FPIs have to live with current taxation: Sebi Chief Tuhin Kanta Pandey

A 1987 batch officer of the Indian Administrative Service from the Odisha cadre, Tuhin Kanta Pandey took over as Securities and Exchange Board of India (Sebi) chief on March 1. On the sidelines of BT Mindrush event, he speaks about how he plans to increase trust in the market regulator and make Sebi a world-class institution. Edited excerpts.

Q: What are the priorities you have set in the one month that you’ve been at Sebi?

A: First, I need to emphasise that Sebi is a robust institution. It has been built over the years with successive leadership and has had the benefit of the large number of institutions built around it. We have one of the best capital market infrastructures in the world. The issue is, how can we make our own contribution. We must continuously meet the challenges in a dynamic environment. I mentioned when I joined that we would have four pillars or four Ts—Trust, Transparency, Teamwork and Technology. On trust, how can we build teams, because nothing that Sebi needs to do can be done unilaterally; it must be done with capital market participants. The second is transparency. In many respects, the trust has been high. Sebi is one of the regulators that puts out a lot in public domain. In many cases, we have industry standards forums. There is a Primary Capital Market Committee, there’s a Secondary Capital Market Committee, plus several committees where they deliberate and invite public comments before things take shape. We can give this process a little bit time and not rush through things so that we don’t have to tweak it unnecessarily all the time. We need to have this conflict of interest (issue) sorted out.

Q: Have you noticed a trust deficit, and has that hampered work?

A: Trust is something to be continuously held and upgraded. We cannot really say if there is a deficit or not. The question is that as we evolve, if we keep the next 22 years to 2047 in mind, how will our capital markets evolve? We need to see where we will be in terms of trust, transparency, teamwork and technology. The latter is another area where a huge amount of work will have to be done.  

Q: A couple of months ago, you and other senior officials in the finance ministry wrote important lines on deregulation and getting the government out of the way. From a market point of view, do you see the need for a similar deregulation, because market participants say that in the past couple of years, there seems to have been a bit of regulatory overreach?

A: I see this as an issue of optimum regulation. If you look at the capital markets, we have companies on the one hand, then investors, and then market infrastructure where all intermediation is done. The efficiency with which intermediation is done, the trust with which things are settled, will bring in investors and so more money will be available, both in debt and equity, for people to play. Regulation is in-built into this. It can’t be self-regulated. There must be optimum regulation. It’s a question of striking a balance. If there is too little regulation, remember the global financial crisis, when many commentators said weak regulations were behind the systemic issues. And if we do regulatory outreach, we will we will stifle innovation, be unable to get any work done and increase the compliance burden. There is a need to strike a balance. Now, that optimum balance is a matter of subjectivity, but when we sit together, we can always thrash it out.

Q: Do you agree that regulatory shifts over the past couple of years have made India less attractive to foreign portfolio investors (FPIs)? Can we expect something to reverse that?

A: FPIs have been a very important part of the capital market landscape. They have invested about $800 billion in Indian markets-about $700 billion in equity, $68-69 billion in debt. The flows have gone up in the last five years. Of course, there have been some outflows recently. In any crisis, when there is such volatility and uncertainty, there is some churning. Notwithstanding that, our effort to is to take care of pain points. We have addressed many of them earlier. If there are other obstacles in terms of uncertainties that we create, or uncertainties due to economic, geopolitical and geo-economic reasons, we are prepared to discuss with them.

Q: That’s a very important statement from the Sebi chairman about the openness in listening to feedback from market participants. A couple of months ago, I was among the many who asked you about capital market taxation. Do you think it is an issue that policy makers in New Delhi need to reconsider?

A: Just a few moments ago, you said we should not have too much uncertainty. If some certainty has come in taxation, let’s not unsettle it. We have to live with the taxation which, I think, is reasonable. MSCI US dollar returns over the last five years have been over 11%. For emerging markets, they are around 2% CAGR and for developed markets, minus 2%.

India has offered FPIs 11% US dollar returns in MSCI. And this with the taxation that we have. The taxation has been rationalised. We have to live with that taxation. Fundamentally, the Indian economy is sound. It is the fastest growing large economy with 6%-plus growth rate. We had a bit of a slowdown in the second quarter of the fiscal but growth picked up in the third quarter. Inflation is under control. We have sound fiscal policies. The Budget gave Rs 1 lakh crore additional tax relief to the middle class to boost consumption, savings and investments. Things are in place. Capital formation, both on the government side as well as on the private sector side, is on the upswing. There are several policy decisions such as PLI that have brought several industries to India. Despite economic uncertainties due to geo-fragmentation, tariff barriers and trade issues, India has the biggest potential as a large economy. Fundamentally, the markets will have to track that performance.

Q: What are the risks that any investor, large or small, should factor in today?

A: There is normal market risk and then there is heightened risk on account of geopolitical and geoeconomic reasons. Post Covid, a lot of realignment started taking place in terms of geoeconomic fragmentation because supply chains did not work. Then came the Ukraine and Middle East crises. Everyone wants to reshore the supply chains and work out things in his own way. New uncertainties are arising from the US administration’s stance on tariffs. These things keep coming. We are not really in a benign global environment. There will certainly be problems in global growth and trade, but people are also trying to mitigate the problems. For example, India is trying to work out a bilateral trade agreement with the US and free trade agreements with many other countries. But those apart, there are other risks which come as a matter of fact in any investing.

Q: Sebi has been proactive in protecting retail investors. This seems to have led to a significant decline in trading volumes. How do you see this playing out? Is this something that you as the head of the institution are comfortable with?

A: You are referring to the derivatives market. I would like to give you a holistic picture because retail is very much there in the cash market in a big way. Look at the kind of retail protection that our system has provided. Their money is protected. Sebi has ensured ease of entry and investing.

There is protection in terms of transactions. We have tied up with DigiLocker—the problem of unclaimed money will get addressed as nominees will get access to the DigiLocker. This kind of a system is not there anywhere in the world. Now, let us come to other areas. We have a system of corporate governance practices, disclosures, independent director regulations, investor education, investor grievances and a portal for redressal of grievances. There is a lot of protection, not to talk about other things such as related-party transactions. Sufficient measures have been taken for investor protection. On your question in relation to the derivatives market, a Sebi study revealed that nine out of 10 retail investors have lost money in the F&O market. Sometimes, in their exuberance, retail investors seem to think that they are very smart but lose money. And this has been proven. Therefore, we need a better nuanced thing on that.

Q: Is a clamp-down the answer? Is there a need for a more nuanced framework which allows people to take risk?

A: We need a nuanced framework. We need informed investors. We also need some systemic improvements of how you measure, for example, the volumes you mentioned. Notional interest is sometimes misleading. Comparing options and futures is like comparing apples and oranges. In case of options, it is the premiums which are more important. For example, on the expiry day, you have hordes of people. Just three or four minutes before the expiry, if people are crowding, it can lead to market instability. It cannot be a one-way street. It cannot be that only the very large and organised players make money and retailers (investors) lose money.

Q: Is there more work that needs to be done on corporate disclosures?

A: From the investor’s point of view, there is a big need for corporate disclosures. But at the same time, we have to strike a balance. There was an issue of what is materiality. Sebi provided clarity as to what is the material information that needs to be disclosed and when. There will be greater certainty after that clarity. Corporates also need more clarity as sometimes they are also under doubt. But there are malpractices, blatantly false disclosures being made, though our surveillance system is throwing those out. We will not hesitate in acting against such disclosures.

@szarabi