India’s financial sector regulators have done an impressive job in keeping things in order in the broader markets. The problem is that sometimes the fine line between regulation and over-regulation gets blurred. Take the recent proposal of the Securities and Exchange Board of India (SEBI) that asset management companies (AMCs) should deploy money raised through new fund offers (NFO) within 30 business days of allotment. This is nitpicking, at best. If one goes by SEBI’s own data, out of 647 NFOs, an overwhelming 603 deployed the money before 30 days, and 98% (633) did it within 60 days. One wonders if a new rule was required for just 2%. Worse is the proposal that if the fund house does not comply, it will not be allowed to raise more funds. There are many other such proposals, like expenses of a fund needs to be paid from the scheme and not from the AMCs’ balance sheet. This can lead to a lot of problems. In a situation where an index fund raises a very small amount, say just `10 lakh, the AMC finds itself between the devil and deep sea.

As there is a cap on expenses, it will be unable to pay the index provider from the scheme. But it cannot pay from the balance sheet either as that will be a violation of regulations resulting in warnings and penalties. Even the rules under the “skin in the game” guidelines for liquid schemes are quite tough. SEBI mandates that the fund manager will have to invest 20% of the post-tax salary in the scheme, but it has also set a deadline for redemption after three years, which leads to unnecessary taxation. At the same time, the fund manager has to make fresh investments in the same scheme in the same month. It might make more sense to consider old investments for re-investment like other schemes and defer the tax liability. Of course, even the number — 20% of take-home salary — is debatable. While a CIO or CEO, who is responsible for all schemes, will see this 20% divided among both debt, equity, and other asset classes, imagine the plight of a junior liquid fund manager who will see his entire amount being invested in a low-return liquid scheme.

To be sure, SEBI alone is not guilty of this micromanagement. Even the Reserve Bank of India seems to be falling into the same trap. After removing caps on interest rates and stipulating that monthly repayments should not exceed 50% of borrowers’ incomes in the case of microfinance institutions (MFIs) in 2022, it has changed its stance and started penalising them for charging “usurious rates”. Banks charge as much as 35-40% on credit cards, which doesn’t seem to be catching the regulator’s attention. While it is understandable that the banking regulator is worried about MFIs’ unbridled growth and rising repayment stress, it need not necessarily be due to high interest rates. Surely there are other ways to handle this; for example, ensuring that 100% of MFI books have to be insured or making underwriting more difficult. Instead, it has almost put an entire industry in the dock — something that is already affecting consumption. This is not to say that both the regulators don’t have their hearts in the right place, but constant micro-management not only unsettles the industry, but it also scares new entrants.