‘Insider trading most difficult to detect’

The last financial crisis has brought KYP (know your product and know your participant) to the fore. While there is an elaborate arrangement to ensure KYC (know your client),regulators are yet to promote KYP in a big way. The need to promote KYP has become urgent as the capability of retail investors to undertake KYP in a modern financial product is limited,while products and participants are getting more complex day by day. he most obvious way to address the issue is to spread financial literacy. But,the most effective one is to make available a cadre of competent investment advisers who would help investors undertake effective KYP.

What is your view on the entry load introduction for MFs?

The issue is not abolition or introduction of entry load. The real issue is resolution of conflicts of interest inherent if distribution and advice are offered as a composite service. What is required is segregation of distribution from advice. While regulation on distribution,which is a product feature,ought to be left to product regulators,advice needs unified regulation.

It is generally thought that Indian regulators do not give exemplary punishments. What ensures good quality of orders from regulators?

The directions of regulators generally go through judicial scrutiny. Therefore,there can hardly be any scope for disproportionate penalty. The focus should be on reducing the cost of compliance and increasing the cost of non-compliance. The existence of a dedicated tribunal (SAT) is singularly responsible for the quality of orders issued by Sebi. Regulators need to build capacity to discharge quasi-judicial functions…

How far has Sebi been successful in catching insider trading?

Insider trading is the most heinous offence in the securities market. It is also the most difficult to detect and to establish. Nevertheless,Sebi has a sophisticated surveillance system which is fairly successful. What is required is quick conclusion of cases taken up by Sebi with courts. Dedicated courts to deal with securities market offences would help in providing justice in time.

Do you think consent mechanism is an effective deterrent?

If,at least the same outcomes,as would have been obtained if the proceedings were adjudicated on merits,are achieved through the consent settlement,it is an effective deterrent. It has the potential to achieve more than the adjudication on merits simply because the terms of settlement could be more innovative. Further,it is more effective because the orders are passed only after compliance with the terms of settlement.

Does it not encourage people to violate the law and settle the violation by payment of money?

The statistics do not support this. First,consent settlement is not a matter of right. The three layers in Sebi have to be satisfied that the settlement terms are appropriate to the alleged violation. In fact,Sebi rejects about 40 per cent requests for consent settlement. Second,the enforcement actions are settled not in monetary terms only. In appropriate cases,the terms of settlement include debarment from trading or accessing market,disgorgement or suspension of certificate of registration.