Regulators in the financial markets still don’t get what savers really need

On 27th March, chief election commissioner of India (CEC) Dr. S Y Quraishi had Moneylife Foundation members and hundreds of others spellbound with his description of what the great Indian Election Circus is all about. A mammoth, high-tension exercise, fraught with constant danger of violence and worse, the Indian elections have been conducted with smooth precision by Dr.Quraishi and several of his predecessors.
He spoke of how the Election Commission (EC) works closely with different stakeholders to stop political parties and candidates from flouting rules. From midnight calls of television anchors about hate speeches, to ordinary citizens calling in to report bribe attempts or information about cash being transported in ambulances, hearses or on the rooftop of buses—thousands of empowered government officials working with the EC listen carefully and react with great speed, whenever and wherever they can.
It got us thinking about how the exact opposite is true when it comes to our financial markets. Insurance, banking and capital markets—each has independent regulatory bodies which are now headed by omnipotent IAS officers. All of them wield enormous power with little effect or accountability. What makes the EC different? Is it only about the power it derives from its constitutional status? Possibly. After all, Vinod Rai as comptroller and auditor general of India (CAG) has also blazed a new trail by exposing the brazen loot of nation’s resources in telecom, coal and aviation. But then, why have only a few CAGs before Mr Rai been as bold? Why have we seen only one path-breaker at the Central Vigilance Commission (CVC)? On the other hand, almost every CEC has maintained or bettered the benchmark set by TN Seshan in the 1990s.
One may argue that the stakes are different in the two sets of posts. A careless CEC would cripple democracy and permit mindless violence, as had happened for many decades until TN Seshan came on the scene. On the other hand, the global financial crisis has shown that careless regulators and rapacious finance companies have crippled world economy and bankrupted entire nations. India narrowly escaped the brunt of 2008, but we aren’t doing well either.
Financial regulation in India is in a mess. The only strong financial regulator we have seen in the past 20 years was GV Ramakrishna, also an IAS officer, who set the capital market on the reform and regulation path (dragging it out of a morass of speculative excesses, frequent payment problems, delayed settlements and innumerable market closures) even before the Securities and Exchange Board of India (SEBI) got proper statutory teeth. The quality of regulation at SEBI has been mostly downhill ever since.
Successive governments ensured weak regulators for banking (at the Reserve Bank of India-RBI) and insurance (Insurance Regulatory and Development Authority-IRDA) in the two decades since we started economic reforms.
At the same time, politicians, ministers and policymakers have taken such keen personal interest in the ups and downs of stock markets that there is a strong suspicion that volatility in stock prices is deliberately engineered to benefit big foreign speculators. Further, obtusely worded statutory provisions, regulations and guidelines, far from indicating sloppiness, are deliberately designed to allow the government to remain in control. Netas and babus can trigger market turmoil through seemingly harmless statements, or target and harass individuals (usually film stars, artists, cricketers) or businesses through capricious interpretation of rules.
Take the stock market volatility triggered by the recent Budget. Why is the finance ministry offering a palliative a day to quell fears over how wide and deep are the implications of its retrospective amendment to tax laws going back to 1962? Speculators, day-traders and ‘pattern traders’ thrive in a volatile market and every rumour is cleverly used to set off sharp price movements. Consider this. Despite a terrible Budget (consensus market view) the Sensex shot up 300 points to 17,836 in a 45-minute period while the FM (finance minister) was speaking; it then crashed dramatically by 436 points the very same day to 17,400. On 21st March, ferocious buying saw the Sensex soar from 17,276 to over 17,600 for no apparent reason.
The next day after 11am, it nosedived by 564 points to 17,136. Another round of volatility was triggered by apparent confusion over the issue of non-transparent participatory notes (PNs) and prices continue to yo-yo, based on rumours or finance ministry comments. Again, a government which piously claims that the decision to re-open tax books going back 16 years, is desperate to assure those who invest through such dubious PNs that they have nothing to worry about in the tax policy changes. Is it really so hard to introduce new rules and policies in a clear and precise manner?
Now let’s move lower down the power ladder to government regulators. Our Cover Story this time outlines the daylight robbery happening through regulated insurance products and sales tactics that are pure fraud. I believe that the government does not care how insurance is sold, so long as it can commandeer the mammoth Life Insurance Corporation of India (LIC) to bail out the finance ministry after policy blunders and goof-ups. 
If LIC’s opaque investments were open to public scrutiny, its exposure to Kingfisher Airlines, the UB group and public sector entities such as ONGC would probably raise serious questions. 
Over the past few years, Moneylife has repeatedly pointed out how savers are fleeing from equity investment and mutual funds because of arbitrary policies, poor grievance redress, rampant mis-selling and due to the complete disconnect between the regulator and investors.
The Union Budget had a peculiar way of proving us right on both counts. First, the FM introduced the ill-conceived Rajiv Gandhi Equity Savings Scheme offering tax incentives to retail investors in order to ‘improve the depth of the domestic capital market’. Isn’t it ironical that a country, whose economy attracted large portfolio investment as its economy grew at 8% until recently has to entice its own citizens to invest in equity by offering tax concessions?
Since SEBI, which clearly fathered this idea, didn’t do its homework, it is now working on course corrections.  SEBI forgot that the high cost of market entry and cumbersome processes were a problem. It is now attempting to set things right with no-frills demat accounts (whatever that means) and a single, standard, know your customer (KYC) identification. Since the concessions and restrictions weren’t even as good as the existing provisions, there is talk about tinkering on that front too. And, since investors may still be unmoved, the FM addressed the SEBI board and asked them to ‘diligently’ protect retail investors.
Instead of these vapid exhortations, the FM would have done better to seek facts and numbers. He would discover that investor grievance redress is at its worst today. Investors allege that SEBI’s newly launched SCORES (SEBI Complaints Redress System) does not work and receive no reply. What a contract from the EC which has a polling booth for a person in the Gir region.
The chairman UK Sinha’s office ignores all queries and seems more focused on keeping tabs on the undercurrents in the North Block. Mr Sinha seems to believe that as long as he keeps his political masters happy, makes upbeat public statements and tinkers with the rules, he need not bother about retail investors’ issues. The same is true of RBI and IRDA. In any case, every political party is much too busy either trying to topple the government or holding on to power, to bother with savers and policies that affect them. 

Courtesy: Money Life