Is SEBI behaving Myopic?

Securities and Exchange Board of India or SEBI, for the uninitiated, is a regulator for securities market in India. In simple terms it is an authority which regulates the Share or Securities Market and Mutual Fund Industry, analogical to what is RBI to banks. 

SEBI is responsive to the needs of 3 groups, which constitutes the market : 1) the issuers of securities, 2) the investors and 3) the market intermediaries. It has three functions rolled into one body : legislative, executive and judicial. It drafts regulations in its legislative capacity, it conducts investigations and enforcement action in its executive functions and it passes rulings and order in its judicial capacity. This makes it very powerful and there exists only two appeal avenues against it, the Securities Appellate Tribunal, which anyway is under purview of SEBI itself in broad view. A second appeal lies directly to the Supreme Court.  

Even though SEBI has taken a very proactive role in streamlining disclosure requirements to international standards, it has failed to large extent in developing and increasing investors base and also failed to build trust with market intermediaries, who are the foot-soldiers of the market which SEBI controls. Handbook of Statistics on Indian Economy-2015, released by RBI in Sep 2015, reveals some alarming facts 

• The total currency in cash held by the households was Rs.1.32 lakh crore, while the total Bank Deposits made was Rs.5.8 lakh crore in financial year 2014-15.
• Investments in Shares, Debentures and Mutual Funds were around Rs 57 thousand crore in the same period, a minuscule part when compared to investments in bank deposits. It is low even against investments in Life Insurance or Provident and Pension Funds
• In percentage terms, funds invested under SEBI's control in 2014-15 stands at 4.6%, against 47% in Banks, 19% in Life Insurance and 16% in Provident and Pension Funds.

https://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy

It is an established fact that investment in Mutual Funds generates best returns among all financial products, through proper Financial Goal Planning. But the above statistics declares that SEBI unfortunately failed to generate optimum awareness and there is lot more to do by SEBI in developing investor's confidence in securities and Mutual Fund market.

Nevertheless, of the reasons for whatsoever increase in the penetrations in Mutual Fund Industry, predominant are the efforts of the thousands of foot-soldiers called Individual Financial Advisors (IFA). Mutual Funds are still a push product, as an ordinary Investors is still unaware of the nitty-gritty of the same. IFAs initiates investors money to Mutual Fund, handholds the Investors and painstakingly establishes confidence in him through various services, strategies, asset allocations and review of goal planning. 

Deposits with Banks (in Rs. Billion)

Only a minuscule of investors do actually interpret the Mutual Fund product in right and correct way and that there is a greater chance that its financial planning goals might go haywire in absence of an IFA. SEBI rightly wants its investors to get educated and be aware of all facts and in that intention of transparency, SEBI recently commanded that investors hence-forth be informed in their account statement, that they might get an incremental return of 1-2% if they would have invested directly and not through IFA. This seemingly informative disclosure might prove to be death-trap for investors on the contrary. Humans are miser animal. Its psychological general tendency of greed to gain a little more, might prove suicidal for investors. Interestingly, Financial prudence itself says, even Financial Advisors must hire an Advisor to manage their financials and not to do so themselves, in order to wean-out psychological ill-effects of managing own money.

One solution for SEBI's intended transparency without any practical anguish to both investors and IFAs, is to make Direct mode mandatory for investments in Liquid Funds, GILT and FMP which comprises Rs.4.7 lakhs crore Assets or 35% of total Rs.13.5 lakhs crore, as on March 2016 data (https://www.amfiindia.com/research-information/aum-data/classified-average-aum). These funds are low risk, less volatile and are generally invested by seasoned, knowledgeable investors. The rest Equity investments must be allowed to be invested only through IFA channel for proper fund management and better financial goal planning.

Government is trying best to bring in more Indians to the path of Capital Market products, more so for Retirement savings, but on the other hand in its objective of transparency, SEBI by its recent command might actually end up harming the investors and prove to be dampener in increasing Capital Markets products penetration, which still is at abysmal low. It can be classic case of penny wise-pound foolish, if SEBI behaves this myopic.