SEBI chairman suggests that AMFI should seriously examine playing the role of a self-regulatory organisation. This idea was first mooted in 1994 and is of dubious merit because the concept of SRO does not quite work in India

The capital markets regulator, Securities and Exchange Board of India (SEBI) has asked the industry body Association of Mutual Funds in India (AMFI) to don the hat of a self-regulatory organisation, instead of acting as a plain-vanilla industry body as it is doing currently. This comes close on the heels of a rash of rapid-fire changes made by the regulator over the last one year. However, this is one idea that dates back all the way to the tenure of GV Ramakrishna.

Speaking on the occasion of the CII Mutual Fund Summit 2010 in Mumbai today, SEBI chairman CB Bhave did not mince words while discussing the current state of the mutual fund industry. After introducing a series of game-changing initiatives over the past one year, that have virtually shaken the very foundations of the mutual fund industry, the SEBI chief came up with the proposition that AMFI take up more responsibility and consider playing the role of a self-regulator for the industry.

Mr Bhave said, "One thing we would strongly suggest is to examine the role of AMFI and SEBI. All this while, AMFI's stand has been that it is not a self-regulator, but an industry body. You need to examine for yourself whether this is the right way to go. The advantage of being a self-regulator is that you can have your own rules about how the industry will operate, without having to turn to statutory laws which are so much more difficult to change. Because this is an industry, you can take this route. But for that we need some commonality of purpose and a certain coming together of minds. This is not criticism but an examination of where we need to go. You need to ask whether in order to reach where you need to be by 2015, the organisation needs to take on a self-regulatory character." It is interesting to note that this 'proposition' from SEBI has come after various attempts on its part at micro-managing the industry, which have mostly led to a lot of confusion.

The truth is that this concept of self-regulatory organisations (SROs) has never worked out well in India. Similar attempts in the past have been in vain. There are no SROs of investment bankers, brokers, depositories or stock exchanges. At one point, there was a vague idea of brokers forming an SRO but this not happened. In practice, the stock exchanges, which wield substantial powers of their own, are not willing to take on the role of even minimal regulation. They prefer instead to pass on the buck to the regulator. When asked about price-rigging in illiquid scrips, the BSE keeps mum. The concept of SRO is really on paper.

The bigger question is, is SEBI, in allowing AMFI to play the role of an SRO, willing to pass on some of its powers to AMFI for that purpose? And if it does, will the regulator stop micro-managing AMFI?