been associating only teachers as resource persons, but We have widened the scope. Now, retired banking personnel, retired persons can also become Sebi Resource persons. We also have a dedicated toll-free helpline available in 14 languages.

In addition to the above Sebi has taken number of initiatives for redressal of investor grievances. With the establishment of SCORES our computerised grievance redressal mechanism, the disposal has improved tremendously. In the current financial year, Sebi received about 20,800 grievances under SCORES and during same period 30,900 grievances have been redressed, which also includes some complaints received during earlier period.

Sebi has also initiated enforcement actions against companies for non-satisfactory redressal of investor grievances.

The deadline for companies to achieve minimum public shareholding is nearing. Are companies coming forward to comply with the same?

It was in June 2010 that the government mandated that listed companies should maintain minimum public shareholding of 25%, which is 10% for public sector companies. So, I feel there has been enough time for the companies to achieve this. Sebi also took a lot of initiatives to help the corporates to comply with this requirement. We made available additional methods like offer for sale and institutional placement programme (IPP). Based on feedback received we revised certain norms for OFS in July 2012. After the revised norms, I am told that 15 companies have offered more than 860 crore shares under OFS mechanism at a sale value of more than R10,250 crore.

We are engaging the companies that have not abided to help them comply with the requirements. We have written to the central government regarding the public sector companies.

Any plans for increasing the penetration of Mutual Funds in the country?

This is an important area of concern for SEBI. We need to increase the penetration of Mutual Funds. There should be more retail investors in Mutual Funds. We are approaching the issue in two ways. One is investor education. We have mandated that the industry should set apart a portion of asset management fees annually for the investor education campaign. To sell simple mutual fund schemes we have said that a cadre of distributors like postal agents, retired government officials, retired bank officers etc. can be recruited as MF distributors. We have also said that they would require a simplified form of certification and would pay lower AMFI Registration fees.

On other hand, we allowed AMCs to charge additional TER (upto 30 bps) depending upon the extent of new inflows from locations beyond top 15 cities. To bring in more investors, it has been decided to allow cash transaction in MF schemes upto R20,000 investors don?t need PAN for such transactions. These are initiatives recently announced. If anything more needs to be done, we are open for suggestions.

Concluded