Former Securities and Exchange Board of India (Sebi) chairman, UK Sinha, on Thursday proposed stricter rules for credit rating agencies, adding that maintaining liquidity in the market is Reserve Bank of India's (RBI) responsibility.
In an interview to CNBC-TV18 at Mutual Fund Awards 2018, Sinha said, Sebi and RBI have enough instruments to control liquidity in the market.
Sinha said, "For the first time in 2016-2017, the money raised from the market was more than the net addition in the bank credit for the first time and this got repeated in the next year also. Last year, it was around 119 percent of the net addition in the bank credit."
Q: It's very tempting to begin with the fee issue that you touched on, because you are seen as the most liberal regulator in that respect. But I am not starting there, because today, the fiery issue is something else. It's the illiquidity in the debt market. So, let me start from there. What is the solution? Since you are still thinking like a regulator, if you were in the regulator’s seat, what is the solution to this illiquidity?
A: I think in the market, the most important thing is to give a signal that the trust in the market can be restored or the trust in the market is not eroded. So, the first attempt or the deeper attempt has to be to continue to restore the faith in the market. Because, if there is a faith in the market, some of the processes can be handled, some of the problems can be handled and here I would like to say that the Reserve Bank of India (RBI), the government of India and Securities and Exchange Board of India (Sebi), all must work together. Not only they should work together, they should also consciously give the impression to the outside world that they are on top of the situation, they are going to solve it together. That itself will be a big message.
Q: In a way, that came and you would be aware of it that there was a joint press statement from the RBI and Sebi - very unusual - came on Sunday evening on RBI website, and it was quickly followed up on Monday morning with the finance minister, also saying that everything will be done and they are watching the situation. Everybody here will tell you that deals are getting fewer and yields are still high. Should the regulator not just for today, but on an enduring basis, think of liquidity immediately. Do you think the need of the hour is to provide some kind of liquidity as was done in 2008 and promised in 2013?
A: No, what was done in 2008 and in 2013 was a very different situation. Let us not give the impression that what we are facing today is as serious as the situation in 2008 or 2013. In 2008, the entire money market had died. It has completely dried up. I remember, one public sector banker, who had a branch in London, he told me at that time that his branch in London required 5 million pounds and he couldn’t get that money in the money market in London. So he had to send that money from India. In India, the situation at that time was that a triple A rated CD issued by a public sector bank was not being bought or honoured by the other bank. So, that was the difficult part, that is a very difficult situation.
Q: I am not saying we are at a Lehman moment at all. Some editors have chosen to call it a Lehman moment considering IL&FS is somewhat semi-public owned, it maybe our Fannie May moment. But, it's certainly not our Lehman moment. But I am not trying to compare the gravity of the situation, but illiquidity is an issue, so what could be a solution?
A: Liquidity is primarily a RBI area and for me, who has nothing to do with the government at this stage, to make a suggestion to RBI will not be proper. I trust RBI and I am sure that they are evaluating the situation. Some people are asking that why cannot RBI bring in more and more open market operations (OMO), but OMO also has its own dimension. So, for me to comment on this, that this is the only solution will not be the right thing. I am confident and through you, I would like to assure everybody that the RBI, government and Sebi are looking at it very seriously. They are watching this situation and if needed, there are enough instruments. If you are talking of instruments, there are enough instruments in the hands of the regulator and the monetary authority and I am sure they will do the best.
Q: I am sure there is confidence in the regulators on Sunday evening, when I saw that one sentence press note on the RBI website. I called one of the largest fund managers and when he picked up the phone, not even a hello, he said God has spoken. So, there was that much faith in the regulators making the joint statement. But on a more enduring basis or on a more long-term issue, as you pointed out, the amount of outstanding debt issuance has doubled in the last five years, the amount of CP issuance has trebled in the last two years as you pointed out, but there is still not so much of trading. It's still a buy and hold market and it's not a buy and trade market so much. So, any suggestions for creating liquidity on an enduring basis?
A: Let me tell you two things. There is always a discussion, whether our country is a country, which is more bank oriented or more market oriented. For the first time in 2016-2017, the money raised from the market was more than the net addition in the bank credit for the first time and this got repeated in the next year also. Last year, it was around 119 percent of the net addition in the bank credit. So to that extent, there is something to be happy about that the market is now coming off edge.
I am going to say something, which some of the people here are not going to like - there cannot be and there should not be a race for enhancing your assets under management (AUM) and growth all the time. Why can't I as a fund manager refuse to accept money? When will that time come? At some moment that time must come. If I am finding that to increase my AUM, either a debt paper or an equity paper I am buying just to be ahead of others, I am mobilising money from all corners, then there should be a fund manager who says I am stopping fresh accruals in my funds for next three months or six months or whatever, that moment should come.
On the question of trading, the debate is more focused on the larger issue about trading in the government securities and the benchmark yield being market driven. So, all those issues are there. In spite of that, I am finding that whatever possible measures could have been taken, for example, reporting the private placement of corporate bonds on the stock exchange platform, all that is happening. Some amount of trading is also taking place. I do not foresee a massive increase in trading activities in the near future, but I think we are on the right path.
Q: I wanted to ask you about rating agencies. Do you think more rules need to be written or enforced differently to ensure that rapid downgrades don't happen, after all that was the spark that triggered this problem?
A: When an episode happened about one particular auto component company, after that Sebi took a number of reviews. The practise at that time was that one fine moment you decide that you will not do or release any rating, you withdraw from that rating, so Sebi felt that this is not done. You must assign a reason for withdrawing the rating. If it's for some commercial reasons, then it is fine, but that also you should disclose. But if the company has not provided you data or whatever is the matter, you must report that. In that context, I would like to add that rating agencies should not start behaving like some of the independent directors, who leave a company when there is a crisis. There are several examples of independent directors, where the first thing they do is to resign from the company. Somebody has to ask them, what were you doing when the situation deteriorated? If a rating company feels that something has gone wrong and the matter is now known, so they downgrade it and they think their job is over, this is not fair.
I remember Sebi had initiated and I hope it's working, that even if there is a one day delay in payment of interest, then the dialogue with the debenture trustee and the rating agency was not happening at that time. So, Sebi asked for it and provided for it, that dialogue should happen and that information should be reaching.
If rating agencies are constrained by absence of information, then they are legitimate in their demand that information flow should be restored. However, after an event has happened, after an event has taken place, and some company is downgraded two notches, four notches may be by justification, is not doing a good service to the larger system. So, I would say that those changes are required.
Q: In your time, you were conscious that the industry had to grow. At that time, it was stuck between Rs 8 lakh crore and Rs 10 lakh crore and you were very conscious that the industry has to grow….
A: Not only that. The AUM was going down year after year. For two years - 2010-11 and 2011-12, there was a decline, the industry was in a very difficult situation after 2009.
Q: Now the industry's argument clearly is that only if it makes profits, will it reinvest. Is it a good idea to go after their profits? RBI does not go after banks, which makes profits. So, is Sebi right in going after their profits or should it do something else to ensure that the expense is reinvested?
A: If you are managing others money in millions and millions, then you have some responsibility. I think the regulations in India are quite detailed. Since I have worked on the other side, I also know that there is always an attempt to follow the regulations in letter and not in actual spirit. So, many facilities have been given, so many dispensations have been given, I think industry should start thinking in terms of following it in letter and spirit, because it's in their own interest.
I have no inside information, but the regulator is going to be more and more demanding according to me.