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Money Sep 27, 2012

Investor wariness seen rising over Sebi chief 's appointment

By Arjun Parthasarathy

The regulatory authority, whose primary aim is to take care of the interests of small investors, is itself under the Supreme Court scanner on the appointment of its current chief UK Sinha. A public interest litigation (PIL) filed against the appointment is now being looked into by the SC with notices being sent to the government and the others concerned.

The petition has alleged that there were several irregularities in the appointment of the Sebi chief and it has brought a key aide of the then FM and current President Pranab Mukerjee under the lens for aiding the appointment.

The petition has alleged that there were several irregularities in the appointment of the Sebi chief and it has brought a key aide of the then FM and current president Pranab Mukerjee under the lens for aiding the appointment.

The fact that the appointment of the Sebi chief is being investigated raises questions on the businessmen, politician and bureaucrat nexus. This nexus benefits a few at the cost of many and in case of capital markets the cost of the nexus is borne by small investors.

The small investor will now feel that even the regulator will not protect his or her interests and will rush towards bank deposits and gold, shunning the capital markets in fear of losing money.

The Sebi cloud comes at a time when Finance Minister P Chidambaram has announced a tax saving equity scheme to bring in first-time investors into the market. The Rajiv Gandhi Equity Scheme gives 50% tax break on investment of up to Rs 50,000 in capital markets. The scheme itself is flawed as pointed out by Firstpost and the scheme is sure to flop if the small investor has no faith in the regulator.

The government has to act in haste in the Sebi matter. It is imperative that the regulator is seen as protecting the small investor rather than favouring businessmen.

There is absolutely no incentive for a small investor to invest in capital markets at present. The fact that equities are in a five-year bear run is itself a big deterrent to investors looking to invest in stocks or mutual funds.

The various scams that have taken place in recent years, including the 2G scam and Coalgate scam, have only strengthened the view among investors that they are at the mercy of politicians, businessmen and bureaucrats.

They have been further hit by the fact that Sebi has actually approved increasing expense ratios of mutual funds. Needless to say the small investors are now looking at capital markets cautiously as they feel that everyone out there is out to make money out of him and not make money for him.

The fact that even the Sebi ruling on lower expense ratios for direct investments into mutual funds is seen as being against distributors is another cause for disturbance for the small investor.

Distributors see lower expense ratios for direct investments as a threat to their business as they believe investors will desert them.

The fact is if they add value to investors, they will not desert them but that does figure in the distributors minds.

Sebi now has a tough task ahead. The first task is to make itself be seen as protecting small investors' interests rather than furthering the cause of the mutual fund industry or improving capital markets.

The second task is convincing small investors that no one is out to take their money away from them instead of making money for them. The third is to make markets safe for investors by coming down heavily on insider trading, manipulations etc.

Sebi has to make a big-ticket arrest such as the one made by SEC on powerful men such as Rajaratnam and Rajat Gupta. There are enough cases of market manipulation that is going away scot free by concerned parties paying a pittance penalty while investors have lost crores of rupees in the bargain.

The government on its part must take the Sebi chief's appointment matter extremely seriously and not dilly dally in action, either by proving that there were no irregularities or by arriving at a fresh selecting process. Until then small investors are unlikely to come into capital markets any time soon.

Editor's note: An earlier version of this copy said that the PIL has been upheld by the Supreme Court in the second sentence of the first para. This version corrects that mistake.

by Arjun Parthasarathy

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