Q&A | Focus is on risk-mitigating regulations, reducing unnecessary burden: SEBI's Tuhin Kanta Pandey

To develop markets, you need regulation but that regulation must also protect investors; however, if regulation is excessive, it may impede market development, says SEBI chairman Tuhin Kanta Pandey.

Capital market regulator Sebi's chairman Tuhin Kanta Pandey believes the foreign portfolio investor's view of Indian economy is very positive, and at the micro level, domestic earnings have started to stabilize despite global headwinds.

Speaking to Moneycontrol during an exclusive interaction on April 30, Tuhin Kanta Pandey said his priority is 'optimum regulation' of capital markets to ensure capital formation without too much interference. The vibrant activity of fresh issuances seen during 2024 is encouraging, he said, as it diminishes the chances of asset bubbles.

Tuhin Kanta Pandey added that measures to tighten the SME IPO regulation were taken, and if they require a relook, the capital market regulator will revisit them, in consultation with the industry.

Excerpts:

FPIs have been on the selling side for most part of the year though there has been some trend reversal in the recent past. Is there something that the regulator can do to arrest or stem this outflow of money from foreign investors?

If you look at the data, over the last five years, a net $58 billion in foreign investment has come in, both in debt and equity. Therefore, the phenomenon that you are talking about relates to FPI outflows post September-October 2024. In the last few days, there has been a reversal of this trend. Now, in effect, there could be several reasons for it. One could be the level of market itself and the corrections. People have talked about valuations and profit booking. The other part was also China versus India. At that time, emerging markets like China were available very cheap, and some investors started gravitating there.

Another level of uncertainty came in because I think prior to the new administration, during the (US) election campaign itself, there were certain doubts created about how the American stance was going to be, going forward. Normally, in these kinds of uncertain global situations, there is a tendency for foreign investors to flock back to where they come from, largely the US. They went back, and the dollar was also very strong. So, there are several reasons why FPIs behaved the way they did.

Overall, we are talking of FPIs of the order of $800 billion, both on the equity and debt sides. There were also positive movements on the debt side, following the bond market inclusion and other developments. My sense is that FPIs’ view of India is very positive. In fact, it was more than my expectations. During my visit, I saw how deeply FPIs are valuing India and its growth story, and how they look at the medium to long-term prospects—and even the short term—of the Indian economy.

I think they realise very clearly that India is one of the fastest-growing economies among large economies, and that it has a very solid fiscal consolidation path, the current account deficits are well under control. The bank and corporate balance sheets are stronger than ever.

There has been a slight dip in earnings at the micro level, but they have started stabilising. Despite global headwinds—which are affecting all countries, including the US—India remains one of the more attractive markets for FPIs because of its fundamentals and the resilience it commands. That’s the sense I got.

They seem to be extremely engaged, and the engagement process we have undertaken with FPIs, as well as with others in industry and among other participants, has been very well received in terms of dialogue, discussion, and our intent to remain engaged. I think it’s been a good learning process for us as well. In fact, a number of steps have been taken by SEBI in case of FPIs.

There is an FPI Outreach Cell, which has reached out to about 2,000 foreign portfolio investors to engage with them, explain what has been going on, and also address some of the issues they might have. The Common Application Form for registration and a number of related issues have been streamlined, and the registration process now takes about 30 days. It used to be much longer. Of the 200-odd cases that were pending for more than four months, there are now none, and all of them have been cleared. So, the registration process has become much faster. Some of the issues they may have had have been tackled. Of course, there is scope for further improvement. Overall, the mood has been very positive.

That was my sense not only from the five meetings I had—where I met many FPI investors in Washington, D.C., New York, and Boston—but also from the very positive sentiment expressed about India in the meetings held under the Financial Stability Engagement Group, under the IMF–ISCO track.

Watch: Moneycontrol's interview with the Sebi chairman

What is the profile of these 2,000 FPIs that you are talking about? Are these investors that have exited the country or are looking to enter?

Normally, that is not the way it happens. People keep modulating their investments. You wouldn't find many who have completely exited.

Of course, nothing prevents them from exiting. If a fund is wound up, for instance, they may have to exit. In fact, one important issue we have sorted out is what to do if, post-registration, they face a problem with the liquidation of illiquid securities. That was another issue they raised. We have now provided guidance on how they can do that post-registration. So, we’ve met all kinds of FPIs.

What is your big vision for what you want to implement over the next three years? Or what are your regulatory priorities?

My priorities are, in fact, SEBI’s priorities under its parliamentary mandate. It’s not personal to me as chairman. We are a creature of the Constitution, a creature of parliamentary statute. We have three mandates: investor protection, market development, and market regulation. These three are important and must be balanced. To develop markets, you need regulation. But that regulation must also protect investors. However, if regulation is excessive, it may impede market development.

So, the question is how to strike a balance between regulation that is too much and regulation that is too little. I use the term optimum regulation. If we achieve that, we can balance the two imperatives.

That means more engagement, more co-creation, and a pace of change that enables orderly development of markets without placing too much stress on the system. We understand that every regulation imposes a compliance burden. While a specific context may require certain regulations, we should simultaneously eliminate others that are no longer necessary.

So, while contextualising regulation, we should avoid simply adding more rules. Compliance costs and the ease of doing business are important, even as we mitigate risks. The goal is to manage risk in the least costly way.

Is there a way SEBI can regulate asset prices to avoid bubbles and meltdowns?

I don’t believe that is SEBI’s role. If we interfere too much in the market-making process, it may not be healthy for capital markets. What we need to do is enable capital formation. India currently offers major opportunities in terms of demographic transition, the quality of entrepreneurship, institutional support, and capital markets. The number of investors has grown from 45 million in 2020 to 130 million today. FPIs are quite positive about India. We have all the elements needed for capital formation—many supply chains are shifting to India.

Many unlisted companies can now enter the listed space. That’s important. In fact, last year we saw Rs 4.5 lakh crore in issuances through IPOs, FPOs, QIPs, etc. So, while investors are coming in, issuers are also active. There are many papers and many investors to support them. Healthy balance sheets and continued corporate earnings growth are essential. India’s +6% growth rate and sustained infrastructure spending create the right environment for capital formation.

So, both sides are well-supported. As a result, the chances of asset bubbles diminish. More papers are available now, including REITs and InvITs. We’ve introduced SM REITs. We must continue to enable more products. Specialised investment funds have also been introduced. But ultimately this must feed into the real economy. And, we have all the enablers for that.

I would say this is one of the best times to have a growing capital market in India.

In the next three years, which areas do you think can grow substantially? Your predecessor was bullish on REITs. Any particular thrust area for you?

I think we are at a stage where we need all of the above. Debt market inflows are continuing, especially following India's inclusion in the bond index. As part of asset allocation by households and institutions, a lot of money will flow into liquid funds, debt funds, and equities. Within equities, we also have hybrid securities.

Then there are alternate investment funds (AIFs), where slightly riskier investments take place. We’ve recently allowed AIFs to invest in listed securities as well, easing the requirement that over 51% be in unlisted ones. We've relaxed this to support the bond market and encourage investments in listed bonds rated AAA and below.

It’s about diversifying the market and aligning with different investor needs. We should not apply a one-size-fits-all regulatory approach.

Even for investor protection, our approach must vary by investor type. For retail investors, there will be one framework. For some AIF classes, where investors are more risk-aware and have higher capacity to take risk, we can apply a lighter touch from an investor protection perspective. This variety is key, and SEBI recognises this, introducing differentiated regulations.

We will continue reforming regulations to introduce new products, instruments, and frameworks.

The ‘Mutual Fund Sahi Hai’ campaign has worked wonders. But many investors are entering equities without understanding the risks. How can we address that?

Mutual funds offer a wide variety. Let’s not assume they only offer equities—they also offer debt securities, hybrids, etc.

But the focus seems to have been on equities.

Yes, but equity capital is also important. To build large companies, you need equity. Some people should be able to raise equity from the market.

There’s nothing wrong with equity, as long as the risk aligns with the investor’s profile. For long-term investors, what matters is macroeconomic fundamentals and the real economy. It’s not just about short-term cycles. Over five or ten years, you ride through the cycles. Don’t panic during downturns—they’re part of the market. They remind you of the risks.

They also allow for averaging and entry at different price points. So, if we understand the market, what matters is India’s outlook for the next two decades—its savings and investment rates, productivity, infrastructure development, policy stance, demography, and talent pool. For example, India hosts more than 50% of the world’s global capability centres.

One of the key takeaways from my US visit was how deeply FPIs are invested in Indian talent. Even if they aren’t participating directly in Indian banking operations, they’re running global functions out of India, with some employing 20,000 to 40,000 people here. They’re managing major functions from cities like Chennai, Pune, Mumbai, Bengaluru, Hyderabad—and increasingly, tier-two cities.

This creates a strong sense of trust and long-term commitment to India’s future. That’s a key enabler of long-term capital market and real economy growth.

Investor protection along with investor education is a key mandate of SEBI. Last year the spend on this was very minimal, as less than 5% of SEBI's Investor Protection and Education Fund was utilised. How do you plan to make investors aware of the risks and opportunities of investing in the stock market?

When you are talking of only SEBI's (spend), it may look small. But if you see the overall spend of the ecosystem because investment awareness has been done by several MIIs as well as market intermediaries it is much more widespread because of the reach that they have. Because the more touch points you have, the more investor awareness you can do. But I recognise that SEBI also needs to step up. It will not be enough for SEBI only to ask its intermediaries or MIIs only to do that. And we may have to step up our own efforts directly.

We will give our concentrated effort. But what will be more material is that all the regulators together can do a much more important campaign on investor awareness in terms of how you can diversify, what are the do's and don'ts, what not to do and also how speculative activity is not the motive for long-term investing.

I think we also need to increase our presence. To some extent (our) physical footprints have gone down in the last few years. We have to probably ramp up. We have to have a review because for whatever we might say about the electronic campaign and so on but there is also a lot of merit in being there on the ground and India is a vast diverse country and lots and lots of investors are now coming from smaller centres, tier 2/3 cities, even from villages from different pin codes.

We have also expanded our reach digitally through mobiles and others. But still, investor education sometimes may need different touch points through different investor awareness programmes to train people in physical formats.

We need to, for example, get into schools and colleges. NISM has got a very important programme reaching out to the college students because they become first time investors and they start learning. We have to start early with the schools.

So, will you expand your physical presence through regional and local offices?

I think so. Our footprints on the ground need to be expanded. I have gone around and seen and talked to the people, talked to regional offices. We need language specific people who are going and talking in their own languages.

But we also need to have the other capabilities of digital translating and other things also to make a difference. But many times, we have seen interpersonal efforts are required. But even if the digital programmes are there, they have to be in the languages which the people understand, which will actually do a far better job of investor awareness. So, we have to intelligently recraft our strategy.

There are many concerns related to the SME IPO segment. How do you plan to balance the fundraising needs of SMEs and protecting investors coming to that segment?

Because there are so many SMEs, we have to ease the access of SMEs to the capital market. That was the objective (of the SME IPO segment). And therefore, we went for a relatively lighter touch regulation. They can go through the exchanges, and it is not necessary to approach SEBI for clearance of IPOs.

In between, we had some issues arising out of it. So, there was a change in regulation in terms of who can access it, purposes for which it can be deployed, how much you can use it for general corporate purposes.

I think the role of merchant bankers is also important because to some extent we find that the cost of raising funds is just a bit much higher. Normally if you raise a larger fund, your cost will go down. That is a normal phenomenon. But we also need to see how much they can afford in terms the cost of raising capital. That apart, I think we need to be constantly watchful on this. Certain measures were taken to tighten the situation so we will be watchful as to how that pans out. Our point is that disclosures are important. People should look at disclosures.

Investors must also see how they are putting the money and diversifying and not really trying to put the money in just a few only on (returns) expectation. Returns temporarily could look very attractive in terms of capital gain but they may actually not be true.

I think a lot of people have been misled by wrongful advice because there are people who are perpetrating these kinds of advice, for which we are going against them. Like the influencers who are not qualified to give such kind of advice on specific stocks and also assuring returns. We also had some egregious cases where we found that there was a tendency to pump and dump. But these are the cases where we will come very hard if we find any such thing.

But the regulatory purview will continue to be with the exchanges, not with SEBI?

As I said, we will be watchful. If we find that this requires a relook, we will revisit it in consultation with industry.

The retail quota of 35% in IPOs was fixed long time back. Since then the number of retail investors has jumped significantly. Any plans to review the quota limit?

We are open to looking at it. Whether it is the right thing to do, whether we continue it like the way it is or will it require a modification? It is a part of relooking that we will undertake. But we have not formed a specific opinion about this matter yet.

So, this will be put up for public consultation? 

Yes, it will be reviewed, and we have PMAC, we have SMAC, and we have IPAC. Different committees are there, and they would also look at this and then we will have consultation papers. So, we will have to look at the data, whether this is the right way forward or is it good enough. We also sometimes don't need to destabilise any situation for the heck of it. So, if we have a problem then we can look at it. If we are comfortable with something which is already stable then we can continue with it.

A section of the market also believes that the retail portion in larger issues should be reduced. 

We are relooking at that matter in terms of simplification, in terms of making changes, contextual changes. So, if we find that there is a rationale, if we find that there is a larger support for it, we can go for that. So, it's difficult for me to comment and pre-judge an issue before it is actually done.

At some point in time, SEBI was contemplating fractional ownership of shares but that required changes in the Companies Act. Is that something of immediate priority? 

No, at this moment, this matter is not on the table.

What about T+0? It is an optional facility now and many believe that till the time something is optional, people don't really take to it. What is your view on this?

Well, it was intended to be optional and we will continue with that intention.

So, you are happy with the status quo?

We have to see when the right time is to do it. I think we have taken a very big step forward on being the first jurisdiction to bring T+1. The US has followed suit. Many other jurisdictions are still wondering how we have been able to do that. Many people were asking me in the IOSCO meeting, how did you do T+1 as we are struggling.

Technologies will keep developing, systems will keep developing. We just have to keep in mind the whole need of the whole system.

In our markets, there are domestic investors, there are FPIs, there are custodians, there are also people in different time zones. Certain decisions are taken elsewhere and then funds have to be moved. So, we need to really keep in mind everything because the entire ecosystem should be good enough. It's not enough for me to put something and then not be talking about how the custodians will do it, how the others will do it, how the banks will do it.

So, we need to really understand all those things and say that before we make it mandatory. We must be clear that the ecosystem is getting ready for that.

There are several learnings even in an optional state. I don't think that is a matter of priority for us at the moment.

One criticism against SEBI is that cases remain open for a very long time and at times they get revisited after a hiatus of many years. Would you relook at this in terms of the timeline for any case to sort of stop and not go back to? 

I think that is a bit of a dated information because a huge amount of improvement has taken place. Earlier there used to be a lot of cases, five-year old cases also. There is very little now. (It is) two to five years, mostly falling within two years bracket now.

And investigation is also getting completed in less than two years. So, there has been a lot of improvement in terms of case delivery. We intend to further add resources in our system in terms of trained manpower in order to handle those cases.

So, we will add the resources rather than letting it slip further. We will see that and it will also mean that we will continue to investigate on a much larger scale. We will also continue to do surveillance and supervision on a more intensive scale. If cases are more, we will sort them out in a much quicker manner. We will add resources and we will also add capacity to these resources to do it faster, better.

Will there be any hard stop on cases? In terms of say how long will it go?

No, there will be no hard stop on cases. As I said, we will just add capacity and resources in order to do things faster.

Any additional surveillance tools that you are looking for? For example, wiretapping has been mentioned by previous SEBI chairpersons. It's something that could give you an edge in investigations. Is there anything like that you would push for?

I think whatever tools we have, we want to use them optimally and enhance our resources to do so. I'm not someone who believes we should just keep looking for more powers. If we are given the authority, we can use it. We don’t necessarily need to have all the authority or tools. That’s for the Parliament and the government to decide. Our focus should be on using whatever powers we already have as effectively as possible. That should be our first priority.

Do you think SEBI’s powers are not being optimally used right now?

The powers that SEBI has do leave scope for much more to be done. For instance, even if you have a lot of information, improving your tools can help generate better alerts. Once you have better alerts, you need resources to act on them and processing tools to handle them efficiently. That way, you can process information faster and more accurately.

If you look at the quality of our orders, you may have noticed that we are now able to conduct much deeper analysis — tracking fund movements and uncovering fraud more effectively. That’s the kind of effectiveness I’m talking about. There’s still scope to further develop those tools, and we are constantly working on that.

Of course, if you get more powers, it makes things easier — that’s another way to go about it. But even with the powers we already have, we can make better use of them by adding resources and improving our tooling. A lot of AI is being used in SEBI now. We’ve developed our own tools. So, building that capacity — both technical and human — is important, and we will continue to focus on it.

Coming back to market manipulation and surveillance — there was a proposal for the Prohibition of Unexplained Suspicious Trading Activities (PUSTA) regulation to handle cases where SEBI doesn’t have direct evidence against manipulators. Is that proposal still on the table?

It is not on the table currently, because there were certain concerns raised within the board. It involved shifting the burden of proof onto others, which is a significant step in our legal framework. Normally, it’s the responsibility of the prosecuting authority to prove wrongdoing. When you shift that burden, the law becomes onerous.

We have to carefully balance the rights of privacy, personal liberty, and due process with the powers of investigating agencies. We live in a democracy, and we must be very clear about the extent of the powers we have — and ensure they are not abused.

That risk of potential abuse was one of the key reasons the board did not accept the proposal. So, for now, we’re not pursuing it. It may be revisited in the future with proper modifications, but at present, we’ve put it to rest.

In the 2021 Budget, the proposal for a Unified Securities Code was announced. SEBI has also shared its views. What is the current status?

That’s a question for the Department of Economic Affairs (DEA). It’s with the government, and DEA would be the appropriate authority to respond.

There were reports of differences over how many board members the government should appoint, and funding issues.

I am not aware of any such differences or similarities.

People often ask — when will the NSE IPO get clearance? What hurdles remain before SEBI can approve it?

NSE and SEBI are in discussions on several key points — governance, technology, litigation, and the clearing corporation. Hopefully, these issues will be resolved with a clear roadmap, and then the IPO can move forward.

Regarding the demerger of clearing corporations — there’s a view that doing so before ensuring their financial viability may not be ideal. What is your view?

I don’t want to comment in advance or prejudge the matter. SEBI released a consultation paper on November 24 outlining a possible roadmap. NSE has also shared its viewpoint. We are examining all aspects carefully.

I can’t give a personal opinion in the media, as this is a serious issue that must be assessed from the standpoint of systemic stability and future risks. NSE and BSE — one of which is already listed — are both very important Market Infrastructure Institutions (MIIs). While they are commercial entities, they also serve a public utility function. This is a unique model.

That’s why we have Public Interest Directors (PIDs) on their boards, who do not require shareholder approval — because they represent the public interest, not just shareholders’ interests in profits or market share.

This dual role — commercial and public utility — is why the IPO issue is taking more time. But I hope we will be able to resolve it and move ahead.

Ease of doing business is a key agenda of both the government and SEBI. Have you given any timelines to SEBI departments to review regulations and suggest improvements?

We are aiming for optimal regulation — that means ensuring effectiveness while also considering the cost of compliance and ease of doing business. Every regulation adds some compliance burden, so we have to ask: what are the least-cost options? What alternatives exist? Can we eliminate some micro-regulations?

The idea is to focus more on risk-mitigating regulations and reduce unnecessary burdens. Each department within SEBI is already engaging with relevant associations and stakeholders to prepare proposals. These will be released as consultation papers, and public comments will be sought.

This will help us transparently identify areas for improvement. Some regulations might be rewritten — for example, we are reviewing Regulation 24B in mutual funds to make it more effective and less burdensome.

This is similar to spring cleaning — like when you reorganize your home before Diwali. You dispose of some things, rearrange others, and in the end, your space feels cleaner and more efficient. That’s exactly what we are trying to do. Of course, it’s a continuous process, but we’re now giving it focused attention.

What is the status on total expense ratio (TER) for mutual funds?

We have a cap there. But we have an upper limit in several other places also, such as in debt security or in brokerages’ collection of fees. But it’s not necessary that the upper limit is kept… sometimes it is much lower than (what is allowed). Some brokerages charge zero fees also through we have said that it can’t be more than 2.5 percent.

TER was to be reviewed and it had even gone to the Board of SEBI. The former SEBI Chairperson had said that the Board had asked for additional data to review it. What is the status of that? Is it still under review?

Till the time it is reviewed, it is status quo.

If there is a review then there is a change coming, if status quo is maintained, then it would mean that there is no change. That is how the markets interpret it.

Right now, as an institution we are trying to do a major simplification of our regulations. Going forward we will identify (which are the regulations that need simplifications). It (this exercise) will actually throw up the pain points or (the regulations) that are not necessary or where we can do better. Then you have to tackle it in small bites… otherwise everything will gale mein atak jayega (get stuck in the throat). So, you have to break it down into chewable bits and then implement those regulatory changes.

But they should add up to an objective, which is optimum regulation. In some places (formulating) optimum regulation might mean identifying a thing as too loose (loosely regulated) then it (the regulation) should be made tighter. But rest of the stuff can go. So, it is very difficult for me to give you all the concrete examples before the exercise goes much further. Once it goes further ahead, we will have an idea which regulations are the ones that can be implemented.

Right now, we only have that guiding principle of optimum regulations. And my belief is, and going by whatever inputs I have got from the people, that there are definitely many, many opportunities for reform.

What is your big message to investors?

Investors mean wise investing, long term investing. But capital market is important, and you should do the asset allocation in a wise manner, suited to your needs. Your needs are your needs. You can assess them better and take proper advice.