‘Sometimes, we react very strongly and make regulations tougher than necessary’

We have seen a lot of action on the F&O (futures & options) front recently, where several complex rules and regulations have been introduced. Instead of that, do you think having a threshold for retail investors to invest in F&O would have been easier to implement?

Any issue has two sides. Type 1 error occurs when a lack of regulation creates systemic risk, harming people and other sectors. Type 2 error occurs when over-regulation stifles innovation. Regulators must balance these two sides.

If we are concentrated and unaccountable, the chances of errors increase. Proactive, data-driven engagement helps avoid both types of errors. A balanced approach will do a lot of market development, while flip-flopping causes unnecessary volatility.

F&O is a complex market and when you are walking up the complexity chain, we cannot have a sledgehammer approach or a very blunt approach. We need a surgeon’s knife. We need to know exactly how to regulate or else the innovations will be lost.

Reports showed over 90% of small investors in F&O were losing (money), highlighting both awareness and systemic issues. We are working with stakeholders and experts and have received 800 comments on the F&O discussion paper. Increasing thresholds alone is not the solution. F&O is key for hedging risks and price discovery. The goal is to develop the F&O market linked to the cash market, but without spillover effects causing systemic deficiencies.

You have been speaking lately about removing redundant regulations. Can you elaborate?

A lot of ease of doing business has already happened over the last few years—like delisting regulations, takeover regulations. We have also worked on a master circular approach, where redundant provisions were taken out. We have also brought a consolidated approach for debt securities and securities that are retainable.

I’ve been talking to associations and have asked them to identify issues and suggest an agenda on areas that can be improved. For example, the advertisement board may differ for different regulations. If the objective is the same, can it be made consistent? I have asked them to identify all these points and discuss them within various fora—we have primary and secondary committees, industry standards forum, through which we can work on removing outdated regulations.

Also Read: Sebi can’t adopt a sledgehammer approach for F&O trading: Tuhin Kanta Pandey

There is also a cost of regulation. For example, we reviewed merchant bankers, venture trustees, and custodians’ regulations. Initially, we considered hiving off unregulated activities, but we are now re-evaluating this approach. Creating more SPVs (special purpose vehicles) increases business costs, which are ultimately passed to investors. So, are we reducing the cost of intermediation, or are we increasing it? We need to explore these issues.

Sometimes even regulated entities make claims that are very difficult for retail investors to verify. To address this, Sebi created a performance validation committee to look into these claims about past performance. What is the status of that?

The regulations have been altered, and the follow-up work is being done to progress on performance validation.

When will we start getting regular information on this?

I don’t have an exact date because the timeline depends on the entities, but we are certainly looking into it.

The low number of RIAs in India—less than a thousand for a country of our size. What is your view on that?

I admit that the number of RIAs is really low for a country of our size. We need to look at this systemically. Why aren’t more people coming forward? Are there large entry barriers, or are we facilitating their entry? The second part is educating people on whether they are willing to pay for advice. Many Indians like free advice, but these businesses need to evolve into paid services.

I had discussions with RIAs and I believe the regulations still make it tough for them to operate. For instance, RIAs can’t do performance monitoring unless they meet performance evaluation metrics. Suppose they have 10 years of prior experience; they are prevented from displaying it. This creates a concern for them because they can’t recognize their previous work. There are barriers for the existing RIAs as well.

Sometimes, we react very strongly to egregious behaviour, and as a result, we make regulations tougher than necessary. So, this balancing is something we need to achieve.

The National Stock Exchange (NSE) has written to Sebi recently asking for a no-objection certificate (NOC) from the regulator for its listing. NSE filed its DRHP in 2016 and there have been many issues, what is the status now?

NSE is very important. Before it goes public, it needs to be cleared from different angles. There are pending issues on governance, technology, as well as litigation. There is also a clearing corporation issue, a consultation paper which was put out in November.

Public consultations and comments have been received. Sebi and NSE are in discussion, and I think some letters have gone out and replies have been received. We will examine and move forward in the best interest of the market, not just its shareholders but also the users of this very important institution.

These unclaimed shares, which are transferred to the IEPF (Investor Education and Protection Fund), many investors complain that they are stuck for years and are unable to claim them. Is Sebi doing something about that?

Typically, this is handled by the ministry of corporate affairs (MCA). But we are definitely in touch with them to see how we can expedite the process. There are delays, and people have been waiting for long periods. MCA is looking into this matter and is focusing on building capacity in the IEPF on an urgent basis.