Fuzzy logic

There can be little doubt that the Securities and Exchange Board of India is right to cancel the certificate of registration held by Sahara Asset Management Company (AMC). A corporate group that has been found guilty of securities fraud on the scale that Sahara has, can scarcely be allowed to manage public money in any form. But the question really is why it took so long for SEBI to decide that Sahara AMC was no longer ‘fit and proper’ to manage other people’s money, given that its own ruling holding the group’s fund-raising activities illegal was issued way back in June 2011. Even if SEBI was awaiting the Supreme Court ruling, it was available by August 2012. Still, SEBI waited until November 2014 to issue its first show-cause notice to Sahara AMC. Such belated action by the regulator can cost investors dear. Managing ₹134 crore in assets, Sahara is certainly not one of the country’s bigger AMCs today, but with the fund house given a six-month window to wind down operations, its investors may be forced to liquidate their holdings under adverse market conditions.

But then, this is not the first occasion on which an Indian regulator has used the omnibus ‘fit and proper’ clause to lock the stable doors after the horses have bolted. Recently, the Forward Markets Commission (FMC) found the promoters and managing director of the Universal Commodity Exchange not ‘fit and proper’ to manage the exchange, as allegations of fund diversion came to light. The notice came a full year after the exchange had stopped operations. Regulators including FMC, SEBI and the CERC have wielded the ‘fit and proper’ clause at different points in time to force the Jignesh Shah-controlled Financial Technologies to cede its stakes in various Indian exchanges, long after the NSEL scam (July 2013). In quite a few cases, not only has the regulatory action been delayed, it has also been challenged in Courts. Not only are ‘fit and proper’ criteria defined very differently across Indian financial markets, they are also stated in vague and sweeping terms, which make their application quite subjective. SEBI’s Mutual Fund regulations for instance, define a ‘fit and proper’ sponsor as someone who has ‘integrity, reputation and character’, is not subject to ‘convictions or restraint orders’ and has ‘competence including financial solvency and net worth’, without prescribing any quantitative criteria for the latter. RBI’s guidelines for issuing new bank licences talk of promoters with ‘sound credentials and integrity’. A list of specific disqualifications (such as previous convictions for fraud) would have served the purpose better.

It is time financial market rules were redrafted to lay down more precise and definitive ‘fit and proper’ criteria for promoters of all kinds of financial firms — be they exchanges or managers of public money. India’s multiple financial regulators also need to more closely interact with each other to actively share information on ongoing investigations, so that entities with a dubious record can be disqualified at the starting gate. This would be a far more meaningful way to protect investor interests.