Download Presentation to Hon`ble Finance Minister

Stanford Annual Conference on
Indian Economic Policy Reforms
Presentation on
Regulating the Financial Sector
U.K. Sinha
Chairman, Securities and Exchange Board of India
June 03, 2016
A Glimpse

Size of the economy (Nominal GDP 2015-16) > $ 2 Trillion
•
9th largest in the world in terms of nominal GDP
•
3rd largest on PPP basis
•
Projected to become 3rd largest in nominal GDP by 2030

Consumption -2/3rd of GDP, growing @ 6.5% in last three years

Positive sovereign credit rating outlook

Market Capitalization
:
$ 1.46 Trillion

Market Cap / GDP
:
69%

MF AUM
:
$ 214 Billion

Last 3 Year MF AUM CAGR
:
20.7%

AUM - Life Insurance
:
$ 373 Billion

Outstanding Credit by SCBs
:
$ 1.06 Trillion

Outstanding Corporate Bond
:
$ 300 Billion

FPI AUC
:
$ 332 Billion
2
GDP Growth Projections
Oct-15
Jan-16
Apr-16
Change from Change from
Oct 2015 WEO Oct 2015 WEO
For 2016
For 2017
Country
2016
2017
2016
2017
2016
2017
Brazil
-1.0
2.3
-3.5
0.0
-3.8
0.0
-2.8
-2.3
China
6.3
6.0
6.3
6.0
6.5
6.2
0.2
0.2
India
7.5
7.5
7.5
7.5
7.5
7.5
0.0
0.0
Japan
1.0
0.6
1.0
0.3
0.5
-0.1
-0.5
-0.7
Russia
-0.6
1.0
-1.0
1.0
-1.8
0.8
-1.2
-0.2
South Africa
1.3
2.1
0.7
1.8
0.6
1.2
-0.7
-0.9
UK
2.2
2.2
2.2
2.2
1.9
2.2
-0.3
0.0
US
2.8
2.8
2.6
2.6
2.4
2.5
-0.4
-0.3
Source: IMF World Economic Outlook Updates
3
Existing Regulatory Landscape – Who does What?
• A subject of the Union Government
Parliament
MoF
MCA
Financial Stability and Development Council (FSDC)
Companies Act
RBI
• Monetary policy
• Banking / Non-banking
Regulations
SEBI
• Securities Market
• Commodities Market
(w.e.f. Sept 28, 2015)
IRDA
• Insurance Market
PFRDA
Certain sections
administered by SEBI
• Pension Funds
• FOREX Market
• Public debt Management
Appellate Mechanism : Securities Appellate Tribunal
4
Regulatory Landscape – Proposed Architecture by FSLRC
Part Consolidation/ Part Split
Consolidation UFA
Split
SEBI*
RBI
IRDA
PDMA
PFRDA
FRA
Appellate Mechanism – FSAT
*FMC merged with SEBI
5
FSDC Mechanism
Set up by the Government as the apex level forum in December 2010 with the objective of•
Strengthening and institutionalizing the mechanism for maintaining financial stability
•
Enhancing inter-regulatory coordination and promoting financial sector development
•
Monitors macro prudential supervision of the economy, including functioning of large financial
conglomerates
•
Guides financial literacy and financial inclusion initiatives
•
Coordinating lndia's international interface with FATF, FSB
•
Headed by Finance Minister, Sub Committee headed by RBI Governor
•
All regulators are members
6
Indian Securities Market – Global Standing

Among the top 10 countries in terms of market capitalisation

No. of Equity Trades: NSE-Rank 4 and BSE-Rank 11

NSE Ranks 1 or 2 in no. of equity derivatives/ currency futures trades

India, a favoured destination for FIIs

SEBI, a Board member of International Organization of Securities Commission (IOSCO) and
Member of Financial Stability Board (FSB)

SEBI actively engaged in global standard setting through representations in important IOSCO
policy committees

Global standards guide SEBI regulation

FSAP 2012 by WB-IMF: Fully/ Broadly compliant in 22 of 28 principles

IOSCO-BIS Level1 Assessment of Implementation of FMI Principles : India 1 out of 6
jurisdictions globally with highest ratings on all eight parameters
7
Market Returns-BRICS Nations
CAGR (%) in Benchmark indices
( As on March 31, 2016 )
Last 6
month*
3 year
(2013-16)
5 year
(2011-16)
10 year
(2006-16)
15 years
(2001-2016)
Brazil
11.37
-3.87
-6.11
2.81
8.64
Russia
12.51
-16.64
-15.97
-6.12
8.9
India
0.68
10.84
5.81
8.56
13.56
China
-21.05
10.33
0.51
8.75
2.37
0.79
9.44
10.16
9.89
13.24
South Africa
* Time Period: November 15, 2015 to May 15, 2016
•
CAGR of SENSEX since inception (April 1979 - 37 years)
: 15.45%
8
Net Investment by Foreign Portfolio Investors in India (USD Billion)
(as on May 16, 2016)
FPI Investment
100
80
USD Billion
60
40
20
0
-20
-40
1992
to
1999
Equity 10.4
Debt
0
Total 10.4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1.43 2.81 0.75 6.63 8.67 10.7 8.11 17.7 -12 17.5 29.4 -0.4 24.4 20.1 16.1 3.2 2.18
0.03 0.04 0.01 1
0.7 -1.2 0.88 2.34 2.64 1.05 10.1 8.65 6.64 -8 26.2 7.4 0.02
1.46 2.84 0.76 7.63 9.37 9.48 8.99 20 -9.3 18.5 39.5 8.3 31 12.1 42.4 10.6 2.2
9
SEBI’s Mandate
Investor Protection
Market Development
Uniqueness of SEBI’s Role
• Legislative
• Executive
• Quasi-Judicial
• Financially and Operationally
Independent
Market Regulation
Legal Framework
• SEBI Act, 1992 & Regulations
• Depositories Act, 1996 & Regulations
• Provisions of the Companies Act, 2013
• Securities Contracts (Regulation) Act, 1956
• Securities Contracts (Regulation) Rules, 1957
• Appellate Mechanism through SAT
SEBI Registered Intermediaries
10
Investment Advisors,
MPS Compliance
Major Securities Market Reforms
No Load in MFs,
IRF, IDRs
KYC
Registration
Agencies,
SCORES
2011
2009-10
Securities
Market
Training
Institute,
Foreign Investments
in Indian SEs
T+2
2005
2003
2013
2012
REITs,
InvITs,
FPI,
Securities
Laws Amdt, CG
Norms, Research
Analysts
KYC, Corp. bonds
trading, Currency
derivatives, ASBA
AIF, E Voting, New
Takeover Code
2001
CRA Regs
2000
1999
Stock Derivatives
Demutualization,
Corp. Gov., Gold ETFs
1998
1994
1992-93
2015
2014
2007-08
2006
Rolling
Settlement,
Index Derivatives
Automated,
Screen
based
Trading,
Novation through CC
New Insider
Trading Regs,
Start-Ups, e-IPO
Free Pricing,
Pvt. MFs
Demat
FIIs,
11
Important SEBI Regulations

Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market (PFUTP)
Regulations, 2003

Prohibition of Insider Trading (PIT) Regulations, 2015

Substantial Acquisition of Shares and Takeovers (SAST) Regulations, 2011

Issue of Capital and Disclosure Requirements (ICDR) Regulations, 2009

Listing Regulations, 2015

Stock Exchanges and Clearing Corporation Regulations, 2012

Transparent criteria for:
–
Shutting down trading in a scrip
–
Market wide circuit filters
–
Open interest position in derivatives
–
Short selling
–
Buying and selling by MFs
–
Buying and selling by promoters/ employees
–
Core Settlement Guarantee Fund
12
Recent Developments

SEBI-FMC Merger

Corporate Governance Norms (ranked 8th in 2015 in a World Bank report)

Alternate Platforms / Frameworks –
– SME platform
– Platform for Start-ups
– REITs & InvITs
– Municipal Bonds
 Use of Technology for Investment Processes e.g. e-IPO, e-KYC, e-Voting, etc.
 Stringent Enforcement – Proactive action against unregistered Collective Investment Schemes
– Rationalization of Consent Mechanism
– Strengthening Insider Trading Law
 Opening up of Local Offices by SEBI – focus on investor education/ grievances
redressal
13
Corporate Governance Norms - US v/s. India
United States
(1/2)
India
Board of Directors
Majority of Independent Directors
If the chairman is non-executive - at least one-third of
the directors must be independent.
If the chairman is executive - at least half of the
directors must be independent.
Separate Meetings of Independent Directors
Non-management directors to meet at regularly
scheduled executive sessions without management
Independent directors to hold at least one meeting a
year without the attendance of non-independent
directors
Nomination / Compensation Committee
Composed entirely of independent directors
At least three non-executive directors and at least half
shall be independent directors and Chairman of the
company can be a member
E-Voting
Electronic corporate-shareholder communication and
proxy-voting is permitted. However, vast majority of
corporations still seem to use paper-based methods.
All companies have to enable shareholders to e-vote
on all matters to be decided in General Meetings.
14
Corporate Governance Norms - US v/s. India
United States
(2/2)
India
Audit Committee
At least three members and all must satisfy the
independence requirements
At least three members and at least 2/3 of the
members must be independent
Related Party Transactions
No requirement for prior approval of the RPT by the
Audit Committee.
All Related Party Transactions require prior approval
of the Audit Committee.
No requirement for approval of shareholders for
material RPTs
Approval by majority of non-interested shareholders
for material transactions i.e. if transaction exceeds
10% of the consolidated annual turnover.
Shareholder Approval of Equity Compensation Plans
Shareholders to vote on all equity-compensation
plans and material revisions.
Requirement of shareholders' approval by special
resolution for equity compensation and material
revisions thereto under the Companies Act.
Corporate Governance Guidelines/Code of Ethics
Listed company needs to adopt and disclose
corporate governance guidelines
Listed company has to comply with all the
requirements
prescribed
under
the
Listing
Regulations.
15
Enforcement - Process Flow
 Sources:
 Alerts
generated
by
surveillance
 Complaints
Preliminary
Verification/Checking-up with
entities
Decision to launch formal
investigation
 Media reports
Approval of course of action
by Whole Time Member
 No action
 Warning
 Monetary Penalty
 Cease & desist
 Direction
 Prosecution
Completion of
enquiry/investigation
Enforcement Dept. prepares
the case for various actions,
including Settlement
Pending investigation interim
orders (in deserving cases)
Presented before
WTM/AO/Appellate Tribunal
16
Settlement /Consent Mechanism
Violation Categorized
Consentable
Mathematical Formula
Non Consentable
Rejection
Internal Committee/
High Power Advisory
Committee
17
Major Challenges and Road Ahead
• Managing Global shocks -Volatility due to huge Capital Inflows/Outflows
• Newer challenges from technological advancements / commodity business
– Further upgrading the surveillance systems and capabilities.
– Risk Management in the context of Evolving Technology – HFT, Algo & Co-location.
– Cyber Security
– Efficient price discovery, risk management, increased participation and healthy growth
incommodity derivatives
• Ensuring wider penetration of Mutual Funds across the country.
• Expanding financial literacy and investor awareness.
• Deepening Corporate Bonds Market.
•
Independence of Auditors
18
19
SEBI Registered Intermediaries / Institutions
Intermediaries/ Institutions
2012-13
2013-14
2014-2015
(1/2)
2015-16 (As on 31.03.2016)
Market Infrastructure Institutions
Stock Exchanges
20
20
11
5
Depositories
2
2
2
2
Clearing Corporation
3
3
3
3
Funds
Mutual Funds
52
50
47
48
Venture Capital Funds
211
207
201
200
Alternative Investment Funds
42
101
135
209
Foreign Investment
FIIs (2011-12 to 2013-14) / FPIs
(2014-15 to 2015-16)
1,757
1,710
8216
8717
Foreign Venture Capital Investors
182
192
204
215
20
Back To SEBI’s Mandat
SEBI Registered Intermediaries / Institutions
Intermediaries/ Institutions
2012-13
2013-14
(2/2)
2014-2015
2015-16 (As on 31.03.16)
Intermediaries
Credit Rating Agencies
6
6
6
6
10,128
9,411
9,904*
5,979*
2,957
3,051
2,990
2,760
2,330
2,395
2,406
1,985
NA
NA
NA
295
Depository Participants
871
859
854
858
Investment Bankers
198
197
197
Registrars to an Issue & Share Transfer Agents
72
71
72
71
Bankers to an Issue
57
59
60
62
Debenture Trustees
31
31
32
31
Portfolio Managers
241
212
188
204
Custodians
19
19
19
19
Brokers
-Cash Segment
-Equity Derivatives
-Currency Derivatives
-Commodities Derivatives
New Participants
Research Analyst
-
-
26
261
KYC Registration Agency (KRA)
5
5
5
5
Investment Advisors
NA
129
271
427
REITs/InVITs
Regulations Recently notified
21
Market Movements - India vis-à-vis Others
Global Indices
(as on 17/05/2016)
% Returns
YTD
1D
1W
1M
3M
6M
1Y
CY
FY
0.38
0.53
0.51
9.72
0.44
-6.72
-0.91
2.3
-1.86
-3.65
-4.49
22.57
5.61
-6.51
17.28
0.55
0.27
0.09
-2.77
3.28
-2.63
-12.29
-1.19
0.35
Hong Kong
1.18
0.32
-5.62
3.9
-11.58
-28.13
-8.19
-1.85
South Africa
0.22
0.76
-0.96
5.36
0.55
-2.82
3.62
1.83
0.01
-1.25
-0.61
-0.94
-2.32
-4.51
3.1
5.09
-1.1
-7.62
-8.3
-7.34
0.34
-5.82
-0.28
-4.05
1.13
0.45
-1.16
2.82
-16.23
-17.82
-12.51
3.02
-0.25
0.23
-7.62
-0.67
-21.67
-38.95
-19.65
-5.51
1.65
1.77
-4.88
4.65
-4.69
-19.39
-3.53
-1.33
India
Brazil
UK
Korea
US (NASDAQ)
Japan
China
Singapore
22