Investment Advisor Regulation III: SROs have never worked in the past; will it work now?

The new (flawed) investment advisor regulation is a non-starter since SEBI is proposing to regulate through the idea of Self Regulatory Organisation. SROs have not worked in the past and may fail in this case too

The Securities and Exchange Board of India (SEBI) in a concept paper suggests that a Self Regulatory Organisation (SRO) be set up to regulate investment advisors. The SRO would be registered under the Securities and Exchange Board of India (SEBI). The activity of investment advisors would be regulated by the SRO. However, issues related to the financial products other than securities would come under the jurisdiction of other regulators. Is SRO the right structure to institute so-called investment advisor regulations?

Forming an SRO would just result in a blame-game situation and there would be no accountability. When an issue arises, the regulator would blame the SRO for not being able to supervise one of its advisors. Theoretically, the SRO could penalise the advisor, but will it not lead to a maelstrom of protests and finger-pointing? Who will actually 'run' the SRO? Indians are notorious for not being able to group together for common good and this is supposed to a grouping of sellers for the buyers' good! India's grievance redressal, which is not pro-investor, will just get worse.

In any case, will an SRO be even set up? Is there a precedence of effective SROs? The concept of SROs, mooted by GV Ramakrishna, the second SEBI chairman way back in 1993, has never worked in India. SEBI wanted the investment bankers to form what is called Association of Merchant Bankers of India (AMBI).

Then there is Association of Mutual Funds of India (AMFI). In 2009, the market regulator pushed hard to make AMFI an SRO. AMFI has repeatedly rejected SEBI's offer to transform itself into an SRO. AMFI prefers to be a lobbying organisation for the mutual fund industry rather than an SRO responsible for regulating asset management companies (AMCs).

In practice, only the stock exchanges, which wield substantial powers of their own are SROs of any consequence. This is because the job of exchanges is real time and is of critical importance. They have to have elaborate rules and implement them strictly. But even exchanges are often found wanting when it comes to investor protection. They instead prefer to pass on the buck to the regulator. When asked about price-rigging in illiquid scrips, the Bombay Stock Exchange (BSE) keeps mum. The concept of SRO works only with respect to regulating brokers. The only other example of SRO Registrars Association of India. There are hardly a few registrars, unlike distributors which number in tens of thousands.  

What are the chances that SEBI would be able to get them together and persuade them to create an effective SRO? Where would it even start? SEBI can call a meeting of HDFC Bank, Citi Bank, Karvy, etc, to get the idea going but who is it possible that that these totally bottomline-focused organisations would be willing to come together and regulate themselves? And what happens to smaller national distributors and tens of thousands of smaller once spread across the country. Do they get a voice? If they don't get a voice, what happens?

It seems unthinkable that if just 40 well-resourced and large organisations (the AMCs) could not get together and form an SRO,  a group of thousands of disparate and heterogeneous businesses (financial products distributors), would be willing and able to come together. Can SEBI, which is often found bungling in basic, ways ensure this? Don't bet on it.

In the fourth part of this series we will look at more hurdles in implenting Sebi's idea of regulating advisors, brought to our attention by some smart and ethical distributors.

Here are some articles we carried in the past on the concept of SROs:




sanjay doshi

6 years ago

In the past in the chemical industry I have seen cartels not working and undercutting going on. It is wishful thinking to expect an SRO to work.

Surender Singh

6 years ago

If there is a system that an investor can transact directly with AMCs and no commission is to be paid to any one. Then why the entry load is abolished which was meant to be paid to service provider distributor/agent????


6 years ago

I think AMFI was acting as a organisation responsible for developing MF industry by conducting exams and certifying IFAs,now that power has also been snatched by SEBI and given to NCFM which is riduculous,creating more and more depts for one purpose is just confusing for IFAS and investors,if SEBI do not want to take burden of regulating MF industry,it should give its powers to AMFI and AMFI should be strenthened by inclusion of IFAs and investor organisations and a Ombudsman to look complaints(which are never very serious in MF industry compared to Terminals),and AMFI should work to give a seprate online software for IFAs registered with it for ease and cost reduction of IFAs,
i am sure if these steps are taken care of the whole episode of MF industry which is boiling since last 2 yrs will cool down to normal.
i wish people reading this who agrre to me or those who want to add some more will put their comments.

Govt readies draft on Urban Regulatory Authority

The proposed authority will deal with complaints in the housing sector, violations by builders and lack of basic civic amenities, Union urban development minister Kamal Nath said, adding that the regulatory body would come into being through an Act of Parliament

New Delhi: The government has readied a draft of the proposed Urban Regulatory Authority which will deal with complaints in the housing sector, violations by builders and lack of basic civic amenities, reports PTI.

"We have made one draft. I am going to put it on net next month. There are several issues. You can't have a policy and a regulatory body at the same place. The question is what should be the scope and the reach," Union urban development minister Kamal Nath told reporters here on Wednesday.

The draft would be kept on the website for 60 days to elicit people's views and the ministry would also hold some sessions to discuss the formation of the regulatory body, he said.

Earlier while addressing a convention Mr Nath said, "We are looking at an Urban Regulatory Authority. Now we don't want the Urban Regulatory Authority to have inspectors."

"We already have so many inspectors. The government produces the largest number of inspectors. We are in the process and we are talking to stakeholders. Yesterday we had a session," he added.

Mr Nath said that the regulatory body would come into being through an Act of Parliament.

"I hope we come up with something which enables people to get out of some of their problems which they confront everyday," Mr Nath said referring to numerous problems confronting the housing sector.

"We have master plans for 20 years but time moves faster than the master plan. What do you do with the master plan for 20 years if there is something that can be scientifically changed? So we are looking at the Urban Regulatory Authority," he added.

Mr Nath also said that the government should be considering more houses for the weaker sections and also low income group houses. "I have set a target for Delhi. One lakh houses for the economically weaker sections. This is one issue we will have to confront otherwise we will see more slums," he said.

It is not just the slums of the past but also of the future that need to be addressed, Mr Nath said. One is to rehabilitate those living in the slums from the past and the second task is to create enough houses for the economically weaker sections 'in abundance' for the future, the minister told a gathering.

"In our new urban renewal mission we are going to incentivise (construction of houses for) low income groups and economically weaker section," Mr Nath added.

Earlier Mr Nath said that the country was facing a "huge infrastructure deficits in areas whether it is ports, roads or energy."

Finance for creating infrastructure and closing this deficit was not a problem he said. "Financing is the least of our problems. In India it not projects that chase financing. It is finance that is chasing projects," he said.

The challenge was to identify the right kind of public private partnership (PPP) and make them work, he said.


Principal MF launches 367 days fixed maturity plan

Principal MF new issue closes on 3rd October

Principal Mutual Fund has launched Principal Pnb Fixed Maturity Plan-Series A2, a close-ended income scheme.

The investment objective of the scheme is to build an income oriented portfolio and generate returns through investment in debt/money market instruments and government securities.

The tenure of the Scheme will be 367 days from the date of allotment.

The new issue closes on 3 October 2011. The minimum investment amount is Rs5000.

Crisil Short Term Bond Fund Index will be the benchmark index. Shobit Gupta is the fund manager.


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