Tuhin Kanta Pandey, chairman of the Securities and Exchange Board of India (Sebi), is seeking to simplify the regulatory regime. In his first interview after taking over as chairperson, he talks to Prasanta Sahu and Joydeep Ghosh about Sebi’s thought process on allowing foreign individuals to invest directly in the Indian equity market, the new conflict-of-interest framework, and more. Excerpts:
Many Sebi regulations are decades-old. Are you looking at a regulatory review process?
I would like to give Sebi this goal, through an internal committee, to work on this. It would be quite similar to how the Direct Tax Code was drafted. It was an entirely internal effort in consultation with outside experts and the outcome has been pretty good. At Sebi, we want to accelerate this process but instead of trying to fix these problems very quickly, we will do it after talking to all the stakeholders.
Do you have a time frame in mind?
I think within the next three months, we will be able to start accelerating this process, in terms of identifying the pain points. It will be driven as an organisational mission.
What is the broad theme of the new regulations?
We need an optimum regulation because over-regulation will kill innovation. We understand that if you have to do a complex surgery, there has to be precision engineering. It should not damage other organs. The art of modern regulation is to ease the compliance burden while making regulation more effective.
There are other issues, too. Suppose there is an egregious case. How do we fix that case? Was it a problem of implementation? Or was there a systemic flaw? If it’s the latter, we should fix that. But if we are in a hurry to give our own solutions to a problem, sometimes it may not be the right diagnosis. We have got three mandates –investor protection, development of market and regulation. We have to look at all three equally. Regulation can’t be an end in itself; they should be a means to an end.
Do you think there is a need for assessment of regulatory impact?
Yes, I think we should move towards that direction, both for existing and the proposed ones. But this is a relatively new area. We also need to know who can do the regulatory impact assessment and how. I think going forward, we should also work towards regulations that need to stay for longer periods or ones which should be used to deal with immediate issues. That is because regulation sometimes tend to be sticky. Some regulations could stay for a longer time. But sometimes, we have to fix newer challenges that impact markets for shorter times.In that case, we should be flexible enough to have short-term rules for six months or eight months and withdraw them after thorough review. So the right mix needs to be adopted.
Sebi has proactively gone for conflict-of-interest guidelines. But other financial regulators don’t have them. Why are they so critical for the market regulator?
I will not like to respond on what the other regulators are doing or not doing. But it will be good for Sebi — both internally and for our external stakeholders. The conflict-of-interest issues has two parts — the level of disclosures related to your investments, property, or other things. The second level of conflict of interest are matters whether you are dealing with any of the companies in the listed space.
So, we should have proper guidance as to where we are going to recuse and in what manner. We may be buying products of the listed companies. Is that a conflict? If a listed firm is in the business of selling houses and you are also buying a house, will you treat that as a conflict or not or ascertain that it is not a private deal.
Then, there are relatives, how will it extend and which way, maternal side, paternal side, etc? We also have to see how much people are in control. So, if you have clarity in the form of a modern framework, it will help.
After what we have seen in recent times, has the corner office door been slammed on private sector talent?
No, not at all. The framework has to be clear on the list of do’s and don’ts as there are many grey areas, which is why we want the high-level committee to apply its mind. A framework for monitoring is required. If someone has recused, there should be some readymade database. There has to be a definition of what is a conflict-of-interest and vice-a-versa.
The committee members will be notified soon. I think we are, in a way, moving and developing into a very new area, it could be path-breaking.
Do you think it is time to allow foreign individuals to invest directly in the Indian equity market to broaden the investor base?
Currently, foreign individuals can register and come as foreign portfolio investors (FPI). They can also come in through a pooled vehicle FPI. Yes, there are certain ideas on whether they can come as an individual also. They are being examined (currently, NRIs/OCIs are allowed to invest up to 5% in the equity of an Indian company). There are a number of thoughts on the table, including whether the 5% limit (for NRIs/OCIs) can be increased to 10% collectively, including foreign individuals. But other agencies, including the department of economic affairs, the Reserve Bank of India (as it comes under Foreign Exchange Management Act and Sebi). One has to see issues involving the KYC also.
In the past couple of years, a large number of new investors have entered the futures and options (F&O) market. Do you think additional measures are required to dissuade them?
We did put out a report on derivative trading that said 90% of these investors were losing money. While the ticket size is smaller, a large number of people and the younger generation are trying their luck in this market. They have to be made aware of the stickiness of the market. In addition, our analysis has to reveal the risk metrics. Options have been the main problem, especially on the expiry date.So, our consultation paper is trying to explain that, and some 800 comments have been received and we are analysing them. We have to strike the right balance and the right way of measuring the right way of safeguarding. What would be the limits, intraday, end of the day limits, and how those limits will be calculated, so that we have on systemic basis, a better market.
Was the market regulator behind the curve in controlling investor exuberance? Sebi acted only after the horse has bolted.
After Covid, a lot of new investors came in. Since the market was moving only in one way, they didn’t have any experience of the downside. It is like a child learning to ride a bicycle; you can explain as much to a child how to ride a bicycle. But eventually you have to give him the bicycle. He will fall because he will have to find his own balance, and then he will ride it.
There has been a talk of common KYC for a very long time, but the financial sector has not been able to achieve that.
The central KYC is an important task. A central KYC is something that is highly desirable, and I’m very sure that we will achieve it soon. This is being coordinated by the central government. We are very keen from Sebi and working with the RBI to do it.
SME initial public offers have been a problem. How could they be regulated, say, post listing?
We will let the markets develop. We will have to constantly adjust to new data. Our regulation should be proportionate to what we want to achieve. As I said, what is the right optimum? In order to develop the markets, there should be a greater trust there. People should not be misusing or abusing the markets, which will erode the trust of the investors.
There has been a flurry of consultation papers over the past couple of years, leaving the markets in a kindof a permanent tizzy about more and more compliance. Is regulatory overreach an issue?
Optimum regulation is the way to go. If we are trying to fix everything and do micromanagement, it may not be fruitful. What ultimately matters is our objective. Whatever regulation we write, it should be able to fix that objective.
In terms of market development, what is your vision? Do you plan to introduce some new products?
We are still in the process of crystallising this. A lot of these ideas also come through discussions. But there will be always be the need for newer products. For example, we had REITs, InvITs and SM REITs. We had SME IPO issues. On the derivative side, there could also be
many products.