Full Q&A: UK Sinha's exclusive interview to Moneycontrol

Sinha: You rightly started by comparing with what happened 10 years ago and now. So, let us stick to that in the beginning.

If you look at the number of dollar billionaires, this number is about 300. If you look at million dollar millionaires, that number is about 350,000. And if you look at the middle class in India, and there are different varying definitions of middle class.

But if you look at the upper middle class, which is defined according to one source, those who have an income of $17 to $100 per day. If you look at that, then there are more than 435 million middle-class people in India. So all this has happened in the last 10 years.

So, if that is the change, it is bound to have an impact on the market. Bank deposits, for example, in the range of around 220 lakh crores. Now the mutual funds have reached 67 lakh crore.

So, almost one third, order of magnitude wise, it is one third. In 2015, it was 12%. So from 12%, it has gone to 33% of the bank deposit size.

And not only that, even the investments being made by insurance companies, by pension funds, that has also grown up. In fact, if you compare the overall decline in the bank deposits as a percentage of financial assets, it has declined by about two and a half to three percent so far as bank deposits are concerned. And mutual funds, insurance companies, and the pension funds, their investment in the market is now almost there.

Bank deposits as a percentage of household financial assets have declined by 2.5-3% in the past 10 years.

This is in the range of 37% or so, which was nowhere. So, Indians have gotten prosperous. They have become more aware.

They are now investing in the market. And if they are investing in the market, then we have to be very careful that we accept the new challenges. The challenge is not the same which was 20 years ago or 10 years ago. More Indians are investing in the market, then we should expect new challenges.

If regulators follow this basic paradigm shift in the Indian financial markets, then we'll know where to concentrate. If we stick to this, if we follow this basic paradigm shift in the Indian economy and by design the change in the Indian financial markets, then we'll know where to concentrate and what way you have to function. I talked to you about the mutual fund, and we can talk in detail about the mutual fund. But SEBI had started a policy of investments coming from below the top 30 towns.

B30, yes. B30 and T30. Now you will be surprised that the total number of mutual fund accounts, the folios from B15, is about 55% of the total folios.

So there are 23 crore folios. So almost half are from B15. If you look at the systematic investment plans, there more money is coming, more accounts are being opened in B30 rather than from T30, the top 30.

So what it means is that money is coming not only from the very rich or the super-rich of the country, but actually coming from the cities and villages beyond the top 30 cities. So this whole shift in the Indian space has to be appreciated. And the challenges for the regulator have to be understood in that background.

So you know, I want to chase this mutual fund theme as well. But before that, since you have put a very good question on my lap, what are the new challenges? How will they be different from what it was nine years ago when you were there?

Okay. The first new challenge for SEBI is that the mutual fund industry is growing very fast.

And money is also coming from the pension funds and from the insurance companies. The money which is coming from the small towns, those people are not used to various cycles of market. So an awareness towards that has to be created.

Second thing that is important is that I talked about dollar billionaires and dollar millionaires. I think we need to do a lot more about alternate investment funds and to help the ecosystem in the country so that the start-ups get all the support that they should be getting. I think a lot needs to be done in that direction.

Rising number of $ millionaires & billionaires means we need to do a lot more about Alternative Investment Funds. (AIFs).

And thirdly, on the regulatory front, I would say that instead of making more and more regulations or changing the regulations very frequently, what has to be concentrated upon is how the supervision and monitoring is taking place, how well we are doing that and how timely we are doing that. So I would say that these are the main areas where we can concentrate now.

These are three very different areas. One is, you're speaking about educating the newly initiated investor. The other is sophisticated instruments for the millionaires, like AIFs and funding start-ups. And the other is technology, and so on. Three very different areas. Are you happy with the way SEBI is using technology? Because over the last few years, they have tried to look at whether there is insider trading, whether there is synchronous trading between mutual funds and someone else's mule accounts.

SEBI has a very sophisticated surveillance mechanism. It is not known very well outside SEBI, and it need not be known because this is something which is the groundwork that SEBI has to do. But the mechanism is very sophisticated. And there are examples, I make a guess, Maybe more than 100 alerts are issued every day about all sorts of trading.

Now I remember the word. Apparently, there is an algo called who got lucky. So when a mutual fund buys a large number of shares, who bought it just before that? That alert is there. So they try to check whether it is linked in any way. And there was an insider trading information.

I was told that SEBI is working on all these kinds of... Yeah, SEBI is working on it. SEBI has taken action. So you're happy with the... Some mutual funds, SEBI has taken action on insider trading cases.

But the main point is that SEBI has the wherewithal now. It has the technology now to find if the market is being manipulated. And if you look at the number of enforcement actions that are being taken, if you look at SEBI's annual reports, I think the numbers are going up.

So that is not a problem. One caution from my side would be how good the financial sector is so far as tackling cybersecurity is concerned.

So that is an area where while there is awareness, both at the level of the regulated entities and also at the level of the regulator, but how sophisticated we are and what mechanism do we have in place to safeguard the interest, that is an area where we have to work continuously.

I agree, sir. That is something which the banking regulator faces from the Bhim AP to the UPI to the most sophisticated banks and central bank payment systems. We have to worry about cybersecurity. And I would assume they're trying to do what they can. Let me come to this small investor and the initiation of some 15 crore investors in the last five years, who have come to own Demat accounts. Do you still worry that if there is a precipitous fall for whatever reason, you know, trade, tariff wars or something, the Indian investor could get scared away or do you think they now look mature?

You see, the Indian system has handled several crises in the past and some of them were internal, like 2001 crisis of Ketan Parikh and all, but several of them were external.

For example, the 2008 crisis or the taper tantrum of 2013. The indices fell substantially, but the market held on the faith in the regulatory state. One thing I would like to emphasise here is that SEBI, now, compared to 20 years ago, has come out as a very dependable and mature regulator. Of course, SEBI is a young organisation. It has learned and it has strengthened itself. Systems are strong. Manpower is strong. Technology is strong.

But now, wherever I go within the country or even outside the country, I hear very, very satisfying things about the way SEBI is functioning.

And that is a major point which gives me confidence that even if there is something happening from some external reasons or internal reasons, SEBI is today several times better equipped to handle any crisis than it was 20 years ago. And let us not forget that

For an uninterrupted period of 25 years, we did not have any market-wide misconduct; last one was in 2000. After that, SEBI deserves some credit for this.

There has never been any suspension of trading. I mean, there is no such a glitch that you have to call off trading. So, clearly, the market regulator deserves a lot of credit to keep so much money churning. Coming to that point, do you think we should extend trading hours? That is one of the demands of some people that there should be round the clock because you can react to external events. And then there are brokers who say we do not even have the staff to be able to do round the clock. It is a constant debate.

Well, my position is a bit conservative on this. If a system is working well, then what is the problem you are trying to solve by tinkering with it? I think the current system has worked well. It has changed a little bit over the last 10 years. We should stay with it. We must weigh if we are trying to make any changes, then what benefit we are trying to achieve? If we are not trying to get any particular benefit, then people, and now we are talking of investors across the country. We are not talking of investors sitting in South Mumbai. So we should not do something in a hurry. I am not saying that there should be absolutely no change, but for the sake of some demand, that trading hours should be extended. Let us see the benefits of it and let us see what the settlement mechanism is, because there is a chain of events that will take place. It is not something that you desire and tomorrow it starts happening.

Latha: Yes, yes. I guess banks and others also have to be prepared. Personally, I am on your camp. If they do not otherwise, as a news channel, it will be hell for us if we have to keep monitoring the markets 24 hours.But coming back to the mutual funds, are you happy with the mutual fund corporate governance? You have headed UTI. At that time, it was the largest mutual fund. Every now and then we hear insider trading issues, which of course came out even recently.

Sinha: I think the SEBI regulations are very clear, very well-articulated. I sit on the board of a large mutual fund and I see that the management and the board are very conscious of SEBI regulations.

Instances of front running, which you can also now call insider trading, have been there, but these are not very difficult to detect.

In my view, those instances are very few. One area where some action in my opinion can be justified, which is right now the key management people involved in dealing and in fund management and research are barred from dealing with the shares of their own company. I would say that this should be done for all employees.

For example, in government, if you are a government servant, you are allowed to buy shares once in a while, but if you are found to be very active, then this is discouraged. So, you can make investments through mutual funds. So, in mutual funds, unless somebody has got an ESOP, there should be a provision that they cannot trade in individual securities.

That will take away a lot of advantage or so-called advantage, which some people might be gaining. But SEBI's surveillance system is very strong and I have seen SEBI taking very strong actions in some cases. And SEBI is now also doing inspection of the mutual funds.

Their inspection cycle has been strengthened. So, generally, I feel that mutual funds feel that they are rather being increasingly over-regulated. In fact, that feeling is there.

I'll come to the over-regulation question also. But incidentally, Money Control, our organisation, broke a story that SEBI wants to even initiate or instruct bankers about insider trading rules because often they also are privy to information and there aren't any rules at the moment. So, I think some thinking is happening even on those lines, but I guess there will be inter-regulatory coordination needed.

This reminds me of a very interesting episode. We had set up a committee under Justice Sodhi, who was a side chairman to look at the insider trading regulation. And Arundhati Bhattacharya was a member. There were very eminent people in that committee. One of the suggestions which came there was that if there is a civil servant sitting in Delhi and he's taking a call about a particular sector, say a metal sector or petroleum sector, that can have an impact on the listed companies. So, he should be covered.

If a judge is taking a decision on a particular issue, he should be covered. In my view, mentioning each and every person in that whole thing is impractical and this is not required. However, the general definition of an insider or a person who can be covered under insider trading is somebody who was in possession of sensitive information which is not public, so not public sensitive information.

That is the general definition. But trying to cover A class of people or B class of people, I don't think that's of importance. The important thing is to catch somebody of that particular class and then create an awareness.

Life was easy when most of us, like my father's generation, only saved in FDs. So, they could be in powerful positions and they did not bother about... No, no. But that generation, as I said, is going away.There is a decline in deposits and India is going towards more and more market-driven investments.

Which is the next question to you, sir? You know, first I'll come to debt and then I'll come to the bank deposit part but the problems are related. Although we have seen equity AUMs growing a lot, debt AUMs have grown more because FIIs have invested in debt, I mean, after the index inclusion.But retail investment in debt has not done very well and that is obviously because that indexation advantage of capital gains was gone and capital gains itself is now your income level tax, unlike equity where it is 10%. And there you are taxed only when you sell. In bank deposits, you are taxed anyway.So, my point to you is that debt is also needed. I mean, you need to develop a debt capital market as well. Has the time come to reduce the disparity between capital gains tax on equity and debt? Yes, but I don't think that is the main deterrent.

The awareness about debt investment, especially in small retailers, is not there.

They are used to, like your father's generation or my generation, that bank fixed deposit are the best things. Whether there is some instrument called it now, RBI has permitted and facilitated that government securities also you can make, retail can make investments.

I remember in 2004 when Mr. Jaswant Singh was the finance minister, we launched a platform, retail platform and it failed. It completely failed. So, that awareness will take its own time.

Let us not forget that 15 or 20, 15 years ago, mutual fund industry was criticised that it was only managing corporate treasury money. Yes. We were known to be the managers of corporate treasury. And part of it is outsourced to mutual funds. From that level, I don't think this country has celebrated that. 60% is now in equity. So, the debt part will take its own time.

So far as a question on tax treatment is concerned, my general belief is similar instruments should be taxed similarly.

Now, whether bank fixed deposits and debt instruments above three years or five years should be treated separately or not or similarly, that decision we can leave to the government. But principle that I would argue for is that similar instruments should be treated separately.

No, that is a fair point. I am asking you to wear your finance ministry hat, since you were in North Block also. I mean, debt as a fixed deposit and debt as mutual fund debt are both taxed much higher than equity. And the nation also needs debt capital. If a time comes when banks are not able to finance corporate projects, won't that be a disadvantage in its own way?

You see, the bank, the corporate projects, especially the capital investments require substantial amount of debt. That is not in question. Different countries have found different solutions for debt capital. Some countries still do it based on bank finance. We used to do it in bank finance.

We used to do it. Now, banks are having a problem because they don't have reliable, stable money. They have only mutual fund money.

And you remember in early parts of our growth in 1964, we created IDBI and this concept of development financial institutions. But that merger into a universal bank was a policy. I was also partially involved in implementation of that policy

So right now, the way to do it is slightly different with some more innovative methods. And I will bring you three examples where SEBI was able to come out with regulations. But in my view, not much attention has been paid to these three.

One is about the REITs, real estate investment trust. Second is about infrastructure investment trust. And the third is about municipal bonds.

SEBI came out with a regulation on municipal bonds in 2015.

SEBI held several rounds of conclaves in various parts of the country for Muni Bonds. But I am sorry to say, sad to say that in 2024-25, total 500 crores worth of municipal bonds were issued.

Now, in a country like ours, where urban infrastructure is in great need of rejuvenation, where the capacity of the state governments to finance them is very limited. Why? And the design of the whole thing was that you bring out a project which is revenue generating like water supply, sewer treatment, road, which can be told. And then you keep the revenue in an escrow so that the investors can come in. Globally, municipal bonds, especially in the USA, have been huge success. In fact, the municipal bonds... The investors invest only in Muni bonds. Yeah, Muni bonds. But in this country, and I also talked to various people in the Ministry of Urban Development and all, but somehow this has not kicked up. One has to investigate why it didn't.

No, my worry is only this.It looks like banks are only going to now be able to fund retail because they are having only short-term deposits. They don't have longer-term deposits or stable deposits. Then who finances debt? Because the debt market is not ready. There is insurance, but insurance guys only go in for G Secs. They have about 15 percent for AAA bonds. They don't use for infrastructure. They don't use the whole thing because they're not very sure of perhaps safety. Perhaps. It's only, I think, nine percent of insurance money. So my point is, at the moment, corporates have enough retained profit, but will we hit a wall in terms of debt finances?

You see, Ontario teachers pension money is invested in India and many other parts of the world.

If Ontario Teachers’ money cn be invested in Indian infra, why not Indian pension money?
if their money can be invested in Indian infrastructure, why can't Indian pension money be invested in Indian infrastructure? The way to do is through that route. If insurance and pension money don't come into this market for the development of infrastructure, then you have a serious problem.

Then you have to either go back and create a development financing.

I think the fear is because the legal system does not ensure quick redressal of a bad loan.

So let us solve those things. Let us solve those things. And not only for infrastructure, for alternate investment funds, sectoral regulators are not coming forward. Insurance money getting into alternate investment funds.

Look at this country. A senior minister recently commented that the start-ups of India are only doing e-commerce and we can't get any real technology upgrade and things like that. But let us also not forget that where is the money? If you are an Indian start-up trying to do something serious in machine learning or in artificial intelligence or anything basic, you need money and there is no money.

For example, by 2024 end, the total money raised by AIF industry was around 4.5 lakh crores. But by category 1, which is venture capital and social sector funds, it was hardly 40,000 crores. So if cumulatively we have raised only this much amount, how do we expect such money to go into such innovative things? And I told you about billionaires. I told you about millionaires who are in India.

What we have to realise is that over the last 10-15 years, there has been a huge rise in the number of family offices. There has been a rise in the number of people who are willing to invest.

We are willing to experiment. But in my opinion, there is substantial improvement required in the operation of the AIF regulation.

For example, I have heard from the industry that a private placement memorandum requires approval from CB and that approval takes a lot of time. Not only that, if there is a change in the private placement memorandum, that requires another round of approval. If there is a group of people who are generally called the GPs or the general partners who want to set up an AIF, if there is a change in their shareholding, that requires approval. Now, whom are we trying to safeguard?

There is a hierarchy. For a mutual fund investor, you please place all your attention.It is required. But here are people who are informed investors, more than 1 crore of investment they are making. When AIF regulation was drafted, the whole idea was that SEBI should have data.

Light touch. That's all. It's a light touch regulation and there should be data.

SEBI should have data on AIFs; regulation must be light-touch. Okay. And in countries like USA, AIF has become a problem because of the size. The hedge funds and the AIF, the size is very big.

So, it has become a financial stability issue. So, the regulators and the government is worried. But India is maybe 20 years behind that stage.

So, let us at this stage, in the interest of promoting their start-ups, which have the huge potential of generating jobs in the country, let us encourage them. Because the investors are willing to, there is domestic money. In fact, you may be aware that when anybody goes to raise money, any AIF goes out to raise money, the first question is asked is, how much domestic money have you got?

And if you have to be in a position to say, sorry, we don't have anything substantial, that's a major discouragement. And Lata, let us also not forget that this government over the last seven, eight years has created multiple funds of funds. So government of India and some state governments have created funds of funds, which can invest in this venture fund.

So this industry, I think its potential has not been realised. A very serious relook, not at the regulation, at the way it is understood.

And it has to be understood in the way the Indian economy has undergone a change, like what I said in the beginning.

One of the thing is this, that what all we can do, what was required to be done in 2012-13 for mutual funds, because the mutual fund industry was of the size of 4.5 lakh crores. Today it is 67 lakh crores. Now is the time to concentrate on AIF industry.

Fair points. I think that's a headline you're giving me. And it's also a topic for a separate discussion on how we should proceed on AIFs.Let me come to the other thing, which is very newsy now, because the semi-chairman has appointed a committee to review the disclosure rules for semi-officials, especially where they are conflicted. Do you think that new rules are needed? I mean, all other regulators are not doing that. You see, first of all, let us look at the principle behind this.

If I take you back three, four centuries behind, you will be amused, but let me take you that. During the Mughal period in India, there were rampant examples of the subedar and mansabdars not only collecting revenue for themselves, for the government, for the central government, for themselves. So they were having a second source of income.

The same thing continued during the East India Company. And the harassment of the general population, especially in Bengal in the 18th century, 19th century, happened primarily because of such practises, because they were trading on their own behalf and they were taking all sorts of extortionary measures. So, the East India Company came out with this rule that you cannot have double income.

You can have only one single income. And obviously, the government of India has the same rule.

Now, whatever position you are in, whether you are in a regulatory body or even a government, the primary rule today is, and rightly so, that you are a full-time 24 by 7 employee.

You can't have another source of income. There have been several attempts to do it. Let me also take you back to the Lokpal Act.

Lokpal Act, when it was enacted, one of the requirements was that the Lokpal, that all government servants will have to submit their statements of income and assets to the government and to the Lokpal.

And the thinking at that time was that it should be published on the website. I would argue, for example, that if the assets and liabilities of the Supreme Court judges can be placed on their website, if any candidate fighting an election for an MLA or MP has to declare all his assets and liabilities, then why not? The problem arises that we do it selectively.

The question is, if you do it for everybody, let there be transparency. What is there to hide?

So, you're saying that it was called for, that Mr. Pandey is calling for a review and for greater disclosures.

Here, coming to this particular context, we all commit mistakes and we all learn.

When SEBI Act was enacted, rules were framed for appointment of SEBI chairman and full-time members. The rule didn't provide for a cooling-off period, that once you leave SEBI and you want to take another job, will there be a cooling-off? And the idea of cooling-off is that you should not have compromised your position in that.

Government had a two-year cooling-off, now it is one year.

SEBI Act didn't have that provision. And there were instances when people, within one or two months, started taking up other jobs. So, it was not in consonance.

So, government came out with a law.

But that rule also did not envisage that if what happens if somebody is coming from the private sector and has a running income. So, that was not envisaged.

It's a genuine mistake, it's a genuine oversight because it did not exist at that time.My feeling is that this committee, hopefully, will look into this aspect and provide something where disclosures are there. And obviously, going by the principle that if you have accepted coming from the private sector to be a government servant or a public servant, technically, then you cannot have a second source of income. So that should be provided. That's why the committee... And this should be provided for everybody.

Okay, fair point, sir.I mean, we have evolved and therefore we have to write new rules. That's correct. Just to continue with that point, see, both in RBI, you had non-IAS officers as RBI governors and now the government has shifted back to IAS with Mr. Das and Mr. Malhotra.In SEBI as well, there was an experiment with non-IAS and now they have gone back to IAS. Do you think only IAS can handle this? Is this...

You are putting a very embarrassing question to me because I am conflicted. I have served as an IAS officer for a better part of my career.I think it will be wrong to argue that only a particular class of people can run these organisations. The selection process has to be robust enough to ensure that people who are competent to handle it are there. I would say that people from private sector who have got the right competence should be encouraged to join public offices.

And conflict of interest issues are not so profound, they can be addressed. I mean, people from Goldman Sachs became treasury secretaries and...

It is not only conflict of interest, it is also inability of lateral entrants into high positions to liaise with the bureaucracy in Delhi or elsewhere. I mean, lateral entrants do complain that there is an old boys club there.

No, there my take is the following. You know, if you are selected for the Indian Foreign Service, most of your lifetime you would be serving outside India or in the Ministry of External Affairs. There are one or two positions in certain ministries. So by and large, you are serving outside India. You have not seen the real India. So part of the training of a Foreign Service officer is that he is sent to a district and he is there asked to work as an assistant magistrate for at least six months.

Yes, so he knows the real India.

So lateral entry, the mistake we are perhaps doing was, lateral entry is a great idea. But if whosoever you bring as a lateral entrant, let them be given a task to be in a district in some positions which suits their competence for at least six months. And believe me, if they work in the state governments, if they work in the districts, they will be far superior administrators in whatever area they are. So I'm not...

You can't be aeroplane to the top. That is the problem.

That is the problem. In fact, I remember a person who was a very famous economist. He also had very senior position in the RBI.

He was also having senior positions in the bureaucracy. He was Secretary to Government of India. And he was complaining to me that I don't know what is a cabinet note.

I don't know Cabinet Committee on Economic Affairs, who should I have called? Whenever I go to the meeting, I find that I have not called X or Y and this sort of coordination. I don't know the procedures. So, I mean, you can't bring somebody through a ventilator at the top.

But it doesn't mean that people from outside should be stopped. They should be encouraged. Train them well.

I have too many questions now, but we are out of time. I just want to ask you finally, sir, are you happy? Is inter-regulatory coordination an issue? You have been through it and you probably know even now as an outsider, you have an inside view. Are inter-regulatory coordination problems not well sorted?

You see, this problem had erupted in 2010, 9-10, when SEBI and IRDA had a problem about ULIPS.
FSDC FOR REGUALTORY CO-ORDINATION

Unfortunately, one regulator went to the court and things like, in spite of intervention by the then finance minister. Finally, an ordinance was issued creating FSDC, Financial Sector Development Council. That is chaired by the finance minister.

The mandate of FSDC is that if there is any inter-regulatory differences, then view of Chmn will prevail. I don't recollect any instance where that had to be resorted to, because that gave a signal.

However, there is a hierarchy and the hierarchy, the governor RBI is certainly at a very, very primary position.

First among equals. First. And his view should be respected.

My personal experience is that if there is a very good communication between SEBI and RBI, a lot of issues can be sorted out.

One problem in FSDC that I see today is that now there are too many regulators. Earlier, there used to be three regulators sitting with the finance secretary and finance minister.

Now, there are seven or eight regulators. Yeah, there's pension and insurance. So many of them.
IBC. CCI. IBBI and all that.

So that defeats the purpose of inter-regulatory coordination.

Yeah. No, regulators do have the tendency to proliferate.And the other countries have also observed this.

In spite of that committee report saying that we should have very few regulators. Yes, that's true.
But that is proliferating. You are absolutely right. Yeah.

So just a final question, because it is headlines today or headlines this week, the IBC, the court, you know, throughout the JSW BSPL Bhushan power arrangement, are you worried that we are going to see a lot of reviews, a lot of questioning of old? This has happened several times in the past as well. A judgement shakes the corporate terrain. Are you worried about this judgement?

I don't claim myself to be an expert in this area, but I am worried.

By and large, Supreme Court judgments dealing with IBC have been very helpful in setting up precedents. And they have been very helpful. I won't say the same thing about NCLAT.

But Supreme Court has set the rule in motion and clarified a large number of things. Supreme Court’s Bhushan Power Judgement may create more problems. This judgement creates more problems. So I'm worried.