Dear Mr Bhave,
I read yesterday that you want your successor to join Sebi a month before you step down as chairman so that the transition can be a smooth one. That is a nice thing to have done. Indeed, your three years at Sebi have proved that there is a regulator that is willing to stand up for what it believes is right. Sebi has denied a licence to an entity, which wanted to start an equities exchange, on the grounds that the ownership pattern of MCX-SX didn?t meet your standards. And you put forth your reasons without mincing your words, even though many people have argued your decision was wrong, that the 5% rule was a bad one, that MIMPS did not apply to demutualised and corporatised exchanges like MCX-SX. Sebi?s order said: ?…excluding the warrants held by a shareholder in computing the limits of ownership in an exchange would violate the spirit of the MIMPS regulations and would not be in consonance with it….I am of the considered view that converting ?equity shares? into ?right to equity shares? is an attempt to work around the requirements and attempting to merely meet the letter of regulation 89 (1) of MIMPS regulations.?
I?m sure Sebi must have been under tremendous pressure, as it was when the promoters of Ranbaxy wanted a change in the pricing rules for routing a deal through the exchanges, when it was selling its 34.8% stake to Daiichi Sankyo, so that it could save on capital gains tax. You did not budge then either, saying exceptions could not be made. It?s reassuring to learn that there are still people who do an honest day?s work.
You also did a great job of pointing out that Ulips are nothing but mutual fund schemes bundled together with an insurance cover. Whether, therefore, Sebi should be supervising Ulips can be debated but your action triggered a fall in the very high commissions that life insurance companies have been charging customers and embarrassed Irda into changing the way business is done. While the way in which the issue was raised could have been different?perhaps Irda could have been coaxed into rewriting the rules?there is absolutely no doubt that unless your organisation had drawn attention to these sometimes usurious commissions, customers might not have got a fair deal for years to come. There will be pain in the industry, yes, but then Irda needs to sort that out, you have done your bit. I am curious, and would love to hear your comments on why the HLCC mechanism completely failed to sort this one out since you did take the proposal to it before you went public.
You have also cracked down on foreign institutions insisting that the investor base is broad-based and it?s good to know that Sebi is tracking the money movements of big industrial houses and is not afraid to summon even the chairman as it did with the ADAG Group. Of course, one of the best things Sebi has done, in the last three years, is to increase the penalty, for promoters who let their warrants lapse, to 25%. For sure, no promoter is going to be deterred by this penalty, and will find a way to recover the amount from the company at the cost of the shareholder. But it?s an improvement over the earlier 10%. Sebi has also made life easier for companies looking to raise money from the markets by shortening the time to market; also the time between the closure and listing of an issue is now far shorter. From an investor?s point of view, Sebi plans to increase the investment cap for subscription to an IPO to Rs 2 lakh for larger issues and has also ensured access to ASBA so that he saves money; Sebi has also created a level playing field by asking institutions to put in 100% of the application money upfront. And small investors can now take a cue from the large buyers since they are allowed to put in their applications to an IPO, a day later.
Where things seem to have gone horribly wrong is in the mutual funds industry. September saw a record Rs 7,000 crore worth of equity schemes being redeemed. That?s not really surprising because with the Sensex nudging 21,000, investors want to cash out and many of them have waited for nearly two years to make money. But it?s sad that while the rest of the world is enjoying the stupendous bull market rally in India, as is clear from the nearly $21 billion that?s come in by way of portfolio flows, India?s investors have sat it out. Ever since entry loads were banned last August, money has only moved out of mutual fund schemes. We respect your intentions to help small investors but what?s happened is that not even a handful of investors has participated in this rally; they would not have minded paying a 2% commission for an 80% or even a 50% return. We have to remember that mutual funds are a push product and therefore, it?s not such a bad thing that investors pay some commission. It?s true there are enough and more malpractices in the industry but perhaps you could have reduced the loads in a phased manner and the message would have gone home, both, to the agents and the funds that they cannot continue to mis-sell products or continuously churn portfolios. But in doing away with loads entirely, an entire universe of investors who today, would have started believing in the equity markets, has lost out. After all, it is also Sebi?s job to encourage people to channel their savings into the market and especially through mutual funds. What a missed opportunity this has been! You could make history, Mr Bhave, by reversing your decision. If commissions can be charged for the sale of even a mobile phone, why can?t they be charged for selling mutual funds?
Sincerely,
shobhana.subramanian@expressindia.com