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“I would be focussing on strengthening the capital markets and bringing in good corporate governance…” - Views on News from Equitymaster
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  • Jun 26, 2002

    “I would be focussing on strengthening the capital markets and bringing in good corporate governance…”

    After having had an illustrious career with the Life Insurance Corporation of India (LIC), Mr. G. N. Bajpai assumed Chairmanship of Securities and Exchange Board of India (SEBI) in early 2002. He brings with him a great deal of experience from LIC, which has an asset base of US$ 50 bn, and representations in various prestigious organisations, including the likes of National Stock Exchange of India.

    In an interview with Equitymaster, Mr. Bajpai shared his views on various topics ranging from investor education to corporate governance. He also shared his vision for the Indian capital markets.

    EQM: Before being appointed as a Chairman of Securities Exchange Board of India (SEBI), i.e. as an outsider, what did you feel was the most significant achievement of SEBI?

    Mr.Bajpai: Modernisation of exchanges in security markets is the biggest achievement of SEBI.

    EQM: What sort of modernisation are you referring to?

    Mr.Bajpai: For instances, exchanges are real-time now, T+5 settlement system made operational to reduce settlement cycles, quite a few risk containment measures have been implemented and surveillance mechanism has been improved.

    EQM: As an outsider, what did you perceive was the biggest failure or problem with SEBI?

    Mr.Bajpai: I don’t perceive any major failure and problem. These are perception issues. SEBI has been able to bring Indian markets almost on par with the international securities markets. Somewhere along the line something has happened, for which it would be difficult to attribute the blame to the market regulator. In fact, there is a general tendency that when something goes wrong with the markets, SEBI is blamed for it. Regulator can control systematic and operational risks but, not the frauds. No one can control human imagination or waves that take birth in the manipulative minds of the people.

    EQM: How would you like to correct those wrong perceptions that the markets has currently?

    Mr.Bajpai: I want to start that with investor education. Investors have to be first educated as to what is securities market and what are the trade-offs between risk and return. Unlike fixed interest market, where return is low and risks are few, in the equity market, there is a possibility of higher return, but there is also a possibility of losing the capital. Education, has many facets.

    The second aspect, which we would like to address, is to ensure that information dissemination to the investors is real time, adequate and understandable to enable them to make well-informed decisions. Once they make informed investment decision or make an informed choice, possibly the kind of sentiment that we see in the markets currently, could improve in the future.

    The third aspect is the management of an organisation, which comprises of corporate governance issues. I have been making statements in public that I would like corporate governance to move towards substance from mere form. Assessment of the quality of Corporate Governance on the basis of Wealth Creation, Wealth Management and Wealth Sharing.

    And finally what is called enforcement. As a regulator, we would be prescribing certain dos and don’ts. We would like to make sure that anyone who does not do what is supposed to and does what he is not suppose to do is held accountable. Fairness and objectivity would be hallmark of SEBI’s operations.

    EQM: As we talk of regulatory issues, we would like to extend the question further forward. Do you think the power SEBI has right now, is enough to bring guilty to the book or you would require additional powers?

    Mr.Bajpai: See there are two issues. Let me begin by saying that what is necessary is empowerment and not just power. If you have power and if you cannot exercise the same, it is of no use. And two, power is always event specific. You cannot make use of the same power if events are different.

    Therefore, what is important is empowerment. I feel with whatever powers are there now, it is possible for SEBI to bring guilty to the books. And the number of judgments that SEBI has delivered, speaks for itself. Having said that, there is a case for empowering the regulatory authority further and adequately.

    At no point of time, one can think that a regulatory body has adequate power. It keeps on moving with the times. What is important is that we should be able to get to the truth. Besides, the punishment that the regulatory body awards should be strong enough to deter people from doing the same kind of acts in the future.

    EQM: The reason why we asked the question was that retail investors have time and again seen how unscrupulous traders/brokers are let off rather lightly. Indeed, on a poll conducted on Equitymaster, 90% of the audience was of the view that the current regulatory environment is not sufficient to protect the rights of retail investors. Your views on this.

    Mr.Bajpai: As I said earlier, I am addressing the whole issue from four standpoints. First of course is investor education. They must know that there is a trade-off between risks and returns and there are possibilities of these kinds of things happening. It has happened not only in India, but also in all international markets. Look at Enron, look at Tyco. Therefore, investors have to be educated what securities markets are. Second, there must be adequate information, which will enable industry to take what is called as judicious view. Then, investors entrust their capital to someone else and that person should manage it well. If he does not do what he is supposed to, we must take note.

    Once you are able to strengthen all these four pillars, I am sure people will be happy and comfortable.

    EQM: There has been criticism that too many IAS officers with no market knowledge man Sebi. Will there ever be a day when someone from an AMC will be hired to run Sebi’s mutual fund division or someone from a broking firm will be hired to run Sebi’s secondary market division?

    Mr.Bajpai: I think the objective behind your question is that market view should be considered. For that, we have various committees. Brokers and fund managers have fair representation in such committees. So their voices are heard. Not only that, what I have done additionally is that before I frame a regulation, I upload it on our website. Anybody and everybody have a right to express their views on the same. The takeover and substantial acquisition regulation is the most recent example. After Justice Bhagwati committee submitted the report, we uploaded on the website for public and we received a host of suggestions. We are considering all those views. If the purpose is to take their views into consideration, that purpose is being served. And nowhere in the world, brokers are represented in the regulatory body.

    EQM: The largest fund in the USA, Vanguard, follows a model where they use their brand to raise money and let experts manage it. Can mutual funds outsource fund management under existing guidelines just as they outsource the registrar/transfer agent work? The mutual funds will raise the money because they have the marketing skills or the distribution chain, but they will give the money to somebody else who has the requisite skill to manage it. ?

    Mr.Bajpai: But if mutual funds are going to hire someone else manage funds, what are they going to do. Then they should be in distribution network and not a mutual fund. See, the purpose of mutual fund is to be able to provide expert investment skills, which are not there with the investor. If they are going to hire that skill also, then there should be a different kind of structure.

    We have put in place regulations with a view to ensure that the management of fund is appropriate. For example, we have laid a maximum limit of 5% in one particular organisation and we have recently formulated guidelines on how mutual funds should value the infrequently traded and unlisted stocks. We have also put in place benchmarking for the performance evaluation of mutual funds for both equity and debt schemes. If mutual funds do not have expertise, where else is the expertise?

    EQM: The idea is that if a mutual fund does not expertise in specific set of skills, say pension fund plans, can he outsource management in such a scenario?

    Mr.Bajpai: My point is that mutual funds are supposed to be investment managers only. If investment managers want to outsource skills, then what is it that they are going to do? Take pension plans. It is the insurance companies that are going to do the distribution work and funds so mobilized can be managed by mutual funds.

    EQM: A number of MNCs have either delisted or have expressed their desire to delist from Indian bourses by buying out external shareholders. How does Sebi plan to tackle this from two perspectives – one, to ensure that the shareholders are given an exit option at the ‘right’ price; and two, the Indian stock markets continue to have depth in terms of having a large number of good listed companies?

    Mr.Bajpai: I have been making reference to that for sometime now. We are looking at that issue. But I have one view that if there is an entry point, there has to be an exit as well. The key points that have to be taken care of are that the exit should not hurt the markets. It also should not hurt the small/minority investors. If these factors are satisfied, one cannot deny an exit route.

    EQM: There seems to be a lot of coincidence between bad news first on the companies followed by ‘generous’ buyback offers at low prices. Your views on this. The six-month criterion from this perspective seems inadequate?

    Mr.Bajpai: That is what we are looking into. We have appointed a committee, which is almost ready to submit report. Hopefully, it should be able to present it within a couple of weeks and we will take action accordingly.

    EQM: How does Sebi ensure that communications made by corporates are available to the public at the same time and analysts do not take advantage of material non-public information?

    Mr.Bajpai: Off late, investment analysts are also under a fair degree of scrutiny. We believe that they should use the same information, which is made available to the public. Yes I can understand that they can have inside view by talking to the management, and there is nothing wrong at all as long as their views are objective. Let the analysis take place to provide a fair view to the market. They cannot do this just to profit themselves.

    We will be putting up EDIFAR system in place, which is an improved version of the EDGAR in the US. It is an improved version in the sense that US system is not queryable. Once the new system is in place, you can query questions like segment reporting and holding pattern and get full information.

    EQM: As a regulator, what is your vision for the securities market in India?

    Mr.Bajpai: I hope to create a securities market for India, which not only helps the investors but also the issuers. I am strongly of the view that it is only through vibrant securities markets that sustainable economic growth can be achieved. For sustenance of any market economy, we require two strong pillars. One is efficient capital market and other is confidence in Corporate Governance. As a regulator of the Indian securities market, I would be focusing very substantially on both- strengthening the capital markets and bringing in good corporate governance, thereby restoring investor confidence so that all stakeholders profit from it.

    EQM: On a lighter note, can you share with us the personalities and books that have inspired you the most?

    Mr.Bajpai: Well, it is very difficult for me to say. But what inspires me is the Gita. Off late, I am reading ‘Good to Great’, by Jim Collins. Saints inspire me most.

    EQM: Apart from work, what takes up your time?

    Mr.Bajpai: In the last couple of years, I have had very little time for myself. But two things would take my time if I have. One is to play golf and the second is to read and write.

    EQM: Through this interview, what would you like to convey to the retail investors?

    Mr.Bajpai: I would like to convey that the Securities Exchange Board of India would consistently endeavor to fulfill their aspirations. SEBI is committed to creating an efficient, effective and transparent capital market for all the stakeholders.



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