Podcast: Why SEBI should implement India's EDGAR and more

Recently, as of 7th September 2022, total Demat accounts in India touched the 10 crore mark. This is a staggering increase from 4 crore Demat accounts in Mach 2020. This alone is a testimony of increased participation and inclusion of individuals in Indian markets.

More and more Indians, especially youngsters, are taking to investing in equities enabled by their smartphones - digital broking, increased information access, and social media influence.

The whole securities (stock) market ecosystem has evolved immensely over the past decade and deserves a lot of credit for the recent growth in the participation of new investors. At the helm of the ecosystem sits our regulators who are responsible to enable, guide, protect and watch the market participants to ensure that we have a fair and thriving market.

In this episode, Deepak and Shray talk about the role SEBI can play in shaping the future of the markets. They talk about data warehousing, data accessibility, regulatory enhancements, bond markets, disclosures & reporting, and a lot more that would make our markets more accessible.

References

02:00 - Only 3% of household income is directed towards stock markets. Why are people so scared of investing in stocks?

04:00 - Game changers - Digital public goods in our financial system

09:00 - Data warehousing framework at RBI and its US counterpart

16:00 - Does an average investor even use the granular data that we’re expecting the regulators to maintain?

24:00 - What company data should a centralized database ideally have?

32:00 - The way Indian companies play with stock tickers

34:30 - How will this organized information make things better for all participants?

39:30 - Better information access makes our markets more accessible to FIIs

43:00 - Crazy things that mutual funds & companies do with disclosures

48:00 - PMS & AIF returns should be cross-verified and shouldn’t be based on self disclosures

“The more developed you are, the more signages you see on the road”

55:00 - SEBI is a far better regulator than many western counterparts. What do you still wish they should improve upon?

59:00 - Would information disclosures will be a hassle for smaller companies?

1:03:30 - AMFI - the Self Regulatory Organization (SRO) recognized by SEBI

1:11:00 - What can SEBI do less to make space for things you wish it should do?

1:15:00 - How much impact can SEBI have on increasing household participation in the markets?

Transcript

(Note: This is an autogenerated transcript. We have not manually reviewed it. Please excuse brevity and grammatical errors)

Intro: Hello and welcome everyone to the Capitalmind podcast. If you'd like to know more about us, visit Capitalmind. And if you'd like to invest with us, do visit CapitalmindWealth.com

Intro: This podcast is for informational purposes only and should not be relied upon as the basis for investment decisions. Clients of Capitalmind may maintain positions in the securities discussed in this podcast.

Shray: Hi, everyone. In today's episode, Deepak discusses what role SEBI can play to grow the Indian financial markets. We talk about lessons learned from UPI account aggregator and the RBI database. The book proposes the creation of a SEBI backed database. That's a bit like the Edgar system in the US run by the FCC. We talk about what data we'd like to see available, who will use it and how will pay for this? How better data can improve the bond market, attract foreign investment, and change the emphasis from gatekeeping to monitoring. Some recent rulings by Sebi that make our markets safer and less volatile. How self-regulatory organizations can recreate the success of the mutual fund, say, campaign in other instruments or asset classes. So to listen in to discuss some ways in which India can grow its financial markets through CB. I Deepak. You were discussing yesterday that Seb has played a pretty great role in popularizing and making financial markets safer for investors. But as you were looking through the RBI household financial data, what you found and we all saw was that as little as 3% of household financial flows are directed towards equities and mutual funds. This still feels very low, much lower than it should be. So how do you think we can achieve significant growth in this number to make for a better economy? And what role does Sebi have to play in making this happen, given that it's a regulator?

Deepak: You know what, Shray? I think, you know, we've been talking about this and we were I was actually shocked to find that I was looking at something like 64,000 crores net has flown in from household flows into equities in the last year. That is fy21. If you just put things in perspective, I think $64,000 is just about 3% of the total overall household savings in that entire year is about 20 lakh crores versus, you know, a lot more has gone into other investment avenues and stuff like that. Even though interest rates were at a record low, a fixed deposits got the maximum amount of money and so on. I think one of the reasons why people are afraid of equity markets, not just because of the volatility, is also because equity markets inherently scare people thinking that this is only for the rich people, this is only for the for a certain set of people and so on. And to an extent, we've seen this in other markets as well, including bank accounts. People kept cash because they didn't trust the banks. It wasn't a reliable, great thing and so on. But we know as market participants that this field is a much better field today. We know that for, for instance, no financial player can manipulate the system as they were perhaps or okay to do maybe 20, 25 years ago. Now all those situations have come down quite substantially.

Deepak: The role of Sebi has made it easier for people to participate, but people don't necessarily know this. But one of the things that really changed the game in the banking system, and we know this from the, you know, the financial world in India is digital public goods, which means there are certain amounts of things that are made available by a regulator that is free for use for everybody else. So for instance, RBI created UPI. Upi was a phenomenal framework built on top of a real time system called apps made free or by, I think, mandate in the initial parts of the game. And now it's come to a point where there ten lakh crores a month versus credit cards that are about 100,000 crore a month, one lakh crore a month, which is 1/10. So UPI changed the game and that was because it was a digital public good built on top of the banking system, owned effectively by the regulator, I mean created by the regulator, but owned by the banking system. Also, RBI made bank transfers of other sorts also free. So they set any of these free outages is free. All of them are made available 24 seven and therefore a bank cannot say you can't transfer money on a Friday or Saturday or Sunday or a working holiday. It doesn't matter. You can transfer money anytime.

Deepak: This was, again, a digital public good. The other part and this is where data suddenly comes to play, is RBI created something called the RBI. It's a data warehouse, a lot of data that is free. So they publish data on a regular basis, whether it's a weekly statistical supplement where it talks about number of reserves. They have, you know, things of that or obscure pieces of information like how many credit cards in India are held by women. The answer is 10%, by the way, but only 10% of issuances of credit cards are owned by women. And this is the same for the last ten years. How do I know this? Because RBI has published this data and they publish it on a regular basis, and I can access this information no matter who I am. And it isn't like I should be a bank to be able to access the information. They make this information available to everybody else. And I think this is one area where Sebi in the in the financial market space has a lot of scope to do and a lot more to do. Here we have digital private data known as a digital private data. I'll talk about it with account aggregator ecosystem. The account aggregator system ecosystem has only just started. It is a consent based party to party data accessed at a personal level. What I mean by that is if I need your information, your personal information that like how much money do you have in your bank account, what transactions they were done on mutual funds and so on? I have to ask you for consent.

Deepak: That allows me to say I can see this information, I can see it, and then you can determine exactly how long that consent lasts for. For instance, you can say you can do it one time, only you can do it any number of times for the next one month. You can do it any number of times for the next five years. You can do it once a quarter or, you know, things of that. So it makes sense for a lot of applications, account aggregators useful for people like us who might say, Listen, we analyze your mutual funds as a one time effort and tell you whether you need any changes. People like chartered accountants who want your data at the end of the year. Again, they want the data to be accessible maybe once in three months so that they can pay your advance taxes and so on. It's useful for, for instance, companies to give out their data to different people at different points in time. All of these parts of the ecosystem is handled and it's digital private data. However, I think a lot of aggregate data, aggregated data or generic data should be available to all market participants, which means any individual in India or abroad actually in machine readable and human readable forms, which means you should be able to read the like.

Deepak: If it's a CSV file, the format is fixed. We should be able to have the same format no matter when we look at it. It's machine readable at all times, or it can be human readable in the sense that it's a PDF file. So you should have both in a way. And a lot of us now have started to use CSV files a lot more. Even when we download our statements from our bank website, we download it, we put it onto our Excel file, and then we put comments so that we can share it with our auditors. The same concept can now be applied to all financial data that we kind of read, and I'll come to exactly what that means. So by nature, all data that's collected now is stored by default on computers. It isn't like it's handwritten and then transcribed from that. Every for instance, you make any Ph.D., the fact that you made that any FD is stored in a computer somewhere, it's not a human being taking a record of it and then saying a command are computer models. So they don't say that I'm going to go and put it into a computer.

Deepak: It's already in the computer, so it's already collected in machine readable form in the first place. Then why do you take that? Put it into a PDF, sign across it, and then scan the PDF and send it to everybody saying, Listen, I've reviewed your data like this, this is nonsense. This is a very bad way to do things. You should make it machine readable right from day one. Data warehousing is now an old technique. Of course, people have had data matters for four years, Harvey, as well. It's called DBA. Like I said, currently it still needs humans because the machine readable, I mean, although everything is downloadable at CSP, it just needs clicks to download. It doesn't have API kind of calls that says, Well, give me the number of credit cards owned by women in the last decade. You can't just get that information in a meaningful way or even get even aggregated. And none of this is personal, right? It's like a number of credit cards owned by women. There is no personally identifiable information in that, so it should be freely available to all of us. It's available right now, but it's not machine readable yet. I think they can fix that. The US Fed has a phenomenal tool called Fred. It's a database across all of their different Federal Reserve banks and you can use Fred to access things like, Oh, what's the bank credit and what's the bank credit growth? And you know, access it through an API as well, get the data, process it and so on.

Deepak: It's all amazingly interesting and useful as a tool and Sibley's counterpart in the US call the Securities and Exchange Commission. Sec has a great initiative called Edgar. Edgar is a place where all companies file their disclosures and returns online are different forms and they have something called a Form 15 F or Form 10-Q or form 88q or whatever it is. Each of these things are uploaded on the Edgar website, so you go search for a ticker on Edgar. You will actually get all the filings that the company has given, including press releases, shareholding patterns, big holders, all sorts of information, and they have made it free. So I could sit in India and do this without even having to login on to the website. So I think non login based non identify, so you can't figure out, we cannot know who is carrying this data as in acquiring it or requiring it. There's no need of having that information made aware. It should be anonymous queries. It goes done this. It's quite a phenomenal achievement because what it does is allows us to say, well, let's go back and check what announcements any US listed company has for the last ten years. Also, you can go there and find it.

Deepak: All of this is done through through the CC. It is not done as a separate initiative like it's currently and we'll go through that a little bit. One of the things the SEBI has made a statement of and said, we don't like saying you shouldn't rebuild it. Of course they have a lot of regulations and I think one of the things that they said was all benchmark data because you are required to compare yourself with a benchmark. Pms are, aifs are and mutual funds are. Since you compare yourself with the benchmark, that benchmark data cannot be. It cannot be for pay. For instance, if you use the NSC, if NSC comes back to you and says, pay me some fee. I think that's counterproductive because then people are like, You require me to use it by regulation, but why should I have to pay for it? I want to know what the Mabo rate today is, which is revealed by a company called FB. This used to be free, except now you have to go and pay for this information to FB, which is a fully owned subsidiary of the RBA. I think all such data needs to be free and CBA has actually gone ahead and said, listen, all this benchmark needs to be data, needs to be free, has not yet been implemented fully. But it's a very interesting aspect where they're saying data is important because they say they know the value of data now and they're saying that, you know, you should make it freely available.

Deepak: I think they should go one step higher. They should introduce their own Edgar. And let's not call it a let's call it some India name. I'll leave that to Sebi because I want to put ideas into their head about what they should name things. But I think having a data warehouse owned by Sebi, managed by Sebi itself or managed by a company that's part of Sebi itself, is a key point of India's changing public digital goods infrastructure. And I think Sebi creating this public warehouse and I'll tell you why it's complicated. Sebi currently says you need to reveal information. You're Latika, but where do I reveal it or you put it on your website? There are 5000 companies. There are 7000 mutual funds. There are 7000 different mutual funds for 28 mutual fund companies, 44 mutual fund companies. There's PMS, HFC for PMS. Go to Sebi, one corner of the website for a company related information. Go to either all companies websites or to the stock exchanges for shareholding patterns. Sometimes that information will be in the company website, sometimes it will be in the listing, but sometimes it releases on one exchange but not the other. It's a little complex to have all this information available because it's there.

Deepak: I can't deny that it's not there. But is there somewhere? It's like saying, Oh, listen, I revealed my information on the Internet and you're like, Deepak the Internet. Can you just get a little more specific, please? No, no. I said it's on the Internet. It's on my website. Well, even your website is insane. It is a huge 7000 pages on the website. How do I find this? I have to go to Google and hope that you have allowed Google to query this particular page and Google has cached it and Google has. I've used the right keywords. And why am I using Google to do all this when you should actually be storing it in a way that is that has to be super easily accessible to me no matter what. I can't go to 7000 websites in each of them. Each of these companies go and find a different thing, I think. Every exchange currently tries to do this in some meaningful format. However, if you don't know where the website stores these information exchange websites, so this information and by the way, it's changed quite a bit, has changed for a lot from what it used to be. I mean, the idea right now is that exchanges companies, the information is duplicated in a lot of places. It's even happened where companies have released a certain press release or it's a conference call transcript, then withdrawn it and issued a new one, which had some information that was different.

Deepak: Now, this is not fair because that means you're sending one parties, one set of participants, one information, and then changing it to another set of participants who just happen to really read the press release a little bit later. I think that's not fair and it should not be done. And anybody should clearly know that something has been modified if it has been. But right now it's the Wild West. Everybody can do what they want. They can take off press releases if they want. They can go to the exchange and say, Yeah, there was they removed it, they removed entire press releases. So you go back and you can't find them anymore. So I think that is that stuff should not be allowed. Data is important and data is sacred in that sense. And therefore you need a centralized source of information managed by CB. That's the source of truth for every single company, every single mutual fund, every single PMS player and all that stuff in the in the market. I think all of this democratizes or access to this information, which means anybody, no matter who you are and you don't have to be a certain kind of person to be able to access, it gets this information.

Shray: Now, I completely appreciate and take that point. Obviously, having data available and perhaps having data available in an organized central space is good for the ecosystem. But as I reflect on my own experiences working with what should we call them, world customers or so on in RPMs, it's not like people are sitting and downloading data and building DCF models or using it to analyze whether this company is, I don't know, profit. Profits are going up in a credible way or not. So these suggestions you've given. Does this just benefit PMS and mutual funds like us active investors? Does this really make sense? And another question is, don't companies like screener and trend line kind of do this already at some level? So why did you feel that it's worth bringing this up when there are so many people who don't really look at this data anyway and there's kind of some hacked together solutions and companies building some valuation out of that.

Deepak: Yeah, no. I mean, I think in any case, this trend line will just use different forms of the same information. Right now, what they do is screener, for instance, the metals have actually purchased this data and they're revealing it mostly for free for people who basically, as is their way of giving back to society in a certain way. But they're also charging there's a premium part of it which they do more stuff with. But interestingly, they have chosen to go down this route. America has also done the same thing. They've gone and bought data from a bunch of sources who painstakingly collect them. From all this information, because information is scattered and spread across everywhere, I feel they will continue to survive. Even if you had a web based database, they would just be able to do more with the same data. But there are two levels of people. One is the informed, one is uninformed. So the informed people who know stuff is people like maybe PMS and all of this. They're the ones who will probably have access to this data because they know exactly where to go. But today it takes a sophisticated user to traverse, say, Sebi or an RBI website. You could literally have a PhD in the RBA website. It's that it's that deep and complex. For instance, I can know 15 days before the RBA bulletin how much RBA has in forward exposure in dollars.

Deepak: Now why I need to know that is has no relevance to anything. But the point is there is some data that is obscurely available to somebody but not available to everybody else unless they know that exact location and where to look and how to how to look for it. I think that is bad for for for markets in general. And I'll tell you why the labels informed and informed don't apply forever. If you are uninformed today, there is no reason why you cannot be informed tomorrow. Should we say that the internet should only provide medical information to doctors because you know people are too stupid, they will drink, paint or whatever it is. I don't think that was that has ever worked. Although we have crypto what we do know Trump and people doing strange things even then we did not ban information being made available to everybody. So even today you can say, you know, hydroxychloroquine will cure Y and Z and people are allowed to make their own decisions. I think that is the thing you should do with financial data as well. Why should it be obscure and made available only to people who don't know what things are? I feel here that, you know, keeping information only available to qualified people leads to groupthink, leads to protection of those people's lives, which is why, for instance, if you you can't be a medical doctor unless the Medical Council of India allows to be allows more colleges.

Deepak: I mean, more more people can become doctors unless Medical Council of India increases the number of seats in medical colleges. They don't want it because it induces competition for a lot of people that are already there. And, you know, it's a complex kind of mechanism. This in a certain way in the financial markets, also accessing information, keeping information as a prerogative of only the rich investors is a problem in the overall market. The other thing is that. People will build tools and people will build tools for mass investing or public. And I'll talk about that. For instance, Green has built it. If you had there have been a bunch of startups all over the world who all based their work on publicly available financial data for publicly available data. Not just financial. India also has a lot of publicly available data, and almost every single regulatory organization is producing and giving out its own data, including insurance companies and insurance companies even worse, because they give information in PDFs that are even not even machine passable. So they are another layer of, oh man, we need to do a lot of things over there.

Deepak: But they all give information. They but I feel here there are rules now because everybody has to give information. And these rules are like companies should disclose certain things. They should disclose results within 45 days of the quarter. They should announce something within seven days of it happening and certain other things and so on. How do you track all this? The Sebi is not going to go and track every company saying, oh, you, you you revealed it 15 days after venture to reveal it seven days after. They will only do this as a or if someone complains, then we will go and look into it and then we'll produce some kind of a harsh sentence or something like that. I think tracking violations and delays should all should be a part of harnessing a data warehouse that they built. So it won't be just useful to us as active investors or to the uninformed currently uninformed as who are perhaps passive or secondary investors. But it also used to be useful to the regulator themselves to say, listen, I can increase my surveillance mechanisms in a much better way. I think the other problem is that if you force data to be stored by a company, the company they are how many, how many years or I showed this data, we are five years.

Deepak: Well, you know what? Five years. Too little a time. I want your annual reports as of 1995. Can you give it to me? You can. But you know what? We'll have to look through it, etc.. So 1995 may be a little far fetched, but today, five years ago is 2017. And you know, we've probably run our PMS since 2017. Obviously, there's been data much before that that we we know exists. If companies would only maintain record for for about five years, then you lose the charm of long term investing. And you you you know, you lose the charm of being able to look at data for a much longer time. It's not just the charm. It's a necessity now, because five years may just be half a cycle in many companies lifestyle. So lifetimes. So I think here retaining data forever should be one of the key concepts and that will help everybody. In fact, you don't even have to pay a lot for it. You can you can fund it through an investor protection fund. We'll talk about that at a later point. But I think, you know, this is almost like a no brainer to say, listen, it's needed. And even though you may not see any use of it today, the fact that data is available will be useful to you tomorrow.

Shray: I think that's that's well-argued. I mean, I take the point that this could potentially make service life easier as well could make can increase the number of informed investors because it is now cheap, easy and well-organized to manage and sort of sort of just in general make everyone more effective. Just because you are an active player. It could bring down your break even a um, point and so on and so forth. I completely take that point. But before we get into how you pay for it, I had a different question, which is fine. Let's say people hear you and say, this sounds like a good idea, but then what data do you want here? Because as you said, there are annual reports, there's everything. So what data really needs to be in this this this new database which will be named at some point in the future?

Deepak: Yeah. So, you know, I think there's so much and I can talk about the basics. It's very simple stuff that people reveal all the time. So for instance, if I go to a company, the thing I want to be able to see some of the stuff that the company reveals on a regular basis. For one, it reveals its shareholding patterns every 30 months, 30, every three months. In those shareholding pattern, it distinguishes between promoters where it gives you individual shareholding of any of the large promoters, the investing public, which is the retail public, the institutions like mutual funds and insurance companies and so on. All of this information is provided in a format and there's actually a format in XBRL, kind of a format for it. They reveal it to the exchanges, so they should put this all together in one place because some companies can reveal it first to the NSC, next to the BSE and, you know, all sorts of things. But this is important information because you can find out whether promoters have sold even small amounts of stock. A new player has come in to buy a large stock in information that should be available to investors in the longer term to be able to make good decisions. Financial results. You have quarterly for. Financial results. Your balance sheets. You have PDF documents that contain a lot of the new things and so on, and also just summary financial information, which companies reveal all the time beyond this, the disclosures that are required, there are lots of them.

Deepak: There's Section 52, 54 or 60 or all sorts of things. So for instance, promoter buy is more than 1%. They can only buy up to 5% in a year without triggering some other clause. So whenever a promoter buys, he has to reveal their information within six months or so, within 36 days or seven days or something like that, whenever a new large investor is issued shares, whenever ESOPs are issued, whenever all of these things are different regulations, they all are revealed to the exchanges today. And I think they should all come into the same place beyond this, their corporate actions. If I'm announcing a dividend, if I'm announcing a bonus, a split, a rights issue or anything of that sort, if a company is looking to acquire another company, there has to be a public announcement and then a bunch of procedures that have to be followed. All of these things come under what companies reveal by themselves. Beyond this, there is a you know, since we know Sebi is also the regulator of the bond market, their bond level disclosure. So a bond when it's listed, the same company may have multiple bonds listed. So you can have multiple bond disclosures. I have paid interest on this bond. I have paid principal on this bond. I have missed paying principal or interest on this bond.

Deepak: This is the record date for the certain interest in principal that I'm paying. I think this is all important, but right now it's also spread is in PDF somewhere. If I were to find out what the record date of a certain bond is today, and I'm a guy who really knows the CIBC website well enough, it takes me sometimes upwards of half an hour to sometimes just find the record date of a single bond. And that tells me the price at which I should buy the bond, because when I buy the bond in the market, it has a component of the price, it has a component of accrued interest. That means from the last interest payment date to now, how much is the interest being acquired? If I'm paying 1054 for a bond, it could be that I'm paying ₹1,000 for the one plus ₹50 of accrued interest, so I should be at 1050. But if the record date is passed yesterday, for instance, today I should be paid 1001, not 1050. Yesterday's price may show me 1050. It may look like the price has fallen 5%, but actually that 5% was paid out as an interest payment. So I should be bidding at 1001. This will this will improve the market, not hurt it. But currently that information is available only to sophisticated players, and it's very complicated to go and find it for each single one.

Deepak: There are 40,000 bonds in listed in the market. So just finding what what is important for a bond is difficult. So bond disclosures, apart from that, when bonds are issued, even private companies, non non listed companies issue listed bonds, those listed bonds come with memorandums today. Finding listed bond memorandums is just an insane task. I have to literally Google is the only place where you might get some information and sometimes after the bond is issued, the websites take down the memorandums so you can't find out what that memorandum actually meant. And it sounds like a little, you know, nonsense to me, but they should not be allowed to do that. But I think that's why we need a centralized data warehouse. All public filings should be in that. Apart from that, I think material non-public information that has somehow that requires to be revealed has to be revealed in the markets. In the US, they have a rule that says you have to reveal it at the same time to everyone. That means you cannot have preferential access to information. That means if I'm an analyst and I go to a company and they tell me, listen, we have this great plan coming up and you know what? I think we're going to it's going to get inaugurated tomorrow. That's a big piece of material, non-public information. I have got to know it as an analyst before everybody else, so I could go back and say, listen, let's go buy this stock tomorrow.

Deepak: You go and announce that we're inaugurating this thing. What happens then? I bought it one day earlier. I have actually done something that is technically insider trading. I mean, in the sense of you're using insider information, which is material non-public information to have traded the markets. I think if a company is revealing something really to all parties at exactly the same time and the same, we should make it a prerogative to do so. This is one part that I mean, I think the central portal will kind of help in. Another one is blocking bulk deals in shares. So, you know, companies are in exchange are required to reveal when a big person comes in, buys a lot of shares in a certain company today you have to go to the NSC. They need to go to the back to find out of the deal in a company. But why don't we just have this information all at one place rather than having spread across? So tomorrow there's another exchange to go there. Also to find it, which sounds weird. In mutual funds, mutual funds have to reveal insane amount. I mean, like crazy moderator to the extent that they reveal things like knaves on a daily basis, they have to reveal enemies by 9:00 in the night.

Deepak: Right now, they, they, they publish it to AMPHI and you can get the information from there and get it. But that's, that's like a file that's downloaded from me every day. But I think they should also be part of a sub portal. They also announce a on a monthly basis. In fact, you announce em on a daily basis, but. Nobody knows how to get it or very few people know how to get it. And talk about this, a very interesting point. Now, mutual funds are actually required to reveal even portfolio, sometimes once in 15 days for debt portfolios, once and three months as regulation. But they typically reveal it once a month, at least for even for equity portfolios. But everybody puts it in an Excel file with different tabs, one tab for each mutual fund, and each format is different. Sometimes the same fund has a different format for a subsequent month compared to the previous one. So I'm writing a program to access this information. I am like, Excuse me, you're not giving me the data in the way I want to treat you. Buy this mutual fund data, it costs you five lakhs a month. Now this is okay for us as PMS file tax here, but who wants to be fired like zero to access the data? Why can't you? If you're revealing it anyway, why don't you reveal it in a nicely structured format so that anybody can access it over a period of time? I think if you order two overlaps between two mutual funds I bought, I bought three mutual funds.

Deepak: I don't even know if they all have the same holdings for the last like for the last 15 months. If I do an analysis and quickly say, Bos, are these by like 75, 80% the same, then I might as well buy one. Why should I buy three? Right. So the answer to that usually comes by what is called an overlap analysis. And you today to do this, it is like you ought to sit down and say was a media project. We sit down and we say one month we're going to spend just getting this data together, or you buy data from someplace and hopefully you will have some kind of correct data in many places. I think we need to make this easier. I do think that there is the data coming into a centralized database will help. And as a random aside. United Spirits is united SPI are on BSE as the ticker. United Spirits on the NSC is McDowell hyphen n. Why? I mean, why are there different tickers for the same company into exchanges? The US has a rule, everybody has the same ticker and everybody refers to the company with the same ticker. Msft is MSFT. And you know, Jen practices G. Citibank or C, I think, or something.

Deepak: And these have these tickers don't change over even over a very long time, unless, of course, you change the company names India, you change Eisen's, you change company names, you can change company tickers and sometimes companies can choose hindalco. Once had a ticker whose last the last hindalco or the last zero lost or was replaced by a zero. So can you imagine a guy looking at this and saying, what is that? And I can't find this company anywhere because I'm typing in Darko, but it's actually a zero in the ticker, which sounds miserable. I mean, why do we even do this to ourselves? I don't understand. But I think we should come down flat and say, you guys are going to register your articles with me. It is going to be a ticker issued by me. And you will not be allowed to change this ticker unless there is like a life changing event, like you're merged with another company or you change your own company's name with companies routinely change that occurs at some point in time. So I think here you should not allow different tickers to come on there because it's like data integrity. What's the point of having multiple tickers in multiple exchanges for two companies? One. But, you know, this is just this whole block of data that I think, you know, people should have at least in a single data warehouse.

Shray: I think that's very persuasive. I mean, your point about how difficult it is to manage bonds, which we do in our own company, and the amount of work that needs to go into it. Imagine the plight of a retail investor. You're essentially telling them this is not for you, and that's the signal you're sending initially on that mutual fund overlap analysis that comes up all the time, especially with customers where they have all these funds and they're not realising they just have the same exposure just just through different entities. So I actually that that that's really well put together. I'd like to take it a step further and say, all right, you've made a good argument for the existence of this database. You've sort of helped us think through what's the data that needs to be in this database? What am I now going to do with this? I know you said that things will just work themselves out, the uninformed will become the informed. But what am I as as as a participant in the ecosystem? How am I going to be consuming this? What will I do with it? And could you talk me through how the system will be better off for it, other than, of course, the arguments you've already made?

Deepak: No. So here's, here's, here's the part where it becomes a little complicated, where there are two things, there's the obvious stuff and the non obvious stuff. Let me go through the obvious stuff. I mean, at one level you would say, listen, if everything was coming into one place, anytime a new thing comes, let me know that new thing can be related to my company. So tell me when this company, my company announces its financial results, tell me when this company I know today, you know, what happens is even TV channels do this. They sit in, open the scene and see web pages and wait for the results or have a Bloomberg terminal that effectively Bloomberg doing the same thing, looking at them for press releases and reading, because the press release to the exchanges, the point at which the information has been revealed, I think that's useless. You should just have one place where an alert can come in, whenever an alert can come in, wherever you are, whenever a new result is announced and you could subscribe to such things, so you can have an alerting mechanism that allows you to identify when companies that you own do certain things and so on. There is a lot of information on mutual funds that new information is supposed to allow people like you and me, that is the investors in those mutual funds to catch corporate governance issues, to reveal or to understand that information and so on. So to a certain extent, we've even seen issues in things like, say, the Franklin Templeton issue that happened in the debt markets then that this was a complex situation, but because they were revealing information on a regular basis, we could find out that their ultra short term bond fund, which suppose to have bonds only maturing in the next six months, or rather the duration of the bonds modify duration of the bonds is, say, six months from from now, they owned bonds that were maturing as much as eight or nine years later because there were certain types of bond where you could do this.

Deepak: And they well, their their concept was and we found this only when Franklin went through a crisis and we could dig deeper, one of the bonds that they had was a bond that said, well, we will allow you to reset interest rates every six months. So I said, Well, you can reset interest rates, but what about can you take the money back in six months? I mean, it's not going to mature in six months, right? So it's what's the concept over there? So they did have clauses that said they could take back the money in six months, except they couldn't exercise it because the company would have had to go bankrupt if they actually exercised it. So they ended up saying, listen, we can't do I mean, there was an issue in one of the bonds that had that they couldn't call it earlier because the company was in financial trouble.

Deepak: Of course, this was during the COVID crisis. Everybody was in financial trouble. But the point of all this was, you know, so many more regulations came afterwards because of the Franklin crisis, because due to the Franklin crisis, we looked deeper into the bond system and found out that all these things are happening. Apart from that, bonds, mutual funds themselves do what is called inter scheme and intra mutual inter mutual fund transfers so they can buy and sell bonds. They can also transfer them between different schemes that they have. Now, typically, this is a very simple process. If a bond is coming closer and closer to maturity, I can't hold it in a low duration fund anymore. I'll move it to my ultra short term fund. After I move Ultra, after it becomes another three months down the line, it is less than three months to maturity, so I'll move to my liquid fund. So this is supposed to be the reason why, but what started to happen in the 2020 timeframe in 2018 also was certain very reputed mutual funds were using this mechanism to dump bonds that they couldn't sell, which were in their liquid sorry, the ultra short bond fund kind of portfolios to their fixed maturity plans. Now this is a complex problem because in the fixed maturity funds, even if you find out that they're dumping bad bonds in your fund, you can't exit. The fixed maturity has to wait till the majority is actually achieved.

Deepak: This was a problem. Of course, we eventually regulated that as well, but the regulation came on the back of a crisis rather than by enforcing the rules through the disclosure. And how did I get to know about this? Because I was able to download each of these files, figure out which was the interest scheme and interest scheme transfers, and then find out that some of these bonds are going to fix maturity plans and so on. So the point of this is if you had a single a shared infrastructure that allowed all of this information to be in one place, that the formats were standardised, and therefore I could use this as a querying mechanism to figure out any of these corporate governance issues externally as an investor, but also we could do it internally on its own. The bigger thing that I think is that happens because of this is that it increases visibility to foreign players. If foreign players are told that they have to visit 5000 websites to get someone something and all that stuff, they'll be like, Listen, man, I will do it. Or, you know what? Even a Bloomberg today does not offer half the financial information that they offer for US companies, for Indian companies. Now, they don't offer it because I think the information gathering system is way too painful if you reveal PDFs and out of human beings past that PDF because they're not machine readable and you know, we have to basically reduce it, reduce that friction for foreign investors to say, well, this is a clean market because we're getting this data on a regular basis, we can analyze it over time and so on.

Deepak: I think democratising access to this information, make sure you don't get you don't somebody doesn't come back to you and say you want this information. Great. But yes, we have revealed it, but we revealed it somewhere where you don't even know that we had revealed this information. Conference calls, recordings. India is one of the few places, probably one of the first to say all conference call recordings must be released within 24 hours. That means it allows you to say, for instance, you know, what's the tone of the person talking? And whether they've made pregnant pauses apart from downloading a transcript that gives them all this information. At one point, there's a rule that says all meetings with any analysts should be recorded. I think it's not just you. It's useful for us to know, what are you talking to an analyst about? If you're meeting 25 analysts immediately after you've done your earnings release, what are you telling them? What are you telling them that you didn't tell that they didn't get enough information from your conference call, press release? You have the right to tell them anything you want, but you have to reveal what you've told them. I think that that concept should then make information much more easily available.

Deepak: If I'm an analyst. Also, I want to say what he said to somebody else because I want to make sure he hasn't said something else. And plus, I if he says more than what he has told me and so on, I might hate it initially by saying, Oh no, my information accesses because I know management well, your information access is not that you know, management, your information access about your analysis of the information the management gives you. And I should have access to the exactly the same information that management gives you. You can go and stand outside a shop and figure out how many customers are coming. That is your information. That's not management given information, but anything that management gives, I should have as much access to that information as you do. And I'm sorry if this pisses people off, but, you know, I think democratising and it hurts me also because I know a lot of things, you know. So, for instance, I know very well how to travel, say, the NSC or the RBI or the Sebi website. I learned this over years. I've gone through all those details. Why is this a competitive advantage this has this makes no sense for someone to say, hey, Deepak knows exactly where to find daily liquidity changes in the RBI Web system, and maybe it makes it different. Maybe it doesn't. But the point is, I shouldn't have that as a competitor. It should be an easily available piece of information that everybody should have access to.

Deepak: Now we go to the non-obvious stuff. Now, none of this stuff is let us say on the regulatory front, you you've got rules. And for all the wisdom, we have had mutual funds do crazy things. They call things a mid-cap fund and then went in and invested in some random other stuff. Now, say we looked at this and said, listen, your you guys are crazy. And they put draconian rules and draconian because of course, now it has come to this thing. But they've made rules that said oh, by mutual fund. Sure, that calls itself a mid-cap fund should only invest 65% of its money should be in mid-caps. Who calls what is a mid-cap? We will go to AMPHI and will say they will tell us what a mid-cap is, what a large cap is, what a small cap is, and 65% of your stocks of your item needs to be in these particular mid-cap stocks at all times. Why did this happen? Because people call them mid-cap funds and were in other places. Now, I think saying the 65% is one thing. How do you know that 65% hasn't been violated at any point in time? You have to hope that someone else looks at it and then kind of or each player does its own thing. What is the player in the ecosystem who says, okay, 65. 60%. Who's going to notice? The answer is that who's going to notice will only come to light if somebody complains or somebody.

Deepak: Something happens. But if you have regulations for a reason, it's damn difficult to enforce these regulations. And enforcement takes human effort, which is a pain in the neck. Instead, you can make it digital. So you can say these rules are embedded. We know what the stocks are that are qualified midcaps. The minute you upload your portfolios onto the CB data warehouse, it will tell you, well, your score is that you have passed on the Portfolio Analysis Fund. Why would this will then therefore become a much faster regulatory turnaround process? Plus the mutual funds themselves will get the. Okay, that said, well, you know what, this is not going to come back to bite us because we've got an okay certification from Sebi as soon as they've kind of plugged this in. P Another thing is, for instance, companies are required to disclose certain things within certain times. If you don't do that, then you should submit it automatically. Get to know that some people, some of these companies have not disclosed this information and therefore you can send a show cause notice saying, why don't you? Why haven't you? If you need an extension, let us know why you need it. But otherwise you know you'll be fined if you don't know it. Now are where does these kind of inspections on a regular basis information access on a regular basis because they've set up a whole data warehousing system internally as well with the bank, with the banking system, not just externally.

Deepak: And this internal system allows them to query the data of the banks directly. I forget what the name is that they have this it's a it's a direct access system where RBI can say, listen, I want this report now and I want to be able to access this report. As of right now, you don't give me this data as of 6 to 6 weeks ago and two weeks ago and all that stuff. This kind of data warehousing knowledge has been built by RBI. And, you know, it was there all the way back in 2010. 2011 is when the system started to be developed, and now it's a much more fine grained stage. So I think in the US also by the way, and the company reveals data, it's not just companies, even hedge funds reveal their ownerships and even Warren Buffett, I mean, Berkshire Hathaway discloses what it owns and so on. It's a 1215 F filing. There was a start up that came out of it called Vail Wisdom, which just looked at 15 filings and said, What are these big whales buying in the market? The whales that are buying certain things in the market, since it needs to be known. And I mean, I think it's useful for market participants to know who else is buying or which large player is buying their stock. That I think is another piece of information that can be, you know, or it may be not obvious in right now, but it will come eventually.

Deepak: There's an obscure website as well where, you know, it's part of AMP, but you can actually find out daily income of mutual funds. We were able to find out when certain funds were losing a year. Or not just on a monthly basis, but even on a daily basis, they were losing consistent data. In one of these cases, we actually exited the fund because we were like, this fund is losing so much aom that it doesn't make a whole lot of sense. Now if that particular fund had also because they also knew they were losing em for instance they might have taken measures to kind of address any illiquidity in the market much earlier had the whole world also got to know that they were losing. Erm at the same time you, if, if people, if only a few people get to know that a fund is losing aim, that is when there's a problem because they will panic early and everybody else will say oh well you, how come you guys knew if you if somebody knows everybody needs to know and that that, that getting the data together was a pain in the neck. But it it may give us an information advantage. And I think that's not a fair information advantage for us to have another last one. Pm's India returns. There. I mean, we PMIs we provide our returns.

Deepak: We know for sure that nobody cross checks and cross verify. We want them to. We'll give them enough data to cross verify it if they need it. But why can't I get this data to be cross verified for for everybody? So to find a certain PMS returns over the last one year, you know, you depend on certain disclosures made by the PMS themselves, and you rely on a certain part of the Sebi website to work some of those revelations, sometimes because of, you know, sometimes somebody says, oh, is it 6%? Should I write 6% or 6.00 or 0.06, 0.06? So you don't know what the answer to that is sometimes. And we've ourselves we got confused once and published the percentage number as a percentage, but they actually expected it to because we saw the other people. I said, Oh, is that how it's supposed to be? So this is actually how this non standardization works against you because now you look back, they look and say Capitalmind has 600% return because 6.00 is written someplace. It's not correct, it's 6%. But you know what? I couldn't we couldn't go back and change it because it was only published at that time. So we did ask, by the way, so it's not like we didn't, but I think we should look at this and say, well, can we not rely so much on reputation and can trust but verify? And you can't verify if you don't have data.

Shray: Fair. I think those anecdotes were quite amusing. And I remember that Franklin Templeton example that you give. I mean, definitely the data was there, but it shouldn't be that the guy who spends a lot of time on the Internet is able to access the publicly disclosed information faster. That feels, as you said, like this really shouldn't exist as an arbitrage. Anyway, I guess our customers were happy for it, but the ecosystem as a whole was worse for it. You've now coming to my next question. You already hinted at this so that you up for this. This takes money. So who's going to pay for this database, which needs to be always online, always accessible with, I guess, millions of people trying to scrape their data or get the data from you? Who's going to pay for this?

Deepak: So, you know, here's the thing. And we are paying for it right now. Two basis points of every single mutual fund in the country per year goes to something called the Investor Education and Protection Fund. All the money that sits in the Investor Education and Protection Fund just sits there. There very little of it is used. If you look at the SEBI annual report, there is very little of this fund that is actually used. So what are they waiting for? I mean, it's got 3000 plus crores or something like that. But can, you know, at some point the central government is going to look at this and say, listen, if you guys are not going to use this money, I'll take it away from you and I'll go, I don't know, buy some wheat or rice or whatever it is, and they do. But you absolutely cannot have such a large corpus that is doing nothing. So I think building a data warehouse and paying for it through the Investor Education Fund makes a whole lot of sense. Now, whether Sebi has the information systems capability to do it, I'm sure they do.

Deepak: If they don't, they can always contract or go to get their systems in place, but I do think they should be owned and run by Sebi for free. It should not have logins, it should not have it should be free and completely accessible to every single person who comes on, because that is the real democratization of information. In fact, it's a spirit of education. Education must be free. And we all know this. Right. So there's there's a reason why people make money out of education because they think it is, you know, but the core need of a government is to provide education, health care, infrastructure, all of these things which are core necessities for everybody to succeed. And if education is to be provided by seven, they're charging us for it. As investors, we are paying two basis points to waste a lot of money. I mean, you're talking about a 30 lakh crore ecosystem, right? A 30 lakh crore in ecosystem would be what? Two basis points would be 600 crores a year.

Shray: Might be 60, but we'll do the math.

Deepak: So, I mean, 1% is 30,000.1% is $3,600. $600 a year is roughly what is going as new money, 600 crores a year. I'm sure you can build a website with 600 crores.

Shray: I have. You can probably do it for much, much less. I've seen how they operate. They're quite stingy.

Deepak: So they get frugal. And, you know, to be honest, they could build this website and a food delivery service at the same time. It's that much money that's coming. I think we should embrace the spirit of openness the more. Okay, so here's the other analogy. Every great country or developed country that I've gone to and maybe somebody in the developed country told me, they said, the more developed you are, the more signage you see on the roads, the more that means you'll see are left turn and another 20 meters. Again, you'll see the left hand sign again, and then you'll see three traffic lights on one part, your part of the road, and then you'll see another three, three traffic lights on the other part of the road as well. So it's like saying there are two traffic lights, both are synchronized, but why they're there, they're on the same four way junction. But that signage, that's information. The overloading of information for you for signage is what makes the developed country developed in a way. It also understand that if you are too close to the traffic light, you can't see it.

Deepak: So they've built something else across that says if you were too close, you could at least see something else. Whereas in India what happens is you get only one traffic light and that too sometimes the in Bangladesh, at least many times the dust used to cover these until they got the light switch with those halogen lamps. And the halogen lamps didn't work half the time. So there would be a cop standing on the other side of the thing saying, you took a left turn. It was not a free left. You like wait that there was no signal was was all was was was not working either. Yeah, but I can't help it. There was a, there was no free left. Where's the sign. There isn't that. There's one about 400 meters behind. The problem with this is that it creates arbitrariness and we want to reduce the arbitrariness and general surveillance and all of that stuff. You want to increase the amount of information that everybody gets. I think more signage, more data. That's the analogy that I like to put.

Shray: I can relate to that analogy. I think you're also saying that RBA should do the same thing. They already have a fairly decent database. They should remove the logins and make it machine readable. Right?

Deepak: I mean, it's not like a log in, log in. But they've used some some crystal reports or something that they've used, which unfortunately if you don't access it humanly, it's damn difficult to access and the information doesn't come through and it's very obscure. So I don't feel, you know, that's a great thing now.

Shray: Okay. I think I'll get to a question. You've been talking about things that we can do, but as you have often pointed out in the past, so far in many ways is a far more effective regulator than you would expect India to be at this stage and compared to globally. So why is it that you want somebody to be a better regulator? Because I mean, it's not like we're doing particularly badly anyway, right?

Deepak: Well, I think, you know, particularly badly might be different in different contexts. But here's what Sebi does, and perhaps it's not what it really wants to do. It does a lot of harsh gating. So it says, oh, well, you know what, if you want to be X, you need to have a degree from a certain college or an MBA or something and all that stuff. They do this because they say, okay, well, okay. So for instance, they might say, let's increase the net worth of certain companies requirements that a network requirement does not improve the quality of companies that you actually do. But the most harshest measure to say that, listen, if you if I did this, then perhaps companies won't hurt. Look at Karvy. Phenomenally well funded company, phenomenally well capitalised company. And yet there was so much trauma that it lost its broker ship. It did a lot of really nasty stuff for its customers and so on. They did that because surveillance was difficult and it was costly and because it was difficult and costly, they were able to react only after something bad had happened. I think having a data warehouse and getting this information in-house, in fact, even for brokers, they've they've said no pooling of account. So this thing but there was a certain specific thing that happened in Karvy that was the problem. They they took a loan on securities that were not their own. I think continuous disclosures would have also helped recognise the problem much earlier than it eventually was. I think instead of getting moving to surveillance, moving to digital surveillance will change the nature of regulation that Sebi hasn't improved the nature of regulation. So we have to remember the big problem that people have in equity markets is are you say all of this is fraud, all of this is nasty.

Deepak: I mean, we don't think people can make money because it is rigged against us and so on. I think increasing the faith in the markets like for instance, you say I'll record any meeting that the company management does with analysts improving insider trading regulations, which increases faith. Now, for instance, you could you could say that. Listen, Deepak, let's go meet a company. We go meet the company. And something about the body language. No, not body language. Let's say there's something about something he says. Well, we're going to do X that x might be material, non-public information. I can go back today, I can write a report, send it to certain institutional investors and say, listen, I have this information directly from management. Institutional investors can take that information and directly trade off the market, and it's very difficult for it to be caught. Sec catches this on a regular basis, so to the extent that people have gone even gone to jail for things like this and therefore, you know, enforcement now has become like, okay, listen, if you do this, you're going to get caught so people don't do it. What we should do is go down to the same thing saying, listen, we can surveil and we will have we will have enough surveillance that finds us these transgressions regularly. And, you know, I think that is what makes you a better regulator, because you've got the carrot and you've got the sticks. And I think costs will come down because you don't have to wait for compliance before you recognize pieces of information now and where things are going wrong. I, I also think a regulator's job is both to educate and to enforce. I think the education part will be a little sharper.

Shray: I think I understand then a bit more about the spirit of what you're saying. It's like, can you invest in the infrastructure which will allow you to change a little bit how you go about the regulation and the governance in the first place? I think that's a very understandable and I think net positive point. But, you know, as I mean, we're running a small company here, one of the pain points we have is it's not the amount of compliance. It's just it takes so much work. So if you have this database and everything has to be reported here and all that stuff, isn't it going to make our lives much more difficult as people running companies about how much more information we have to give is just more headaches for us as companies, right? We'll need like a bigger admin team, a bigger and so on and so forth.

Deepak: This is actually, you know, will it will this are these regulations enough? Are this is this data? I think a lot of the information is useless and not useless, but it's just redundant. So for instance, you have a real dividend in one different regulation and you have to reveal the annual I mean, the quarterly results in a different regulation. So what companies do is they publish the exact same thing twice, one under that regulation, one under this regulation. So this, this is, of course, are the thing, but they don't reveal information that is actually useful. For instance, a company reveals profit and loss statements every quarter. It reveals balance sheets every six months. And it reveals cash flow statements only once a year. Now, my point is, why are we doing this? Why don't we allow why don't we enforce balance sheets? Because you need all three to be able to generate any one of them. You if you have a PNL, you also have a cash flow. You also have a balance sheet. It's not it's like it's basics of accounting. But why don't we reveal all three at the same time? It makes no sense. I think they will not extra regulatory burden because you're going to need all three to. You're just revealing all three at the same time. But I think this makes the financial markets even more deeper. If you're revealing all three at the same time. I also think since Sebi also regulates the bond market to some extent, where there's a bit of a move, we can make this much, much, much better to improve the bond market.

Deepak: What we should do is make the amount of data automatically and electronically available much more rich. For instance, retail, retail has bonds, Twitter, you know, what used to be called retail earlier was anyone who invest less than ten lakh rupees was retail credit. Ten lakh rupees also a similar retail? A lot of people have ten lakh rupees, and that's the face value of corporate bonds so many of them can buy. So you've got websites that sell corporate bonds to effectively what is a retail investor. Yet we don't have the amount of data that is required to calculate any of this. For instance, bond memorandums, they're not there. So you have a startup that says, oh, you know what? There's this company that is well funded by some random guy and some random we see, and they are there for good companies to invest in. Please buy and I will give you this information. But that information doesn't correspond to the kind of regulatory information that Sebi has to Sebi demands. There's something called an information memorandum that is actually quite detailed, and you are supposed to give it to anyone who asks. But if you're reselling these bonds, you don't reveal this information. I think Sebi should introduce a regulation and build the database themselves so that people can cross verify this information that start. Parties who are selling bonds don't give the wrong information to anyone in the first place.

Deepak: Why are bond information to go to NSD lends itself to get bond information. That means when there's a bond, I mean, what is a bond? Who issued it? What are the covenants? What are the things and all that stuff? The memorandums in fact then are on the CB and B on the BSE, but not all of them. They're only about 50% of them are. The rest of them are on Google. You ought to find them and hope that some, you know, investment banking website has it somewhere. Record dates, when is interest going to be paid? Like I talked about, I don't know whether it's these things or when is the date, what is the how should a bond be priced in the first place? I think this will improve the health of the bond market. You know, institutional and retail customers currently, they buy institutional largely by buying bonds, but they are supposed to be listed. These bonds, many of them are supposed to be. We don't even know what the tickers are. It's damn difficult to find it and it's a pain to find even for government bonds. I think it's just a little bit sad that we don't have this kind of regulation disclosure in the market. So I think in some cases there needs to be more disclosures than we already have or disclosures in this by the same amount of work that is required, but in a format that is easily more easily consumable by by everybody.

Shray: I sort of go back to the. I mean, the whole point of this podcast's topic today, which is that, look, you've talked about how we should do these things and that's how the market will become bigger and so on and so forth. But when I think of like the big success of mutual funds, there seems to be conventional wisdom that that mutual funds campaign is the one that really created a lot of interest because it was the odds were good and the information was useful. So, I mean, won't you need more of things like that, which is, I believe, paid for by the Investor Education Fund, something like a bond sale or some equivalent of that, rather than simply going and producing all these regulations. I mean, what's your thought on that?

Deepak: Yeah, I think I mean, so individual mutual funds can't say mutual funds. So what they've done is they've made AMP, which is a self-regulatory organization under Sebi. So Sebi recognizes that mutual funds have come together and formed fee and they will therefore listen to Sam Fee. I think you can have a bond regulatory organization as well where you have all the bond players come together and say We are the guys who come together and then self regulate our space to a certain extent and also give data and educate our customers and all that. That can be the skill there. You can have many more. You could have crypto or you could have forex zero. I mean, the idea is that sometimes Sebi makes rules and I'm fee is the one that effectively creates the framework around it. So for instance, Sebi may say, listen, I want large cap funds to only invest in large cap stocks. So what are large cap stocks and forget retirement. What large cap stocks? They create the rules. So again, they should be cross reporting. The Saro should then report data to Sebi as well. Currently, Amphi puts data in complicated PowerPoint PDFs which says how many retail investors have invested? What is the percentage of retail to institutional? What is the percentage of direct to regular and so on? But you don't get past history of these files, and I think it's important for the SRO to kind of put the data into Sebi so everything can be queried over time and see how things have changed. I also think personally that RBI should cede control of the government bond market and give it to Sebi. And I know that nobody likes the likes and I.

Shray: Think that we wouldn't disagree with you anyway. So yeah.

Deepak: So I mean it's just that, you know, that the bond market, anything that's a market should be regulated by Sebi, it should be the overarching regulatory body. They have done this before. There was no market regulator. There was a different market for FMC, for the forward market commission for commodities. They merged that into service and Sebi is now the market regulator for commodities as well. Why should it not regulate crypto as well? Eventually, when crypto become if anything, then you you you should have Sebi as the person running. People currently feel the stock market is either for rich people or for scamsters, and I think we should change that impression by doing more or enough surveillance. And I think having campaigns to do it, you know, is important. And there are a lot of small, small things like, for instance, if YouTube influencers come and say buy the stock, is that investment advice? Is it research? Is it something that should be regulated? All of these things are image things that Sebi has to put in place and say, Well, you know what? Maybe you can create a YouTube influencer, SRO as well, saying, you guys have to abide by certain guidelines. You can't, for instance, endorse stuff that you, you know, in certain ways you cannot guarantee return. Some people have actually said guarantee 12%. How can you say that? That is nonsense, that nobody should be allowed to say it.

Deepak: But they do. And unfortunately, people are allowed this when they're not regulated by Sebi. But Sebi is a regulatory framework, has to work closely with these self-regulatory organisations as well. And in the end, you know, one of the things that we I think they can do better in terms of saying this is not for scamsters is they catch a lot of these scams or types with technicalities rather than what they really did or I guaranteed 25% returns. That's not allowed in the first place. But instead of catching a guy who said, I guarantee 25% returns, they said, Oh, we caught him. But because his address he gave us was wrong. And I think there was a company called Finance who financed or something that did this. I mean, if and recently he's done it again and some other thing that he started and all that stuff, it's I mean, if you're not allowed to do X, that should be enough to shut you down. I shouldn't have to go to technicalities like this. You know, this is why you have so many regulations, because in the end they can catch anybody because your violated some regulation or the other and then you're catching people on technicalities. Doesn't sound all that great.

Shray: Yeah, I think they're doing the right thing anyway. So we should empower them too, rather than make them have to seek refuge in these technicalities when perhaps many other people are also in violation. I get it. In the past, both you and I think the ten of zero to have said stuff about how you're both very happy with steps that Sebi has taken. And again, this is versus the US, I think by and large where we're making our markets safer, less volatile and stuff like that. Could you talk a bit more about this? Like what are these great rules that Sebi has come up with in the. Recent past that has you guys feeling that we have a safer and better market this year itself?

Deepak: No. In fact, right now, for instance, as we speak, the mutual funds can, only they can you can only reach in mutual funds directly from a customer bank account. This is a problem because brokers were getting money into a comingled account. Which is a broker ledger, which is a single ledger which contains money of all brokers. This co-mingling is not allowed for people in like the broking space where they have individual ledger accounts. You can do it as a PMS perhaps, and you can do it as some other mutual funds and all of that stuff. But you can't do it as a broker which invests in mutual funds because that is a different mechanism. So I think safety of customer accounts is more important. Therefore, building this as a regulation has will help. Of course, there are teething issues around it. Leverage requirements over the last few years there they were. Brokers are offering 100 to 1 leverage for Internet trading. That means you give me ₹1,000. You trade up to one lakh rupees. This is a recipe for disaster. Eventually, the guy can blow up so much that he can blow up ten times margin. So if he has given you ten lakh rupees and he treats ten crores, you can lose one crore. Who's going to pay that one crore? The answer is usually the broker who's liable. But then you introduce a certain stress because the broker goes bankrupt because of a few guys stretching him out. The rest of the customers are brokers suddenly are in limbo, and then you create a systemic risk unnecessarily.

Deepak: So when Sebi is gone, rotten leverage consistently brokers themselves could offer margin to their customers, and brokers could earlier have borrowed money as well. Now, brokers cannot borrow money to give loans to their customers. The loans should come through an nbfc instead. We've also seen a lot more of reducing of volatility and of defaults by brokers. And of course, a lot of brokers have gone bust because of these rules, which is fine because, you know, they couldn't deal with the superstructure. But I think despite all of this, there have been a lot of insider trading cases, whether it was Axis MF, where there was accusations flying around a few others and so on. Even the Franklin case hasn't completely been settled yet, and the time frame that has taken for them to investigate and bring people to book, I mean, come with an order. I don't even care if it's a very deep or I mean, it it needs some kind of resolution. It needs some kind of time bound resolution. You can't leave a mutual fund of the size of Franklin in limbo for two, two and a half years after an event has happened. In that case, maybe the fault does not lie with Sebi at all, but it is. What I'm trying to say over here is you have to push Sebi as to push for faster resolutions. And therefore I think all the rules have been great. And, you know, bringing in enforcement into play will also have to go down that route.

Shray: I'll come to my last two questions. The penultimate one, you've been saying that we should do this and we should do this. So what do you think Sebi should do less of? Because, I mean, this isn't like infinite resources and finite people.

Deepak: Yes. Yes. I in fact, look at the resolution or regulation on mutual funds. You have a percentage concentration risk. And so far that these are our percentage concentration in mid-caps wasn't percentage concentration in large caps and so on. These rules, by and large, I think are are hard numbers. And I don't think you should have hard numbers in rules at all. You should have ranges rather than hard numbers. So why should we have 10% rather than 8 to 12 or some numbers like that? So if you are a mid-cap fund, why should you have a minimum of 65% in mid-caps? I think the idea there should be it should be a more easily usable range because a stock that's qualified as a mid-cap can become a large cap tomorrow. And I don't want to sell it just because you guys have suddenly changed the definition of what a mid-cap is. And therefore this has become a large cap industry for mid-cap. Instead, give me a range so I should be able to go around moving it, this and that, and I should have a time frame to bring it back as well. So whenever I think so, I think more ranges rather than exact numbers work. The rules like, say, pmas managers should have an MBA or C degree. Why? It makes no sense whatsoever that you put qualification requirements of MBA and see you make me take an exam. That's fine that there anyway, make us take an exam. But it's meaningless to say that, you know, a person like this should have an MBA or C or have to be educationally qualified in a world where education is getting disrupted overnight.

Deepak: Every I wasn't an MBA till two years till a year ago, in fact, till January this year. In fact, I think I would qualify as knowing as much as an MBA does, simply because I've been in the field for so long and worked with it. It doesn't make sense. And another thing, och derivatives, it's the largest thing in the market today. They're much more than the cash market. And yet index funds can't use index derivatives to trade. Most of the derivative action by mutual funds happens to be only in the arbitrage space. Mutual funds themselves need not have to take leverage, but there are certain elements of what is called leverage. It shouldn't be. For instance, if I buy a call option, the maximum I can lose the premium might be on the call. But what someone tells me is, listen, if you buy a call for ₹6,000 and you have the. Total exposure of that call. Gross exposure of that call, even though the premium is only 6000 pieces. But the call can actually have an exposure of two lakh rupees. That means effectively, if whatever you're buying is two lakh rupees goes up by 1%, you make ₹2,000, your 6000 becomes ₹8,000. So your gross exposure is two lakh rupees, but you've paid a premium only ₹6,000. What's the max? You can lose 6000, but what's the exposure you have is too lax. They take the two lakh number as your exposure number, which means your aim.

Deepak: If it was ten lakh rupees, you could only take five of these contacts. Pay ₹30,000. What do you do with the remaining money? Keep it in an overnight fund or keep it in a money market instrument? I think that is not the right way to look at it and we should perhaps change some of these rules as well, especially when it comes to things like spreads and so on, where your risk is relatively lower. And there are some small rules. The small rules are like, for instance, the Company Companies Act has something called a net worth requirement and a net worth concept. The Companies Act says net worth is equal to the share capital, plus any reserves, plus the share premium account, which is a separate account. Sebi Rules says I won't allow the share premium to be part of your net worth. Why? It makes no sense. Because accounting wise it is money. I don't have to return at any point in time. There is no reason that somebody can ask back for their share premium. And because of that, it's my equity. It's an encumbered equity of without any encumbrances on it. So why would they say we have a different definition of net worth then what the companies act as? We've actually tried to ask also, but Sebi hasn't responded. I think that that kind of stuff they should do less of it should be less ambiguous, less ambiguous about some of these things.

Shray: And so now I'll end with my final question on this, which is as I've been reflecting about what you're saying, look, how much impact do you think Sabby can truly have on financial markets? And coming back to the very first number, what was it, 2 to 3% of household flows? How do you take that? What's our upside here? And so how much impact can there be, have? And if it does all go to plan and everything is great, what's the number? How much can that grow as a percentage?

Deepak: You know, that is the point that when I see developed countries, they have a significantly higher percentage of financial stock and financial flows of households sitting in assets like, you know, mutual funds and equity. Now, the reason for this is also there will always be some demand and that some demand is, for instance, in the US, for instance, you have ETFs and mutual fund shares and so on. That form about 50% of household investments. In India, it's 3% or maybe four of it's it's a significantly smaller number compared to what in fact, if you look at the whole household stock as well, the household stock, I think only about 15% of overall household savings, which is roughly of the order of ₹200 trillion, 200 lac crores, only about 1819 lakh crores is sitting in mutual funds. At this point. The there is some inequity as well and the rest is, you know, in fixed deposits and for the most part, insurance and all that insurance gets 10 to 20% of all new funds and stocks and mutual funds are much lower. Insurance has a massive tax advantage. Hopefully over time we will get either the tax advantage of insurance will go away or mutual funds will have a similar advantage if you put it into, say, a retirement deferred account. We've talked about a mirror account. We should probably do a separate podcast on that. But the idea over there is how a tax deferred account where people can invest in mutual funds, not pay tax on the money they've invested in it only when they take or take the money out or if they die, tax is paid at 30%.

Deepak: So or whatever your marginal rate is. I think this is crazy because pension funds and small savings schemes today get five x the money, five x the money that, you know, people like and insurance companies get get more than five X, the money that is invested in stocks and mutual funds. And because of this, fixed deposits which get 50% of financial savings into the for by households, fixed deposits yield less than government one year government bonds. And for the same tax implication, I would rather choose an free rather than a government bond simply because the instruments that can access those government bonds, which are mutual funds, aren't popular enough or aren't deep enough to, you know, kind of access. I think this makes no sense whatsoever. If you're a person who invest in fixed deposits, then you just want the highest interest rate from the safest borrower in the country. How is it possible that the safest borrower in the country, which is the Indian government, is paying a higher interest rate than a bank which is technically less safe than the government? I mean, if there was no one.

Shray: Of course.

Deepak: So I think here is where bringing the data, bringing information to people and allowing them to scale out in terms of investing into equity and mutual fund markets. I mean, and having this financial data available to everyone without a login, without any need for any and 24 seven, it's going to be a massive accelerator to increasing household savings into equities and mutual funds.

Shray: Thanks so much, Deepak.

Deepak: That was fun. Thanks.

Shray: Thanks so much for listening. If you like how the Capitalmind team analyzes markets and thinks about investing, visit Capitalmind wealth dot com. See a portfolio management service that is among the lowest costs in India, with products starting at 0.25% per year and no performance fee. If you have any feedback, suggestions or topics for our next episode, please send over an email to podcast at Capitalmind dot m.

Podcast: Why SEBI should implement India's EDGAR and morePodcast: Why SEBI should implement India's EDGAR and more

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