Over the past couple of months, many fund managers have been talking to us about the Securities and Exchange Board of India’s (SEBI’s) investor education plans. It wants mutual funds to spend crores on lecturing investors and KN Vaidyanathan, executive director SEBI, has set stiff targets which the funds are scrambling to fulfil. SEBI's National Institute of Securities Management (NISM) is also trying to rope in financial advisors and former SEBI executives to educate investors and the media.
Stock exchanges, flush with hundreds of crores of investor protection funds, are also burning money through television and newspapers to ‘educate investors’. Thanks to their sponsorship, the SEBI chairman is flashed on television every few hours expressing concern for investors. It is the kind of free publicity that any politician or Union minister would love to have.
Is this going to yield results? No. If ads and glitzy televised seminars raised investor confidence or financial literacy, the investor population would not have shrunk steadily over the past two decades. The problem is in SEBI’s functioning—ensconced in a high-security tower and discouraging any contact with investors, intermediaries and the majority of media.
Only the most determined investors get to meet the regulator. Most intermediaries meet SEBI when summoned and complain about being treated contemptuously. SEBI committees are populated with those who won’t raise uncomfortable issues. Technically, SEBI takes decisions after deliberations by advisory committees and after eliciting public comments on its website. But some crucial decisions affecting investors, like the scrapping of entry-loads and major changes in the takeover code, were made without reference to the advisory committees or public discussion. This attitude may have worked if stock exchanges, which are the first lines of regulation, had a system of reaching out, but they too work out of fortresses that avoid all direct contact with investors. Brokers tell us with great amusement how the National Stock Exchange has turned from being scornful to syrupy because of the threat of competition.
The upshot of all this is chaos. The fund industry is suffering a continuous outflow of money. Investor education cannot fix such structural issues. SEBI decided to hastily scrap entry-loads and permitted transfer of AUMs (assets under management) without studying its implications. The consequence: a free for all, where the investor is paying as much or more, without the benefit of genuine financial advice, better service or even a choice (see ‘Gouging Strategy’ in "Crosshairs", page 22).
Similar chaos is raging over trail commissions where, again, it seems inevitable that only banks will gain. Having banned entry-load without an alternative plan, and having failed in another hair-brained attempt to push fund investors to stock exchanges, SEBI executives finally met and heard over 800 independent financial advisors (IFAs) in Mumbai. But this too was perfunctory. IFAs tell us that SEBI rejected 3,000-odd letters written to SEBI explaining their issues with the no-load regime, because they were all similar in language. It decided that this is an orchestrated campaign, but hasn’t bothered to communicate this. In fact, the decision to send individual letters (with the same language) was suggested by the Association of Mutual Funds in India (AMFI). But AMFI is too timid to tell Emperor SEBI the truth about its policies because it has turned into a club controlled by a few top funds.
The industry is now attempting to work with IFAs and reach investors directly; but they admit that it is an uphill task and there is no clear path. Investors are voting with their feet and moving to traditional fixed deposits or are being lured to unit-linked insurance plans. The situation is ripe for intervention by the finance ministry to set things right at SEBI. But if the mandarins remain proud of ‘not understanding the capital market’ or are dazzled by trading volumes and stock indices, there is no hope of change.