Why is it that the interests of consumers and consultations with consumers is never at the centre of any rules the regulators make?

If you ask a roomful of people whether the consumer should be the primary focus of financial sector regulation, it would be safe to bet that you will have nearly 100% concurrence. Every stakeholder pays verbal obeisance to the importance of the consumer of financial services. The preamble of all statutes creating independent regulators (for capital markets, insurance or provident funds) casts a duty on regulators to ‘develop’ markets and ‘protect investors’. But, as Moneylife has repeatedly pointed out, regulators and policy-makers merely dance around issues that consumers face, without ever interacting with them to frame appropriate regulation.

This is why after 25 years of modernisation, development and regulation by India’s capital market watchdog, we have only seen an exodus of retail investors from primary and secondary market as well as mutual funds. It is also the reason why we are an under-insured nation and why our pension regulator has made no headway. But, put a set of neutral people connected with the financial sector in a room and the focus immediately becomes the consumer. At an interesting panel discussion organised by CUTS International on 16th December, there was a strong consensus that ‘there is need to focus on the consumer as the core purpose of all financial sector regulation’.

What do I mean by regulators’ dance around consumer issues without addressing them? Consider how the Securities & Exchange Board of India (SEBI) deals with mis-selling of products to retail investors. First, it makes it impossible for genuine and honest advisors or brokerage firms to function by tying them up in costs, rules, red tape and permissions. Those who ignore the regulator happily fly below the radar, unless they do something so big and foolish that they are caught. And, even the honest and ethical, who occasionally stumble on meaningless rules, are hauled over the coals.

Instead, exemplary punitive action in select cases or adopting a class action approach to mis-selling techniques will get better results. Consider the Suchitra Krishnamoorthi case that we have repeatedly documented. SEBI took long enough to issue a show-cause notice to HSBC and is now hearing the matter. A stiff monetary penalty and disgorgement order will really send a strong message to banks who have perfected the art of mis-selling of third-party products to their customers. Banks violate their fiduciary responsibility to customers when they mis-sell mutual funds, insurance or wealth management services; they get away with it because the Reserve Bank of India (RBI) has a hands-off approach to products that have separate regulators.

Tough action by RBI or SEBI in Ms Krishnamoorthi’s case would fall squarely within the new global thinking on consumer protection, which has moved away from the meaningless disclosure-based regime that we continue to follow to a policy of ‘treating customers fairly’ and ensuring that financial products are simple, easy to understand and sold on the basis of the customers’ needs and financial profile. Let’s look at a couple of key issues that came up at this consumer-centric discussion.

The multiplicity of regulators, and having similar products regulated by different regulators, leading to regulatory arbitrage and conflict between regulators was flagged off as an important concern. Turf wars between SEBI and the insurance regulator and the fact that we have a separate pension regulator when asset management companies will manage the pension funds were cited as examples.

A prominent view was that the lack of coordination between regulators was the key reason for conflicts and inappropriate regulation. And coordination was missing because regulatory bodies had become sinecures for retired bureaucrats who, often, bagged these posts without any relevant experience in the sector. These appointees were then expected to decide on complex, technical and developing issues—a tough act even for those with decades of experience in a given sector. This would not have mattered if regulators were accountable to parliament. Unfortunately, even the standing committees of parliament do not exert any clout because very few members have domain knowledge of, or interest in, regulation, good governance or consumer protection.

In the past year, the appointment of SEBI chairman has been the subject of multiple litigations. There is now a move to extend the term of the current incumbent through an executive decision. Such ugly controversies can be avoided if key appointments are validated by parliament or a select parliamentary committee as is done in the US.

Many panel members felt that the FSLRC’s (Financial Sector Legislative Reforms Committee) recommendation has provided answers to many of these issues by proposing a unified regulator. Unfortunately, dissenting notes by three of the FSLRC’s key members marred the report. One would have thought that a committee as eminent as the FSLRC, which operated on a generous public budget, would have understood the need to hammer out a consensus and present a set of unanimous and unequivocal recommendations. We also find it strange that FSLRC made almost no effort to engage with consumers or consumer organisations in the financial sector.

Prithvi Haldea, chairman of Prime Database group, raised a very significant issue. He pointed out that the absence of a systematic data collection, analysis and interpretation mechanism, that could feed into policy- and regulation-making, is resulting in poor regulation and a lack of regulatory predictability. Mr Haldea’s www.watchoutinvestors.com has been providing yeoman’s service to consumers by publishing orders of a slew of regulatory agencies, quasi-regulatory and self-regulatory organisations in the financial sector and those under the ministry of corporate affairs. Watchoutinvestors.com is doing the job that the government and our regulators ought to be doing, in creating this goldmine of collated, cleaned and standardised information which can be the basis of significant academic research and policy-making. Instead, regulators hardly give the work its due and Mr Haldea says he, often, receive threats and requests to remove regulatory orders posted on the website.

Citing an example of how data capture can improve regulation, Mr Haldea pointed out that promoters, often, reclassify themselves as public investors in order to sidestep regulations and disclosure rules. They also change the classification repeatedly, without any fear of detection, since regulators have no mechanism to track the mischief. In one case detected by Mr Haldea, a promoter had changed his classification from promoter to public investor as many as five times. In the absence professional data-mining, there is no scope for detecting or acting on early warning signals thrown up by these corporate actions.

We, at Moneylife, believe that data-mining and analysis that Mr Haldea refers to, especially with regard to information filed with the registrar of companies, is critical to detect and act against thousands of ponzi schemes or direct marketing scams that are looting gullible Indians everyday.

What was evident from this discussion was that almost every regulatory change that would be considered imperative to true consumer protection would be opposed by corporate lobbies as well as government bureaucrats who enjoy a five-year extension to the power and perks they draw at the highest level. A quick data check would also reveal that all top regulators spend over half of their time on foreign tours. This leaves little time for serious consumer protection. The result is that we have endless articulation and forced spending on ‘financial literacy’, but very little action on the ground.

Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]

Devyani Khobragade claims the value of her properties at Rs1.78 crore plus three tracts of land in her own statement to MEA. A lot of her properties are inherited from or gifted to her by her father, Uttam Khobragade, a controversial former IAS officer

Dr Devyani Khobragade, the officer from Indian Foreign Services (IFS) cadre is at the centre of a diplomatic row between India and the US. In order to ensure full diplomatic immunity post the arrest and release episode in New York, Dr Khobragade was on Wednesday transferred to the Indian permanent mission at UN in New York. While several people know about her father, Uttam Khobragade, a retired officer from Indian Administrative Services (IAS), nothing much is known about Devyani Khobragade. What is interesting are the huge assets in her name, a lot of which was gifted by her father, a controversial officer of the IAS.

According to a statement submitted by Dr Khobragade to the Ministry of External Affairs (MEA), as of 31 March 2012, she owned 11 properties, including flats and land in Maharashtra, Kerala and Uttar Pradesh. She declared some of the flats and land as 'inherited' from her father while others were bought by her. As per the declaration, Dr Khobragade earns a salary of Rs50,350 (including grade pay) per month, while generating revenues of Rs2.26 lakh a year from all her immovable properties. The total value of properties, excluding three agriculture land, owned by Dr Khobragade is Rs1.78 crore as per her statement. In short, as of 31 March 2012, Dr Khobragade was earning total revenues, including her salary and income from properties, of Rs8.30 lakh for FY2012 and owned properties of Rs1.78 crore, plus market value of three tracts of land.

However, as per the present market value, her properties may be worth more than Rs6 crore as her 1,000 sq ft in the controversial Adarsh Coop Housing Society (Adarsh CHS) in Mumbai alone is worth about Rs4 crore.

Dr Khobragade stated that she bought the flat in Adarsh CHS for Rs90 lakh by selling a flat in Meera Coop Housing Society at Oshiwara in Mumbai. While this may look good on paper, the reality may be quite different as the property rates between Oshiwara, which is located between Goregaon and Jogeshwari, and Colaba, the prime location of the Adarsh CHS, are way apart. For example, at present a flat in Colaba is priced between Rs39,400 to Rs43,600 per sq ft, while the same in Goregaon costs between Rs14,800 to Rs15,300, per sq ft as per Magicbricks.com. In short, the price difference between a flat in Colaba and Oshiwara is about three times. She did not mention the purchase price or value of her Oshiwara flat in the statement, though.

In 2006, Dr Khobragade purchased a non-agriculture plot measuring 5,000 sq ft at Alibag from Maharashtra Housing Area Development Authority (MHADA) that is shows as worth Rs10 lakh in the statement. As a co-incidence, her father was the chief executive (CEO) and vice president of MHADA between 2000-02 and 2004-05. Even this plot is worth over Rs50 lakh as per the current market price.

As per the statement filed by Dr Khobragade, out of her 11 properties, she purchased only four, while rest were either inherited or gifted or transferred by her father over the years. Besides, a flat in Adarsh CHS and plot in Alibag, Dr Khobragade also purchased a flat measuring 500 sq ft at Kanchanwadi in Aurangabad district for Rs7 lakh and a plot of 200 sq metres at Swarna Nagari Greater Noida in Gautam Buddha Nagar district, Uttar Pradesh for Rs20 lakh. According to the statement, she bought the Swarna Nagari plot by selling a house at Gurgaon from Ansal Building. But there is no value attached to her Ansal Building house in the statement.

For three agriculture lands, Dr Khobragade inherited from her father and from which she earns an annual income of Rs70,000, there is no purchase value mentioned. This includes 25-acre land at Gowardhan village in Chandrapur district, 8-acre land at Gawahne village in Ratnagiri district and 2-acre land in Kalamb village in Raigad district.

Dr Khobragade earns highest revenues of Rs1.20 lakh during FY2012 from a flat measuring 800 sq ft at Kondwa in Pune that was purchased by her father in 1995 and as of March 2012 was valued at Rs25 lakh.

Uttam Khobragade also gifted two land parcels measuring 2.02 and 2.7 ares in Ernakulam district of Kerala to his daughter on 20 December 2011. Present value of these two plots is shown as Rs16.35 lakh in the statement submitted by Dr Khobragade to MEA. Mr Khobragade also transferred a plot measuring 3.97 ares (9.805 Cents) in Pallipuram village in Kerala to his daughter's name on 2 January 2009. This is valued at Rs5 lakh.

Here is the statement of immovable property returns of Dr Khobragade as on 31 March 2012…
 

According to a report from Indian Express, Uttam Khobragade's name had also figured in the Adarsh CHS scam and he was accused by the Central Bureau of Investigation (CBI) of helping the CHS use higher floor space index (FSI) than permitted by allegedly transferring an adjoining plot reserved for a BEST bus depot to Adarsh. “He and Devyani, it was alleged, had got a flat each in the society as quid pro quo. Khobragade, who had denied any wrongdoing in the case, Wednesday said he and Devyani would not return the apartments. Devyani, who already owned a house in Mumbai — which too was allotted under the state government's 10 per cent quota — got the Adarsh flat after she applied for it,” the newspaper said.

Uttam Khobragade, who was the general manager (GM) of Bombay Electric Supply and Transport Undertaking (BEST), on 15 December 2007 introduced AC buses in Mumbai by labelling them as King Long buses. These so-called King Long buses  that used to cost Rs40 to Rs45 lakh at that time were not even made in China but in our own Mohali and that too by a local manufacturer using few parts from the Chinese company.

According to a report in Mumbai Mirror, the King Long buses, sold to commuters as top-of-the-line Chinese import, were not King Long buses at all. “The purple buses you see breaking down every now and then have nothing to do with the Chinese bus maker Xiamen King Long United Automotive Co, except a mechanical part here and there. The rickety clunkers that have given the usually efficient BEST a bad name are Cerita buses put together by an Indian company JayCee Coach Builders (JCBL) at Lalru, Mohali in Punjab,” the newspaper said.

During the inauguration ceremony on 15 December 2007, both the then chief minister Vilasrao Deshmukh and Uttam Khobragade, the then GM of BEST referred to these buses as King Long, says Mumbai Mirror. For years Mumbai had been sold the lie of these haphazardly put-together vehicles with a ridiculously high incidence of breakdowns—4,037 in two-and-a-half years for 285 buses—boasting of a Chinese lineage, the newspaper report said.

Khobragade, the then GM of BEST when these AC buses were introduced in services, told the newspaper that since the matter is too old, he can't remember the specifics.