You, the Indian investor, have been pick-pocketed, stolen from, mis-sold, cheated and defrauded in all kinds of scams perpetrated not by knife-wielding muggers but white-collar criminals who bend, twist and totally escape from regulatory norms that are meant to protect you. A mapping of the big money vanishing tricks of the past two decades points a finger at systemic regulatory failure to protect household savings.
As the Indian economy opened up, the regulators were set up to develop the market and protect the investors. However, the development role, along with turf wars, has taken precedence over its protection role and India has found its regulators repeatedly asleep at the wheel, costing the household its savings again and again (see graph). The latest season of the loot story has Karvy Stock Broking Ltd dipping its fingers into your money and using your shares to borrow money for its own use. Why have the regulators failed investors in India? The answer to this question is a mix of politics, power, capture, hubris and incompetence.
The spat between the insurance and the capital market regulators is now at a critical stage of a game theory experiment. While the regulators are debating the location of the court where the dispute will be heard (the insurance regulator does not want Mumbai where the judge may actually understand finance), insurers are debating whether to carry on with the launch of new investment-linked products.
From what I understand, the debate in the insurance industry is to figure out how far the Securities and Exchange Board of India (Sebi) will go in carrying out its threat of banning new unit-linked insurance plans (Ulips). And what form that ban will take. If the Insurance Regulatory and Development Authority (Irda) were to approve new Ulips, as it has said in repeated press statements that it will, it would be a violation of Sebi’s quasi-judicial order. An ex-regulator tells me that if there are two laws, one that says you can do something and another that says you can’t do that particular thing, the one that says you can’t will prevail.
So it comes to pass. The ministry of finance, which could have laid to rest the uncertainty that faces millions of retail investors, in the best tradition of bureaucratic ennui, has passed the buck to the courts to sort out the differences between the capital market and insurance regulators. While the post-retirement sinecures are no longer at threat due to bold decisions the ministry could have taken, this example of cynical buck passing will cost India in terms of the lost opportunity of fixing the retail financial market.
The seeds of the conflict between the Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Authority (Irda) began when, around 2002, the insurance regulator suddenly banned life insurance companies from outsourcing fund management to asset management companies.
Ancestral homes tell a story. Of families and fortunes as they swell and ebb. That room was added when the elder son got married. That backyard was converted into two rooms for the nephew who moved in with his wife. That portion, beyond the wall, was the one that was sold off when the land ceiling Act took away the family land. While families can feel warm and sentimental about messy old homes, similar feelings are hard to generate when the financial regulatory system of a transforming economy shows signs of patchwork and years of political placating.