The Securities and Exchange Board of India (SEBI) under Madhabi Puri Buch is earning a reputation for being highly vigilant and proactive. This is seen as a much-needed regulatory attitude by one section of the securities market and is seen as a little stifling by another. Whichever side a person is on, no one will disagree that the regulator has benefitted immensely from the consultative approach it has taken and the industry experts it has called in for advice through various advisory committees.
Co-founder and CEO of Zerodha, Nithin Kamath, is also part of various committees including the Secondary Market Advisory Committee. In a conversation with Moneycontrol, he spoke about important regulatory changes that have been made in the recent past and the one segment that needs regulation with urgency—the finfluencer segment.
How has your experience been working with the regulator?
It has been a great learning experience for me. Before every single regulation is brought out, there is a lot of debate that happens. When you sit outside (the regulatory process) you don’t understand all the limitations the regulator has because the regulator must think about not just one type of broker or one type of customer… India is a large country with thousands of brokers and regulations must be made keeping everyone in mind, that’s when it becomes complex. I started appreciating how hard it is being a regulator after sitting on some of these committees.
Also read: Zerodha's Nithin Kamath on root cause of corporate governance issues in Indian startups
Has it been more consultative under Madhabi Puri Buch?
It generally has been consultative but maybe more so in the last few years. There are more consultation papers coming out from the time she has become the chairperson but even before that it has been so (equally consultative), that is maybe over the last six or seven years… or maybe SEBI has always been and we started getting more importance (more involved) in the last six years and we started getting asked about our views.
What are the most important changes that have been made under Buch according to you?
Over the last five to six years, there have been so many changes and each of these changes has been hard on our business because it changes the entire way you operate. But now when you think about it, all of these regulatory changes have helped us as a business…
Because you are the biggest player?
It is not because of that. The way we thought about this business is that we need to have some kind of regulatory foresight as well. You need to have a sense of how regulations will play out over time and build a business accordingly and not wait for the regulations to come and then react. We have done okay like that as a business. That is one of the reasons for our success, that for all the regulations that came in the last six to seven years, we were already ready for them.
So when I said that the regulatory changes were good, I meant that it removed a lot of regulatory arbitrage. A lot of the time regulations had different interpretations. There is no more arbitrage in interpretation.
What would you say has been the most significant change?
The most valuable thing that the regulator has done is the removal of leverage (the change was made before Kamath’s time). While it probably hurt us as a business in the short term in terms of revenue but (the change helps in the long term)… leverage is really like a WMD (weapons of mass destruction) in the stock market. It can help a few people make money fast but a majority of the people using leverage actually end up losing money.
How does this help a broker?
The problem with leverage is that people who use it become inactive after a while. The higher the leverage, the faster a person becomes inactive (in the market). This is because they lose money faster and they stop participating. As a broker, we want the participation in the country (domestic stock market) to go up… that is the long-term vision. In the short term, it hits your revenue. But in the long run, the odds of your customer doing well increase with lesser leverage (available) which is in a way beneficial for the business.
Is it an unrealistic vision for a broking business given that a large majority of the stock-market business in India is done in options, and options largely depend on leverage?
There is a common misunderstanding about options trade (regarding its extent)… Daily not more than 10 lakh people trade on options. So, while options’ turnover seems large, it (volume of investors participating) is not really significant… 10 lakh in an Indian context is nothing.
Any other regulatory change that you think helped significantly?
In the recent past, the change to T+1 (settlement) has helped significantly. The fact that India is T+1 (helps)… the fact that a customer if he/she buys a stock, it is settled in one day or if he/she sells a stock, he/she gets the money in one day. India is the only country outside of China (where this settlement regime is followed). Even in China, this isn’t followed across the market. Every time I travel around the world, when we say India is T+1, people look up to us.
How does that translate into a business advantage?
It helps in building the India brand. It says that India is in the forefront of (innovation in the capital markets)… It attracts capital.
But it helps the customer more than it does us (brokers) as a business.
What are the issues in the market that needs to be tackled with a sense of urgency?
It has to do with what the Chairperson said in the press conference after the last Board meeting (on June 28) on doing something about the finfluencers. I think that is important… there are already (SEBI) orders passed against some people and it (finfluencer activity) has reduced. But there is a lot of ambiguity around the regulations (for finfluencers) and they are working on that.
Do you think associated partnerships, which brokerages have with finfluencers to draw investors, would be affected?
In the short term, it (a regulation that curbs finfluencer activity) won’t be great for us but, in the longer run, it is needed. When people come into the stock market, they should come with the right expectations and some of the influencers have been setting them up with the wrong expectations, in that they can make money quickly and all that. That needs to be set right.
When you are choosing associated partners how would you know that the person isn’t selling stock tips on the side?
We do some diligence (to check if they are doing this). Anyone who has done blatant advisory, we have stayed away. We have a team that monitors this.
But what if it is a fake channel running in the influencer’s name or the influencer is claiming that it is a fake channel? Then how do you take a call?
Then they could take legal action. They need to go to the cops… show a police complaint to us, or something like that. It (channels or entities faking association) happens with us as well. Exchanges reach out to us and ask us if we have put out a promotional video, and anyone can make a video on Zerodha being the best platformer, and we get a query asking if we paid this person to say this. Then we have to prove that there was no kind of association.
But isn’t that a lot of compliance requirement?
We take it as part of the game. We are a regulated business, dealing with something as important as money… this is the deal you get, you can’t (shy away from the responsibility).
The thing is as long as there are explicit regulations around this, automatically 99 percent of this activity (misleading finfluencer messaging) will drop… Say tomorrow if there is a regulation that says that any person who is acting like an advisor without registration cannot associate with a broker, then it cleans out (the bad actors to a large extent).
Also read: Market at all-time high but doesn't feel like a bull run, says Nithin Kamath
What about the software-as-a-service (Saas) platforms? Have you suggested anything to the regulator on how to manage them, for platforming unregistered advisors and getting away with it by saying that they are providing tech support?
We have said this earlier too, that an algo acting like an advisor or an analyst needs to be registered. Just because they are algos, they can’t get around the regulatory requirements, saying that they are just algos (just tech).
Saas platforms should also be regulated.
For example, instead of an unregistered person giving another person stock advice in person, what if the former is sending an automated email? It is essentially that person’s advice being sent through an email. Can that email (automated service) claim that it is just a saas platform (and get away with it)? If yes, then everyone will start using that route, won’t they?
So we have been saying that anyone who acts as an analyst or advisor, human or non-human or platform or Saas or whatever, then they need to be regulated. If they are not, it makes for a regulatory arbitrage and people will misuse it.
Should RIA or RA regulations in the country become easier? Maybe.
RA regulations seem more so, in terms of mandatory requirements, maybe they can be relaxed.
Which particular criteria in the RA Regulations need to be relaxed?
Those in terms of net worth or experience… maybe the regulator should make it easier for people who are interested. One of the reasons people do not want to be an RA is that it is hard to be an RA.
One of the problems people cite in registering as an RA is the rule that restricts trading, on not trading a stock that has been recommended 30 days before and five after the call has been given (publication of a research report). Do you think that needs to be relaxed?
I think it’s always good for an analyst not to have a conflict of interest. In an ideal world, an analyst should not be trading.
But income from being an analyst would be much less than what a person could make from being a trader…
You can’t solve all problems (laughing).
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