SEBI, the ‘regulator’ of the Indian capital markets, is truly a bull in a China shop. Chronicles of regulators worldwide would rival Cervantes’ Don Quixote. The regulator thinks that it is engaged in ‘investor’ protection. Action that is focused on investor protection ends up having a totally bizarre result. To protect the ‘investors’ from the mutual fund sales man, it took several steps, which have had the unintended (?) impact of hammering a nail in to the coffin of the yet to mature mutual fund industry. When the noise became unbearable, SEBI tried to take on the Insurance industry which was merrily run by proxies of the insurance salesmen. Regulators tend to see windmills as giant enemies.
SEBI has never been able to pre-empt any white collar crime in India. Its investigation and prosecution has been the stuff that comedies are made of. The Harshad Mehta scam, after everything was handed to it on a platter, is testimony to its prosecution abilities. The Gods got tired of waiting for action from the regulator and pulled Harshad below. Innumerable acts (rulings) of SEBI were overturned by its tribunal.
Suddenly, SEBI discovered ‘compounding’. A full import from the US of A. Compounding has now become a planned expenditure for brokers, bankers and other players who now have a way to evaluate the costs and benefits of breaking a law. And compounding has enabled AMC’s, brokers, investment bankers, companies and other regulated entities to break the law with impunity and not carry any scars! When punishment for an act is merely a fine, it is no longer a sin. There is merely a price at which it is right. Going through the website of SEBI and reading the compounding done so far, is scary. The hallowed names all have contributed to the bottom line of SEBI. Of course, the IRDA (the agency that ‘regulates’ the insurance industry) has also picked this practice up. Recently, it slapped a ‘penalty’ of a miserable half a million rupees on an insurance company that submitted one product for approval, but sold something else altogether!
Now SEBI is chasing the likes of Bennett Coleman (Times of India, Economic Times, ET Now etc). These media companies have been selling ad and PR space in exchange for equity in many companies. Naturally, to protect their investments, the media ensures that the investee companies are plugged and negative news blanked out. Yes, it is a scam, but who can say it is legally wrong? The media company is not bound by any law. They are unlisted entities. They do not legally mislead anyone. On what basis can SEBI regulate this? SEBI clearly is caught with its pants down. Crime does pay.
World over, it is the business interests that write the rules. Regulators are there merely because it seems logical. No country in the world can actually claim that regulators stopped or saved an investor. Sometimes, public pressure and legal compulsions do force the regulator to do some good. Given a choice, the regulator is merely a spectator. I remember going to meet the Deputy Governor of RBI, once upon a time. My boss and I were worried about what the leasing and hire purchase companies were up to. It was obvious to everyone that there is a tragedy in the making. Public deposits were being accepted in gross violations of all norms. Fancy accounting had inflated the networth of all the NBFC’s. Credit quality was slipping. NBFC’s were paying six to ten percent commission to get one year deposits at the then ceiling rate of 14% p.a.! We discussed all this. Then the honourable gentleman said that the RBI can act only if someone ‘brings it to our attention’. We were stunned! He wanted us to put in a written complaint so that the government could act! I lost my temper and told the gentleman, that right outside the main RBI building, there were cloth banners announcing incentives of six percent on the one year deposit by a NBFC. The gentleman was getting uncomfortable and we were pissed off with him. True to his form, the Dy Governor did precisely nothing.
How many people have lost money with time shares and plantation companies? Has the regulator been able to do anything at all?
Regulation of financial markets is a charade. You have only yourself to blame if you get trapped in the web of deceit that is continuously being spun by the players. Caveat Emptor!


2 thoughts on “The Gods that Fail

  1. nice post. You should have mentioned the GOLDEN RULE of investing. He who has the gold makes the rules. So Bennett Coleman, Citibank, Hdfc, etc. are the rule makers. Aw come on SEBI read somewhere that Einstein said 'Compounding is the 8th wonder of the world' – it is true is it not? So they are using it…:)


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