India may be entering a more professional phase of regulation to protect investors and markets
Two regulators read the riot act on Thursday,pulling up companies that may have strayed from norms. The Competition Commission of India slapped fines worth Rs 6,300 crore,the highest ever,on 10 cement companies,and the Securities and Exchange Board of India (Sebi) has warned mutual funds that have underperformed for over three years at a stretch. The cement companies are expected to petition the appellate tribunal while no real steps have been taken against mutual funds,so nothing dramatic is about to happen right away. But the message is clear: when required,oversight agencies will speak up in the interest of the economy and the investors who drive it. Sebi has threatened to go beyond fund managers and chief executives and question even the directors or trustees of underperforming asset management companies.
Pending appeal,the cement companies stand accused of cartelising to underuse installed capacity,reduce production and thus make a killing in times of high demand. It is a serious charge because there are implications for growth and development and the apex industry body,the Cement Manufacturers Association,has been pulled up for serving as a platform for the cartel instead of blowing the whistle on it. The case of underperforming funds is slightly different,since investors have competing options to turn to. However,Sebi has noted that 18 asset management companies have schemes routinely performing below their benchmarks and investing in a manner that violates concentration norms and amounts to conflict of interest. The regulator has also sought the governments permission to use call record data as evidence in insider trading cases and is working on guidelines for IPOs to protect investors. Perhaps this is inspired by the insider trading case that has just been closed in New York,in which Rajat Gupta was nailed by phone records.
The Harshad Mehta and Ketan Parekh scams had taught the government that liberalisation would lose public confidence in the absence of strong regulation and oversight. Now,we are perhaps entering the second phase of regulation,with agencies trying to build up a regime of best practices,and doing so transparently. Antitrust and competition law has been a crucial enabling feature of markets in the US and the EU. Targets of action have included major corporations like Microsoft,AT&T,Standard Oil,France Telecom and Deutsche Post. Now,Indian agencies are not hesitating to draw attention to what is wrong in prime sectors of the economy. It is a healthy move that will increase investor confidence.