The multi-cap fund fiasco

SEBI is a market regulator. And hence, setting the broader policy is important and correct but micro-management tends to reflect a loss of confidence.

The recent order telling AMC's on how to position their multi-cap funds leads to some pertinent questions and warrants some reflective suggestions.

Questions:

1. Why do the index S&P BSE 500 and Nifty 500 have 80% weight in large-cap stocks, if these are supposed to be Multi-cap Index. 

2. So which is the one equity fund category where the fund manager can buy irrespective of market cap restriction? (A multi-cap fund that has fund manager’s discretion). 

3. Why not launch a new category with this criterion rather than making changes to an existing segment?

4. Who will bear the loss that is likely to happen in this category due to their action? The valuation in mid-cap and small-cap will become insane and speculation in this market has historically been punished. Or the other way of putting it is that these categories tend to make more money with more volatility.

5. Has SEBI's mandate moved from investor protection, in general, to ensure that some investors make money and perhaps everyone loses eventually?

Instead is it not feasible that the the regulator should also seek input/discuss with respective ministries and other fellow regulators to implement the suggestions, as follows, which might potentially have far-reaching benefit for both the market and investors.

Suggestions that are under SEBI’s control:

1. Change market cap definition to global standards, wherever it is dynamic (rather than the current hard numbers since it is mentioned in percentage terms) and it needs to be updated every month.

2. Ensure the main index is not based only on market cap. And that there are stricter caps, stock wise and sector-wise, even an index. This one measure will make the markets more sanguine as momentum stocks would not become an avalanche distorting the market.

3. Constitute study groups to understand the impact of majority investing moving into passive space. (Analysis by independent experts in the USA shows that it increases volatility. Hypothetically, I reckon, it should show high volatility in stocks and higher polarisation)

4. Study the Canadian & Australian stock exchange and their venture exchange to bring balance between compliance cost and capital raising via capital markets. Some element of originality will be required here because our legal structure and governance standards are not favourable to investors. Additionally, our system has a high backlog of cases.

5. Fast track cases at SEBI’s end and penalise wrongdoers heavily. Ensure that the effort is to be just for all parties. A task that may seem hard, but with proper training, it is possible to deliver at scale.

Suggestions that require co-ordination perhaps from the Ministry of Finance, Ministry of Corporate Affairs and RBI.

1. Dividend should be made tax free. People who get dividend will either spend or invest them, both of which support the economy. So, why double tax them? Let the power of circulation of money work. Transaction charges are already levied and now we even have the additional stamp duty. So why not, let the investors gain the tax advantage.

2. CIBIL score of businesses should be available in the public domain for a small cost. And if there are any remarks by any lenders, it should also be made available to investors. This is required, per se, on basis of the same logic that bankers get CIBIL score for people borrowing from a bank. So why shouldn't the investors have similar access, since they are lending for potentially higher risks?

3. Force companies to have a separate chairman and Managing Director. Power corrupts, and absolute power corrupts absolutely - this is a famous maxim that holds substantial weightage, so the logical premise is to reduce the power of the individual in order to maintain balance.

4. All listed companies should have a minimum public holding of 45%. It shall bring in greater transparency and also improve the liquidity ratio.

5. Companies that are listed in India should have lower taxes compared to private companies wherever their size allows them to be eligible for being listed since listed companies allow the public the advantage to earn additional wealth.

6. Long term capital gains tax for equity, debt and real estate should be the same and they should all be calculated for a holding period of 3 years.

Some of these suggestions will take time to show results. And some shall be difficult to implement because of the requirement of various inter-departmental working/approval sanctions. However, in order to help small investors and improve the economic standard in the country, eventually, these measures will have to be incorporated.

Author -- Anonymous