## Thursday, September 23, 2010

### SEBI order on MCX-SX

One more top quality order by SEBI. Bhave's SEBI has really set new standards for the quality of orders.

1. can you explain the gobbledegook in simple terms?. it might be an outstandin order,but its a pain to read.
dont they do executive summaries in babudom?

2. According to this blog - it is one of the most defective orders of SEBI:
http://blog.livemint.com/initial-private-opinion/?p=756

3. I read this blog post and was not convinced.

The conversations that I have had with legal professionals say that the order is iron clad.

It's a free country. Sandeep Parekh can try these arguments at SAT :-)

4. Sir I totally agree with your view on the SEBI and Mr Bhave. A few goof ups apart they have done a great job. However, there was an article in Mint by Tamal Bandopadhay how Mr Bhave might not get an extension. it is absolutely vital that such people who are doing the right things, should be encouraged.
Please see if you and influential people like you can ensure that guys like Mr Bhave should stay :-).
A super duper fan of your gr8 blong
:-))

5. valueinvestor2010,

Bhave at SEBI and Subbarao at RBI are both reminders of the incredible importance of the appointments process. We have to be able to steadily throw up such top quality appointments.

Do I have any role in it? No! I'm just the bottom of the food chain.

6. I have no clue about this order. But, I'm not sure that SEBI is all that good, as claimed by most.

Look at the entry load ban issue. The load, as commonsense would have expected, moved into the exit load/expense ratio/trail commission. So,

1) no benefit to the end user (me!).
2) It is a form of fee fixing that I am not comfortable with. Why should a regulator decide what and how much fees should be charged for a product? Why not instead simply make the process transparent so that the exact commissions/expense ratios are provided to the investor (along with say comparisons to averages). If a fund is able to charge high entry loads, by all means let it do so. But, only as long as it is clear to the user.
3) Often the argument is made that the investor might be naive, financially illiterate so SEBI should ensure a fair outcome - well, in that case, a) SEBI won't be able to help that person anyway (there will always be a way to dupe the person, and I'm not just being cynical), there's nothing unfair about a penalty for not being informed and hence the push for financial literacy, b) SEBI's ban didn't work anyway and distorted the market and perceptions, c) The answer/better approach still is to provide transparency about the fees, d) why penalize informed investors, fund managers to protect uninformed investors (let the fund managers who can charge more for alpha, do so and let informed investors make the choice if they want to), atleast create a separate classification/market for informed investors? e) a holistic policy for advisers based on how well they do for the investor would have been much better. That has never been addressed by SEBI. Anything else it does is bound to be ineffective. f) Yet another argument against implementation of transparency is that the fees may not be disclosed to the investor by the distributor, etc. Well, that's easy to fix, a fee declaration form can be required at the AMC, ensuring the distributor can't fudge things in between?

This is such a fundamental policy mistake (fixing fees as opposed to enabling transparency, aligning advisers with investors), that I find it hard to support the claim that SEBI is any good. If you want to do consumer protection properly don't go about banning stuff (as you say, the job of a policeman is easy only in a police state, I suppose, similarly, the job of a regulator is easy only when it dictates all manner of things to the industry).

As an individual trader/investor, 1) I still prefer to trade outside India just because of STT. 2) The lot sizes are so big that I cannot assemble an appropriately proportioned basket of futures. I also can't size relative trades/hedges because the lot size don't provide appropriate granularity. 3) There is a small cap India ETF listed in the US but not in India! 4) The mid cap index etf and futures have zero liquidity. 5) The etf expense ratios are higher than in the US (whatever happened to cheap services in India)? 6) Commissions are way lower in the US than in India. 7) Why are etfs not encouraged by SEBI as competition to mutual funds? Why don't we have a Sri Lanka ETF. Why are other Asian ETFs not listed on the indian stock exchanges. 8) There is a weird discount for intraday trading in all brokerages (just because its easier on their systems). Whatever happened to consumer protection there? Does SEBI really believe that intraday trading is to be encouraged (60%+ of volume now) at the expense of longer holding periods?

I can go on and on, but needless to say SEBI leaves much to be desired and I don't understand why it is praised for achievements which are miniscule, if any. But then, in India, we have to be satisfied with what we can get, not what we should get.

7. I have no clue about this order. But, I'm not sure that SEBI is all that good, as claimed by most.

Look at the entry load ban issue. The load, as commonsense would have expected, moved into the exit load/expense ratio/trail commission. So,

1) no benefit to the end user (me!).
2) It is a form of fee fixing that I am not comfortable with. Why should a regulator decide what and how much fees should be charged for a product? Why not instead simply make the process transparent so that the exact commissions/expense ratios are provided to the investor (along with say comparisons to averages). If a fund is able to charge high entry loads, by all means let it do so. But, only as long as it is clear to the user.
3) Often the argument is made that the investor might be naive, financially illiterate so SEBI should ensure a fair outcome - well, in that case, a) SEBI won't be able to help that person anyway (there will always be a way to dupe the person, and I'm not just being cynical), there's nothing unfair about a penalty for not being informed and hence the push for financial literacy, b) SEBI's ban didn't work anyway and distorted the market and perceptions, c) The answer/better approach still is to provide transparency about the fees, d) why penalize informed investors, fund managers to protect uninformed investors (let the fund managers who can charge more for alpha, do so and let informed investors make the choice if they want to), atleast create a separate classification/market for informed investors? e) a holistic policy for advisers based on how well they do for the investor would have been much better. That has never been addressed by SEBI. Anything else it does is bound to be ineffective. f) Yet another argument against implementation of transparency is that the fees may not be disclosed to the investor by the distributor, etc. Well, that's easy to fix, a fee declaration form can be required at the AMC, ensuring the distributor can't fudge things in between?

This is such a fundamental policy mistake (fixing fees as opposed to enabling transparency, aligning advisers with investors), that I find it hard to support the claim that SEBI is any good. If you want to do consumer protection properly don't go about banning stuff (as you say, the job of a policeman is easy only in a police state, I suppose, similarly, the job of a regulator is easy only when it dictates all manner of things to the industry).

8. Continuation of above rant:

As an individual trader/investor, 1) I still prefer to trade outside India just because of STT. 2) The lot sizes are so big that I cannot assemble an appropriately proportioned basket of futures. I also can't size relative trades/hedges because the lot size don't provide appropriate granularity. 3) There is a small cap India ETF listed in the US but not in India! 4) The mid cap index etf and futures have zero liquidity. 5) The etf expense ratios are higher than in the US (whatever happened to cheap services in India)? 6) Commissions are way lower in the US than in India. 7) Why are etfs not encouraged by SEBI as competition to mutual funds? Why don't we have a Sri Lanka ETF. Why are other Asian ETFs not listed on the indian stock exchanges. 8) There is a weird discount for intraday trading in all brokerages (just because its easier on their systems). Whatever happened to consumer protection there? Does SEBI really believe that intraday trading is to be encouraged (60%+ of volume now) at the expense of longer holding periods?

I can go on and on, but needless to say SEBI leaves much to be desired and I don't understand why it is praised for achievements which are miniscule, if any. But then, in India, we have to be satisfied with what we can get, not what we should get.

9. You seem to have got the entry load ban completely wrong. What SEBI has done is removed fixed fees (entry load) and made it totally transperant.

So all your rantings seem to be misplaced and misguided.

It benefits you (I presume an investor). Your full 100% money is at work.

10. Anonymous responding to the RantsWednesday, 29 September 2010 at 16:25:00 GMT+5:30

Your basic facts are so wrong that it does not make sense to respond to your rants. Even so....

1. STT is a Tax issue, nothing to do with SEBI
2. The lot sizes on futures are not big - 4000 US$- definitely not big 3. a lot of ETF’s are listed in India and more coming 4. not true, there is no mid cap futures 5. Not true, can u enumerate the expense ratio of the small cap India ETF which you talked about. Is it lower than 50 basis points 6. Absolutely not correct. India is the lowest commission market in the world 7. SEBI is a regulator not a business promoter 8. what is the problem with intraday trading? Are you saying that the algorithmic trading in international markets is bad SEBI has turned out to be the best regulator in the last 2/3 years. The cleaning up of mutual fund distribution (by the way UK, Taiwan and south korea are follwing in the same footsteps), ensuring ULIP’s do not fleece the investor, allowing algorithmic trading, introducing efficient systems for IPO’s and many more……… 11. one more point - you have ETF's on Hang Seng on NSE 12. Anon2, 1) It is not totally transparent. Do you know how much your mutual fund gives out as upfront commission and trail commission. Until you know that, it is not transparent. I remember before the ban, there were lots of funds without exit loads. After the ban, *all* equity non-index funds have exit loads of 1%. The expense ratios also increased. All that happened was the entry load shifted into expense ratio, trail commission, upfront commission and exit load. 2) Using the same point, I can undoubtedly say that 100% of your money is not at work in a mutual fund. The fact that you as a reader of this blog do not know that is a failure of the SEBI regulation mechanism. That is my central point. 3) in fact its not just about entry loads. Earlier this year, SEBI tried to get the MFs to reduce upfront commissions, which is now resulting in higher trail commissions. That is even worse because the trail commission is applied every year whether you transact or not. Please read the following and let me know if you still disagree with me: Entry load ban: MFs may pay more trail commission to distributors Understanding Different commissions on Mutual funds Agents commission in Insurance Policies ? (for comparison with above) Mutual fund commissions vs. Unit linked plan commissions Then there's all the huge upfront commissions for tax saving funds and NFOs but I won't go there right now. Look, obviously, I want to pay less fees. But, the best way to determine fair price is for the market/customers to force that, not the regulator. The regulator should make sure that all the information (on fees) is out in the open - otherwise, you just see the musical chairs between entry load to exit load/trail commissions, etc. My annoyance is that I have to work hard to get information on what exactly is being charged and how and when (amortization or load account, etc). Reading the links above and understanding the structure is a waste of time and energy! Its atrocious! 13. Anonymous reacting to the rants, 1) No comments. 2) A lot size of 4 times Indian GDP per capita is big in the Indian context. You cannot justify similar sizes as in the US. Ok, lot sizes don't necessarily need to be proportional to GDP per capita, but it should be smaller to some extent? 3) Great! At this pace when do you think one could see liquid etfs on atleast all the sectors in India. You seem to know by when that may happen. And, will we ever have liquid options on those etfs/indexes? And, despite that, higher STT on ETFs will be a discouragement (yeah, I know this is supposedly not SEBI's fault, although they could have a say on this if they wanted to). 4) I was referring to these: NFTYMCAP50. You are right though, it is as if they don't exist. This itself is the sign of a broken market. 5)There is no small cap etf in India. What will I compare it with? I would compare broad domestic index etf in the US (SPY with expense ratio of 0.2% and no STT) with domestic index etf in India - NIFTYBEES of 0.5% and STT). 6) That's laughable. Proof please? 7) Well a regulator's job is also to promote free and fair competition in the context of its regulatory responsibilities. 8) I have no problem with intraday or algo trading, but I have a problem with wide discounts for intraday trading as compared to longer holding periods. "SEBI has turned out to be the best regulator in the last 2/3 years." I don't necessarily disagree with that. But, its not saying much either. The marketplace could be a lot, lot better. "The cleaning up of mutual fund distribution (by the way UK, Taiwan and south korea are follwing in the same footsteps)" What I do know is the bottomline: Mutual funds are still much more expensive in India as compared to other places. I would be surprised if the UK expense ratios were anywhere close to Indian levels. Don't know about Taiwan/SK. "ensuring ULIP’s do not fleece the investor," Lol - when no one was left to dupe and the whole world understood the problems, they moved. And, that too because of the impact on the mutual fund world. They were way too late on this to claim any credit whatsoever. Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticism is perfectly okay; uncivilised language is not. We delete any comment which is spam, has personal attacks against anyone, or uses foul language. We delete any comment which does not contribute to the intellectual discussion about the blog article in question. LaTeX mathematics works. This means that if you want to say$10 you have to say \\$10.