The UK Sinha Interview
Hello and welcome to this special edition of The Firm- an interview with SEBI Chairman UK Sinha. Now Mr. Sinha spoke to me today at length about a variety of issues political interference, governance standards in India Inc and pending regulation, his list of priorities. This part is on political interference and let me tell you how we got here. I know regulation is meant to be steadfast irrespective of time, place, person and circumstance. But it would be unreal to assume that regulators are not affected by the political and economic environment they exist in.So my first question to Mr. Sinha was about how the current political and economic environment has impacted his thought process and by extension securities market regulation in India.
Sinha: Let us understand that the political leadership, through the political executive in power and through the parliament, articulates the policies, which government has to follow or which country has to follow. The idea of an independent regulator passed by an Act of parliament basically pre-supposes that most of the implementation part has been given to the regulator. Broadly, I would say they can be broken into three parts- one is the policymaking. Policy making, in my humble judgment, remains the prerogative of the government and the parliament. They do consult the regulators like they consult other experts, but the final decision is to be taken by those who have been running the parliament, who have the voice in the parliament. Once that part is done, the second question is to draw out various regulations and implementation part of that. Drawing the regulation my position and the understanding is that this is a job of a professional organization, which is doing a technical job and in our case for example SEBI. So, when we are drawing a regulation based on a policy given by the parliament or by the government- that should remain entirely the domain of the regulator and nobody outside the system, once the policy has been enunciated, should interfere in this area and the third area is the implementation- the enforcement of the actions. Those enforcement actions would depend entirely or remain entirely with the regulator. So if you break it into three parts the first part of policymaking in my view is within the purview of the government and the parliament, but the other two activities should remain and must remain with the regulator.
Doshi: Have they remained with the regulator or in the recent past would you say that there has been political interference in both- the way polices are crafted and the way the regulator does its job?
Sinha: As far as SEBI is concerned it will be right for me to talk only about SEBI.
Doshi: I am talking about SEBI and your one and a half years.
Sinha: Okay, in that context I don’t think there have been any major legislations in this period. So the policies which have been there from the past, so far as the laws are concerned, they have remained there. What has happened that the country has passed through certain major changes in its economic environment in the last one and a half year. For example the money which is being raised from the primary market- that has undergone a change; the whole atmosphere about how much money is being raised through the mutual fund route- that has undergone change. So, as a regulator, we also have to start looking at our activities keeping in mind the broader objective and the broader objectives are for example, in our case, to ensure that the corporates or entrepreneurs in the country are able to raise money very efficiently, the broader objectives are that the retail should be able to participate in this area. Keeping all that in mind we may decide inside SEBI to give focus on certain activities and to keep certain activities for a time when the situation improves.
Doshi: But that’s your prerogative. My question is on political interference. The perception has been that in the last few years the political interference and maybe its good interference, I am not even saying its necessarily bad interference or asking the regulator to favor some entities or any of that kind but the political interference has increased and therefore the question I am asking you is has that been the case, is that your experience in the last one and a half years? How would you characterize the political dispensation towards SEBI in your period here?
Sinha: In my period, the type of decisions which SEBI has taken and the number of decisions which we have taken are unprecedented. And none of these decisions have been influenced by anybody who is not legitimately authorized to take the decision. And to answer your question directly, there are certain decisions within SEBI which can be taken at my level or even at the level of my younger colleagues but there are certain decisions which have to be taken at the level of the SEBI Board. SEBI Board has representations from the government, SEBI Board has representations from the Reserve Bank of India, and SEBI Board has also got two outside members. So, to the extent they are members of my Board and their approval is required, each and every member of the SEBI Board contributes towards that. I will not like to think that as interference.
Doshi: So at no point do you believe that your independence has been hampered by the political motivations of the parties in power or the government in power or the individuals that currently run the ministries that SEBI may have to report to some extent?
Sinha: Not at all but I would like you and the rest of the country to judge it rather than saying it myself. I would like you to look at our track record, what we have done in the last one and a half years and then come to a conclusion. We do not allow people to interfere in our working. In fact our colleagues who have some delegated authority, they are able to take their decisions on their own and that is why you will, for example, see that even in cases where certain amount of irregularities has happened one week back and we have been able to take an action. We have been able to take action in GDR cases, we have been able to take action in some cases recently, last week we took action within a week of something happened. Can you imagine this happening when you are dependent upon certain signals coming from outside the system?
Doshi: If I may candidly ask you and I know you don’t answer company specific question, so I am not taking any names but there have been certain positions of SEBI that have been reversed in the recent past and that has added to the perception that is there political interference and therefore I so candidly put that question to you directly that have you experienced political interference, not inputs from you Board members which is all very valid and that’s fair, that’s why you have a Board and its legitimate but political interference- we all understand the phrase commonly used- has that been your experience?
Sinha: Not at all. Again you are referring to certain matters about which it is not proper from me to talk outside but I would encourage you to get into the merits of those cases and the facts of the cases and the series of judicial pronouncements which have come in those cases. If you combine these three things maybe you will come to the right conclusion.
Doshi: The other reason why I chose to ask you this question is connected to another question that I have been wanting to ask you for several months now. In a recent public speech you were fairly critical of what is now commonly referred to as the government’s policy paralysis and you touched upon several policies that have been pending for a long time but there has been no action, be it insurance or pension reform or FDI sectoral caps in several sectors and it was interesting, if I may use the word, to see you take that very strong position and I wondered when I went through those speeches, when I heard you speak there, that is what prompted Mr. Sinha because you often take a consolatory view. So I was curious to know what has prompted Mr. Sinha to take such a strong position on matters that are not even directly within SEBIs jurisdiction and I wondered whether it was an outcome of political interference?
Sinha: No not at all, it’s very easy to answer that. It’s not an outcome of any political interference. As a part of our normal working, we have to meet foreign institutional investors or even other potential investors and we are asked a number of questions about what is happening in the country on the economic front and as a part of our normal duty, we have to tell them and educate them about the developments in the country. Some of the feedback which we were getting were consistent about certain decisions which were being taken by the larger political system and the background in which I made that statement was, I would say, more constructive rather than a critical one- in the sense that I highlighted the need to act on those issues because its part of my job as Chairman of SEBI to inform the government about what feedback we are getting from foreign institutional investors. Unless you take a completely contrary view that whatever the foreigners are saying; it’s not important and we do not need foreign investment, which I don’t think is anybody’s position. So, what a great mass of foreign investors are saying something which has to be articulated to the people.
Doshi: I understand that but let me quote to you what you said in that speech and one of the portions and the reason is its very subtle- it’s not what you said, I understand the feedback that you were giving to the government, and I understand that you were pushing forward on or asking the government to push forward or make up its mind on the reform process, I get all of that and you have extensive experience with the Finance Ministry, you have worked with the government. So if I put all of that together, I get a fairly good idea of where it comes from but one quote, for instance, this is the strength and the intensity and passion with which you were speaking- “I am quite bewildered that if an agreement has been signed between a raw material supplier and a utility company and both the sides are government-owned companies but year after year that is not getting honored, I am referring to the coal and power sector.” I won’t go on because that will take up too much time but it just seems to me that the regulator sounds exhausted; maybe I am not using the right word but exhausted or tired or at pains with the lack of action or maybe even fatigued by the way this government has been behaving?
Sinha: Let me explain the background and the whole context. One of the greatest strengths of India is that India is a country where rule or law prevails. India is a country where there is an independent judiciary. India is a country where contracts can be enforced and if you look at some of the other countries, I would not like to name them, but there are countries which are perhaps growing very fast, which are perhaps attracting more investments- all the investors that we meet from outside India, they have serious concerns about that country. So far as India is concerned, these are given things. So, if somebody has signed a contract and that contract is not being honored, it is important for us as a nation to restore that confidence- that is the main point because either we want to be counted as a country where rule or law prevails, where contracts can be enforced or they cannot be enforced, so that is the background.
Doshi: What you’re telling me is its not political interference that provoked an otherwise very mild-manner Mr. Sinha that we have known over several years to make these strong comments against the government?
Sinha: I don’t know why you were saying strong comments ---- (interrupted)
Doshi: The cumulative impact of your speech was interesting, I should tell you that. We were all watching and wondering what prompted Mr. Sinha to do this or say this?
Sinha: Number one; there is nothing in that which government is not aware of, nothing in that which has not been articulated by others.
Doshi: And yet you chose to articulate.
Sinha: But in a background where the whole context had to be given and the positives were also highlighted which we are not talking at this stage but if there are concerns emerging, it’s my duty also to highlight that.
Doshi: Government or political interference can sometimes be by pushing a certain kind of action and sometimes by not taking any action at all and what I am referring to is you have two vacant positions now in the senior most level at SEBI and I am sure that given that this regulator needs to function at full capacity to be able to enforce regulations in this country, it must be, in a sense, sort of curbing you from being able to move ahead. What has stopped the filling of those two positions?
Sinha: That only the government can provide the answer to but so far as we are concerned, I would like to assure you that in spite of two positions being vacant, no work is getting stalled. Only thing is we have to work extra but we are trying to ensure that none of the tasks given to us are getting compromised.
Doshi: It’s not my case that they are getting compromised at all. I am just saying– a government can either force a regulator to do something it likes or hurt a regulator by not giving it optimum capacity and I am a little worried that these positions have been vacant for a long time now and there has been absolutely no progress. Whilst talking about vacant position, I will even point out that your employee- UTI MF- and an entity that comes under your jurisdiction at SEBI, has been headless since you left in February 2011. Now to me that is one way of looking at government interference, I am wondering if you look at it that way as well.
Sinha: You are mixing too many things. Let me clarify the position- government also has its limitations, government has to follow a procedure and nowadays unless everything is followed to the last tee, there can be problems. So my feeling is that government is very sensitive that all the rules, regulations are very thoroughly followed because each and every decision of the government is questioned. So if there has been a delay, the delay should not have happened, the government should have anticipated that such positions take about three months or six months or nine months, whatever and then fill it up during that time frame. But to say that government is deliberately not filling up those posts so that SEBI is incapacitated, I think it’s not a very charitable conclusion to draw.
Doshi: No, I am not saying that, if I have said that then I will take that back. What I am trying to say is that you are giving the government a very long rope Mr. Sinha- they have not filled two positions and these are two very important positions in your organization. They have not filled that position of UTI MF head - now there is this acting CEO, but its acting, this is the third largest mutual fund in the country. This government interference can be either do this or government interference can be we will not do this.
Sinha: I must correct you that I have nothing to do with the day-to-day running of UTI. I used to work their earlier, but your impression that government has to fill up this post of the CEO of UTI is not correct.
Doshi: Something is stuck somewhere and it is stuck between, I will not take names because again if I take names then you will not like it. But it is stuck between the government and a shareholder and some variety of issues.
Sinha: It is for the shareholders and the Board of the company to take a call. I don’t think government has any (interrupted…).
Doshi: Unit holders you mean in the case of UTI MF?
Sinha: No, not unit. The shareholders and the board – shareholders of the asset management (interrupted…).
Doshi: The shareholders have been pushing some of them, but for whatever reason there has been no decision for a year and a half.
Sinha: You maybe knowing something which I am not aware of but it is for the shareholders and the Board of Directors of the company. So far as SEBI is concerned since UTI is an entity regulated by SEBI (interrupted...).
Doshi: Are you not concerned that it doesn’t have a proper CEO?
Sinha: That is the point I was going to address. Since it is a regulated entity of SEBI, SEBI provided that unless and until the CEO is appointed, no new scheme will be sanctioned.
Doshi: Now there is an acting CEO.
Sinha: And now they have appointed an acting CEO.
Doshi: So acting CEO is equal to CEO?
Sinha: Only then we have allowed for some of the fixed maturity plans to be sanctioned. So, we have put pressure and we have been talking to the management of or the shareholders of UTI that they should fill up the position quickly.
Doshi: ‘Talking to’- as a kind general advisory or talking to as a promised regulatory action if you don’t toe the line?
Sinha: Let us not be hostile to the government. Let us understand facts. As a regulator, our job is to ensure that the unit holder’s money is protected. You should find out and I am happy to report it from the point of view of SEBI that even in this period there has not been any violation inside UTI. While I don’t say that a CEO is not required, CEO is required, but SEBI has been extra careful to ensure that the shareholders’ interest, unit holders’ interests are protected. So that is our primary responsibility as a regulator and that we are doing. We are not compromising the interest of the investors in UTI, but when and how the shareholder will select the CEO of that particular asset management company is not something on which the regulator should be directly involved.
Doshi: No, I am not saying you should be involved in any fashion, but I am saying does it not concern you when the government drags its it feet on important appointments whether it is two whole-time directors of SEBI or whether it is head of the country’s largest mutual fund?
Sinha: Again the whole-time director of SEBI is, by law, a burden of the government that I accept. (interrupted…)
Doshi: But their inability to do so has hamstringing you or your organization? Unfortunately, the two cannot be divorced?
Sinha: No that part is okay, but don’t link it with the UTI. UTI is a shareholder’s issue; it’s a Board of Director issue.
Doshi: Do you have any idea from the government on when they will fill those two vacant positions?
Sinha: My impression is that the matters are in a very advanced stage and one position might be filled up maybe within next 7 days.
Doshi: Let us hope that happens. We have spoken about the political environment. I want to talk to you about the economic environment. You have touched upon some issues already. What I specifically want to talk about is the way you brought about the changes in the consent order mechanism or the ability of SEBI to settle with certain alleged offenders or violators. Now, I know that in the context or before that change came about, you spoke very eloquently of the pressures that the 99% are putting on regulators across the world to be perceived more fair and more equitable, you said this at an M&A conference early this year and a few months thereafter SEBI brought in this changed consent order. I am connecting the two, I am not saying that two are necessarily connected, but I am connecting the two. Many people have appreciated what you have said and done that certain offenses are way too serious to be settled in any fashion, but we put this question to two other regulators- Former Chairperson of the SEC Harvey Pitt and Former SEBI Chairman Mr. Damodaran and they both thought it was an interesting experimentation, but it may backfire, SEBI may have boxed itself in because now, on all of those issues SEBI will have to proceed regularly upon and not settle in any fashion, thereby taking on a far more onerous case load. What do you think of the pitfalls?
Sinha: Let me begin by answering the background of this question that you raised just now and I would endorse the point that I had made earlier that world over, there is now a demand on the regulators that they have to be active and that they have to be alive to the needs of the ordinary investors and people are raising questions and quite rightly so because they have been going through so much of turmoil over the last four years; they are quite legitimate in raising their demands. Keeping that I mind, we in SEBI believe, that we have to be accountable to the people of this country and we should be very fair. Coming to the consent mechanism, the idea has emanated from that larger concern which we have. Talking about being boxed in- let me give you some interesting facts. The consent mechanism has been in place since 2007, almost one third of the applications which we have received by SEBI were getting rejected. Its not that every application which was filed, it was accepted; one third was getting rejected. The second issue was that the applications which were allowed in, the consent amount or the settlement amount used to vary quite widely. So what we have done is we have tried to bring in transparency in what can be consented and what cannot be consented and how have done it is we have analyzed this one-third of applications which were getting rejected. We got our idea from there that why should we leave it at the discretion of our officials and create doubt in the minds of outside public; why not say it upfront in a transparent way that certain offences are very serious in our view and we have support, for example, from the criminal law justice administration where also certain things are compoundable and certain offences are not compoundable- we have followed the same logic. So one third that was coming in there that we have dealt with in this way and made it in a transparent way. Second is that certain things which were happening and settlement amount was varying, we have come out with a mathematical formula and we have assigned weights to certain things on which the amount can be decided. The ideal situation which SEBI would strive for is anybody who is coming to SEBI tomorrow; he should be able to know before hand that what is going to be the amount that he will have to pay as a settlement amount. He should be able to calculate it himself; so we have given very detailed mathematical formula, for example are you coming right in the beginning or you were coming at the later stage.
Doshi: The objection is not to that- that transparency is very well appreciated and taken as well.
Sinha: So what we have done is, we have removed discrepancy and discretion at the time of coming for settlement and at the time of decision. The third thing which we have done is we have tried to remove delay. There was no certainty about when a consent application would be decided. So, we have given a time frame of six months. We have said when you can come, when you cannot come, if you have filed an application which is defective which is something which many people deliberately did. They filed defective applications and the rectification used to take years. So we have said that if you file a defective application, you must come back to us within 15 days. So, there are three basic things we have done. We have provided for what can be consented, what cannot be consented; we have provided that the discretion in the settlement amount is removed and we have provided that the delay is given a very good timeframe so that delay is avoided.
Doshi: All of this is taken very well and appreciated. The only question I have when I use the word boxed in or the phrase boxed in is the question or the issue raised even by let us say Harvey Pitt. I am going to quote him- he said this is a very interesting and potentially very valuable experiment, clearly regulators across the world are looking at what SEBI is doing and if SEBI succeeds in doing this they may take a page from your book, but he also said that where there are cases where settlements immediately produce huge benefit to investors will now have to await a guilty admission or trial that could mean a substantial time delay. S what they say about justice delayed is justice denied- if a case is going to take 10 years and in that much time there is a sense that justice has been delayed as opposed to you being be able to penalize that case and settle it in far shorter time period, have you lost that advantage, that’s one. Mr. Damodaran said and I am going to use his articulation because it’s so much better than mine- ‘I don’t know whether if you keep so many categories of cases out you will have the bandwidth to continue to fight these cases effectively in courts of law because every setback you suffer in a court of law tends to somehow encourage people to take liberties with laws, rules and regulations to do things which are not in the interest of the market or community’- that is the only fear that you will loose the urgency of time and that if you lose in court the enforcement message will not go out as strongly.
Sinha: I have very high regard and respect for these two gentlemen that you are referring to but allow me to differ from them completely and they have perhaps missed the point. The argument that because we are not having consent proceedings and so the justice will be delayed, is an argument that I cannot accept. On the contrary the whole idea is that whatever bandwidth which we have in SEBI, that bandwidth is utilized for tackling serious crimes, serious offences and the smaller offences which now we are saying can be cosentable, they are taken to the logical end as early as possible so that the staff in SEBI can concentrate on those offenses. So it’s a very convoluted argument; I am sorry I can’t accept that.
Doshi: There has been a lot of conversation on insider trading in the recent past herein India because of some high profile individuals of Indian origin that have been found guilty in the US justice system. I am referring to Rajat Gupta or Raj Rajaratnam of South Asian origin. I think several discussions that we’ve had on the matter, we’ve come to realize that there has not been a single successful criminal prosecution of insider trading in this country and I am putting the question to you that why hasn’t SEBI pushed for criminal prosecution of insider trading?
Sinha: If you are talking about the civil penalty versus the criminal penalty, my case is that SEBI’s power and jurisdiction is very effective so far as civil penalty is concerned and in civil penalty I think SEBI has done a reasonably good job. So far as the question of the criminal jurisdiction is concerned the SEBI has permit to file a prosecution in the court of law.
Doshi: Why haven’t you, not just you, over the history of SEBI, I don’t mean just you?
Sinha: I appreciate your passion, don’t worry, I appreciate it; I am not taking it on me. SEBI has filed, but unfortunately our track record and experience has been very bad. We filed those cases, they are not even any earmark cases, there is only one place or two places where there are earmark quotes, even earmark quotes are not there. The offenses against which we filed the prosecution, those offenses are not taken very seriously, but number three and most important even if the prosecution is taken seriously, the final punishment, which SEBI Act allows is very limited. So if you have what is happening in the USA in mind, you will find that the Indian law does not envisage a criminal punishment for these things in that measure of seriousness as it does for the civil penalty.
Doshi: So in a criminal prosecution if an insider trader is found guilty, he wouldn’t have to go to jail?
Sinha: Going to jail is just a starting, for how many years you go to jail? What is the type of evidence that is required to be given? What type of punishment in jail? Is it a simple imprisonment or a rigorous imprisonment- if you look at those issues and compare the US system with the Indian system and the SEBI system, then you will discover that the parliament of India has not taken the criminal prosecution part of it as seriously as maybe the US has done.
Doshi: It that one thing that you would like to see changed?
Sinha: We can, but the civil penalty part, if that is implemented effectively, lot of the deterrents will come in and people get very excited if somebody is sent to the jail and especially if he is an important person but the civil part has to be implemented first.
Doshi: But the civil part is you cannot access markets for a while. Then after two years, you can access markets, so it is all very limited in terms of the penalties, depending on the individual penalties?
Sinha: No, there is a very high level of penalty which is possible. SEBI Act, in case of insider trading for example, provides that the monetary penalty that can be given to you will be Rs 25 crore or three times the unlawful gain you have made, whichever is higher. This is one of the few laws in the country where between the two options it is whichever is higher; so it can be very effective. The problem is slightly different- rather than getting excited about who is going to jail or who is not going to jail, the problem is, what is SEBI’s capacity to gather evidence to prove that insider trading has happened- that is an area where SEBI has a problem.
Doshi: In terms of the powers of SEBI?
Sinha: Power to gather the evidence and in that context SEBI has taken up with the government that allow us to have at least access to the call data records. There are eight or nine other agencies which have even got the power to intercept the call, to monitor the calls; SEBI is not asking for it. SEBI is just asking for data records to show whether two persons who in SEBI’s judgment have been acting in concert and together whether they actually know each other or not because before SEBI they are denying that we don't know each other and that call data record can help us establish that. We are asking for a very small thing. I do hope that government will take a view very soon; we had a meeting about three weeks back and I was assured that government is going to take a call on this very soon. That is an important matter; if we get those powers, proving an act of insider trading will become easier.
Doshi: Former SEBI Chairman N Damodaran was the Clause 49 champion. Mr. Bhave mandated mutual funds to disclose their voting actions in investee companies and more recently you have decided to take action against qualified audit reports and also push the case for more shareholder participation via e-voting. So, what else do you hope to do to foster higher standards of governance in India Inc?
Sinha: We want to take more and more measures. However we do not want to take measures in a disruptive way. We would like to take measures by making the corporate India ready for this and we will welcome this movement of the proxy advisory firms to gather steam and to get strength. We would like the institutional investors in India to be more proactive.
Doshi: Do you think they have been proactive because I must point it that in all their disclosures, we have come to discover that institutional investors, as we always suspected especially mutual funds because they are making the bulk of the disclosures are mute. Eight out of ten times, they abstain from voting on any shareholder resolution and this is an eye opener and thanks to the disclosures but it’s not very encouraging when it comes to institutional activities.
Sinha: Tell me one thing, while I share your concern and things could have been much better but how do you expect regulator to enforce that an institutional investor must vote and must vote in a particular manner- that I can’t do by law but the environment has to be created for that .
Doshi: But the norm Mr. Bhave put in place and SEBI had at that point decided was that you have to explain what your voting action is. So, you have to tell us what the voting action is and you have to tell us why you voted in that fashion. What can be the logical reason to abstain in eight out of ten cases? So if the explanation is not adequate, SEBI can ask for follow ups, you can ask enough questions to force them to explain at least why they are abstaining and if they are unable to explain then be ashamed of the fact.
Sinha: There will be too much of a micro management on the part of regulator. I don’t think you should be even asking SEBI to do it because tomorrow you will feel uncomfortable that SEBI is getting into too many things and SEBI is then trying to take a decision in a particular corporate to be taken in particular manner. Ideally, SEBI should not be getting into it; maybe media can play a role by highlighting what you were doing.
Doshi: We have tried very hard; you will remember when you were at UTI, we have tried very hard but it seems nothing can change the way our mutual funds work.
Sinha: I am not feeling as frustrated as you are because it’s not the job of a mutual fund to get into – let me give you the background. If you go 20-30 years ago, the largest institutional investors in the country were owned by the government- LIC and UTI and generally at the political level and at the operational level in the government, the decision was taken that they should not get into the shareholder issues so long as the company is being run, they should not be voting one way or the other that can destabilize the management. I suspect that that culture is still permeating even in the private sector asset management companies that culture is persisting. So, only in the cases where they feel that a particular decision has been taken which goes against the interest of the minority shareholders then they start agitating. In my earlier job in UTI, we did that in two-three cases and in one case we succeeded; in two cases we didn’t succeed.
Doshi: In more than two-three cases you have told me UTI has raised its voice when it thought that a shareholder resolution was not in favor of all shareholders unfortunately other mutual funds have not followed suit. I recall our last interview when you were at UTI, you took an active stand against this, and other mutual funds have not done so.
Sinha: Let us encourage them but I don’t think the solution lies in the regulator forcing them to take one way or the other with the decision but we have to create that awareness.
Doshi: When we are talking of governance there is only one pending thing I wanted to speak to you about and that is that it has come to light in a recent proxy advisory firm report itself that there are still companies that are handing out special rights to private equity style investors. I won’t name the company because I am not specifically trying to get you to comment on that company but it’s a prevalent practice. Now when companies come to SEBI for IPO clearance, SEBI insists that there are no differential rights between a class of investors, that is SEBI’s goal and that has been what exchanges also enforce over a period of time but once these companies have gone public, in subsequent arrangements they are altering their Articles of Association and they are reinstating special rights to certain classes of investors- mostly private equity. I am curious to know why is it that when SEBI doesn’t allow this when you go public, SEBI doesn’t stop it once you are public?
Sinha: The answer would lie that if all the rules and regulations and procedures have been followed, then SEBI cannot come in the picture. If for example, they have not taken the approvals the way it is prescribed --- (interrupted)
Doshi: You are opposed to differential rights when they come to you for clearance of IPO, that’s when you interface with the company, you see differential rights, you are opposed to it, you ask them to clean it up and come to you with equal rights. Then after when they reinstate differential rights, is there no action you can take?
Sinha: What I am trying to articulate is that if any company has taken a decision which is in violation of SEBI rules or in violation of the Companies Act, we can take action.
Doshi: Unfortunately, it’s not an explicit rule in the listing agreement.
Sinha: Or in the Companies Act.
Doshi: But you stop them from doing so at IPO stage, so why can’t you stop them from doing so thereafter in the life of the company?
Sinha: It’s a good suggestion. Maybe we can incorporate it in the listing agreement that certain things have to be done on a continuous basis.
Doshi: I think it’s a need because you are stopping them at the stage when companies are going public, you are saying no differential rights. Once they are public the same standard should be maintained.
Sinha: But so long as it is not there I would be very happy to know if any company has violated.
Doshi: It’s not a violation because it’s not there; as you pointed out.
Sinha: Then we have to incorporate.
Doshi: This is the last thing on my list and this is fairly rapid fire. All I want is SEBI’s position on some pending regulations/grey areas. For instance, the very vexed issue of call and put options. I would like you to share with us what’s SEBI’s position is on this?
Sinha: If the agreement is not speculative in nature and it is by way of a strategic decision taken between the two shareholders, we think it should be provided for, it should be made legitimate and we are in dialogue with the government because the final decision requires government approval as well.
Doshi: What do you mean by if they are not speculative?
Sinha: We have to ring-fence what is speculative and what is not speculative. If it is, for example, some strategic agreement between one group of shareholder who is coming as a private equity or even not a private equity, but who is coming as a shareholder and the agreement has been signed that certain decisions will be taking place at the happening of certain events, they have to be provided or treated in a different way and whether somebody is buying and selling outside the stock exchange and violating the provisions of the SCRR. So, those are speculative part and non-speculative. Non-speculative broadly I would say are strategic in nature.
Doshi: The vanilla-type of call and put options that are used in most shareholder agreements will be hopefully cleared by SEBI?
Sinha: I hope so.
Doshi: When do we expect a final decision on this because it is really creating a lot of confusion?
Sinha: The problem with media is that you want a timeframe and the problem with me is that certain things I can’t decide on my own. I have to decide in consultation with the government. So, it might not take too much of a time. My impression is that the dialogue is in the fairly advanced stage.
Doshi: The next second pending issue is a GDR clean up. I think as a result of your own GDR order at SEBI and the several malpractices, if I may use that word loosely, within the GDR space there have been some learnings. I understand that the government has expressed a desire to sort of reform this and SEBI had made it views available to the government; what are those views?
Sinha: Views are very clear. For example, we found in our investigation hat companies were raising money and the money was being parked outside India. GDR rules allow that money to be parked outside India in the legitimate hope that perhaps the company needs to buy some capital equipment from outside India and they need that money there. So, they allow them to park outside India for a limited period and for a limited purpose. We found that for years together money was being parked and it was not being brought to India; that is one. Secondly, when the money was being parked, it was also being utilized for trading in the market. So you raise a GDR for a particular purpose and then you park the money outside India and you start trading in securities. Third, you may start trading in Indian securities that means you violate the FII rules and GDR rules and bring this money through some channel and start trading in Indian securities. Fourth, you may start trading not only in Indian securities, but you may start trading in your own securities- so these are the areas.
Doshi: So what you are going to do to block this?
Sinha: We have suggested to the government that certain ring-fencing is required. Various specific guidelines have to be provided that in what situation the money can be kept, within what timeframe it has to be brought back, within what time it has to be utilized.
Doshi: There are outsize GDR issues that have taken place as you’ve mentioned in your own order. So, the size of the GDR issue, the ownership of who owns those GDRs because till now SEBI has been relying on the Know Your Customer Norms of other jurisdictions to ensure the GDR participants – that needs to get cleaned up as you have observed in your own order. So, I am wondering if those are some of the solutions you suggested?
Sinha: That can be part of the solution.
Doshi: But you won’t tell me what the solutions are?
Sinha: It is for the government to decide. Why do you want SEBI to say what government is likely to decide; is it the right thing to do?
Doshi: Now the last issue that I want to talk about and I suspect this is an issue that is even more closer to your heart than any other issues that we have discussed and that is the impending deadline regarding the 25% minimum public norm requirement. I think the deadline is July next year and there are two big concerns there that many companies have left it to the last minute and they are not going to be able to do the required dilution in the given time given the market conditions; that’s one. Secondly, and this is the concern I would like to talk to you about as many people believe that the routes that SEBI has laid out for such dilution are fairly restrictive and the question is being asked why can’t SEBI open it up and leave it to the discretion of promoters themselves on how they want to sell down. Why must SEBI decide that you have route A, route B, route C, or route D available? Why can’t you open it up and say come down to 75%, however you will, as long as you are not placing it with friends and family?
Sinha: Yes, so long as you are following the objective of making it widespread and not controlled by you directly or indirectly, I have no problem. I was in a conference two days ago and I made this point very clear that any suggestion, which we receive from the industry or from anybody, which can provide us a safeguard and also a way out for them to commit more options and more avenues, we will do that.
Doshi: Why have only 3 or 4 routes?
Sinha: The first thing I would like to tell you is that SEBI is open to providing more and more legitimate ways and I am not saying it as a philosophy or as a future statement, we have already done it. I want you to appreciate the two more avenues have been provided. In the first avenue we provided, by experience, certain shortcomings were discovered; we have made those amendment. For example, cooling-off period of 90 days, we have reduced to 14 days. The 100% margin, we have brought it to 25%. 1% of share capital, we have brought it down to 25% all these changes we have made, whatever was legitimate. Your question that allow all possible avenues (interrupted…).
Doshi: As long as its not friends and family.
Sinha: Yes, that is one limited explanation you are giving. We are concerned that all the options that are being asked for, if those options do not have a chance of manipulating the larger market or the existing market and in letter and spirit, it follows the philosophy of making the promoter holding below 75%, we will do that. We have received some concerns and let me assure you that those suggestions are under active consideration. You might hear something very soon.
Doshi: What will I hear?
Sinha: Maybe two weeks from now.
Doshi: No, not when, what will I hear?
Sinha: Within two weeks from now.
Doshi: No, but can you give me a sense of what those routes maybe? I will tell you why because for some promoters who --- (Interrupted)
Sinha: Let me interrupt you on this. People who are raising these issues, they do not have their heart on diluting. I am leveling this allegation that if there are so many options available, why can’t you, as a promoter, reduce by 1%. Show me your intention, why is that intention not being shown? Just imagine there are 30 companies who are less than 10% and this rule has been in place since 2001. In last 11 years you didn’t find any opportunity to dilute and you are as low as 2%; how will you reach 25%? Please show your intent, don’t expect everything from SEBI. I am giving an assurance that we are willing but where is the action from your side, please do that. You will find us very responsive.
Doshi: I fully agree with you on that that I think companies have also pushed their luck by leaving this to the last minute in the hope that probably this deadline will get extended as it has been over the last several years and therefore we may not actually have to do anything but clearly the regulator means business and that is evident in your body language and your conversation. You will consider all legitimate options and you may even not prescribe two or three but maybe create a negative list saying if you are allocating to X type of entities, you will not be allowed but if you are diluting by preferential allotment to private equity or doing a block deal which is a genuine block deal on the market place and not an negotiated one, it will be okay.
Sinha: Let me frame my reply in the following manner. If I find that companies are very keen and they are serious about diluting their stake, then the manner in which they can divest or not divest- that will not come in the way. We are looking at the entire thing in a fresh manner. Just because the avenues are limited that will not come in the way. We will provide them all the legitimate avenues.
Doshi: Thank you for your time Mr Sinha.