Everyone seems to agree that U.K. Sinha, who will take over from C.B. Bhave as chairman of the Securities and Exchange Board of India (Sebi) on 17 February, is the right man for the job. As chairman of the Unit Trust of India Asset Management Company, he is a man of the markets. And together with his stints as joint secretary in the ministry of finance, he brings reformist bureaucratic experience to the job of a market regulator. No need to check that resumé again.
The timing of his appointment as Sebi chairman seems fortuitous for a mutual fund industry that is in severe trouble; it has not been very successful at attracting fresh capital while struggling with higher redemption pressure at the same time. Mutual funds are also facing competitive challenges from the insurance companies who do not have to worry about ‘no load’ offerings in selling unit-linked insurance plans, or Ulips.
To be fair, insurance companies and mutual funds have faced allegations of mis-selling when it comes to Ulips. It all boils down to who pays for distribution. Life insurance companies selling Ulips — which compete with mutual fund products — have much greater freedom on passing on distribution costs to the investors while mutual funds are restricted from doing so. Since both kinds of products have to be heavily sold, costs and selling expenses matter.
Mutual fund company chiefs say that the manufacturers of mutual fund products (the asset management companies), and the products (mutual fund schemes) themselves are tightly regulated, but distributors and agents are not at all. Incentive structures and fee commissions play a big part on how distributors behave.
That could well be Sinha’s first challenge: setting up a regulatory framework for distributors so that there is no mis-selling, and evening the playing field for mutual funds vis-à-vis life insurance firms, even banks. If Sebi under Bhave could enforce investor protection by imposing no-load rules, the same argument (investor protection) could be used for setting rules for distributors of financial products, say industry officials.
Then, there is the question of corporate governance. Different elements of this issue — from board composition through mergers and acquisitions to financial instruments — fall under the purview of different regulators that stretch from the Ministry of Corporate Affairs and the Company Law Board (CLB) to Sebi. It cuts across disclosure in financial statements (and the accounting profession) to reporting standards.
Sebi seems ideally positioned to take the lead in corporate surveillance. It already looks at company promoters in a number of ways. It could frame rules seeking quarterly reporting on cash flows, voting patterns in company boards on critical matters (particularly the promoters). In Indian companies, say experts, corporate governance is not about ownership versus management, but majority versus minority. And here, the investor protection imperative gives Sebi the rationale to take this task on.
The third, and by far the toughest challenge, pertains to the regulation of asset management companies (AMCs), a business that Sinha is intimately knowledgeable about. Sebi’s current purview extends to the regulation of products; as markets get more sophisticated, it will be necessary to separate the products or mutual fund schemes from function, or asset management companies, akin to separating the horizontal from the vertical.
Soon, along with life insurance companies and their AMCs, there will be pension funds and their AMCs, and the advisory. In the more developed markets such as the US, for instance, AMCs of all stripes and colours are regulated under the Investment Act of 1940. We are fast approaching the point where regulation of that kind will become necessary. It is time for our markets to grow up.
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