"Many people think the order in the case of Indiabulls has been withdrawn, reversed. Only an interim relief was given"

He's been in the hot seat for 15 months now, and it's been a period of hectic activity for M. Damodaran, Chairman, Securities & Exchange Board of India (SEBI). During his tenure, the market regulator has been proactive with its market orders (mostly interim ones). These range from the order prohibiting UBS Securities Asia from issuing offshore derivative instruments for a year to the recent scathing one on the IPO scam. Many of the high-profile orders-including the UBS one-have been overturned by the Securities Appellate Tribunal-but Damodaran hasn't hesitated to go up to the apex court. "A few high-profile orders have been overturned, but on the whole, only 28 per cent orders have been appealed against," says the Chairman. Ideally, Damodaran would want a period of "relative quiet", during which he can focus on organisation-building. But, as this interview illustrates, such a period is wishful thinking as SEBI has its hands full dealing with suspected market manipulation, heightened volatility, inspecting the quality of foreign money flowing into Indian markets, and scamsters exploiting the IPO process. Excerpts from an exclusive interview:

When you started your term, you talked about the need for a substantive clean-up. How do you look at what you've achieved since taking over in February 2005?

With a lot of satisfaction. I think initially in any job you have to understand the organisation. Wherever you come from, you come with a total understanding of what you can do. I think SEBI has been reactive, and hopefully it will not be so in the long term. We do get compared to the Reserve Bank, but we have been around for just 15 years, and RBI has been around for much much longer. They have had long periods of relative quiet. That is a luxury SEBI hasn't had. Something or the other is happening and you have to respond. I think what SEBI needs, and hopefully what we will get, is a period of relative quiet where you can focus on how to build an organisation. I don't think any of my predecessors have really had this luxury. That is something I think one should do in course of what is left of the tenure.

Your tenure would be for three years?

Three years with the possibility of another term and the age limit is 65 years. Theoretically, there could be another term once this gets over, but I want to repeat, theoretically... (But) Three years is enough. If you look at organisation-building as a priority, three years is enough. If you stay too long, you get stale and a kind of a disconnect develops between you and the organisation and you don't work too well. Within three years, what you need to do in an organisation like this is recognise some truth. One is what we have on our plate and what we will have. We simply don't have enough people and I think on that, there really is no argument. If you look at organisations elsewhere, other jurisdictions, other capital marketers/directors, they have for the kind of job we do, much more people or they do much less than we do. Then you need the right kind of people; securities regulation really is about lawyers and accountants and then about everyone else. So, if you look at the total number of officers that we have and the lawyers in that, it's a fairly small number.

What would be the number?

Our total law department is about 30 people or so in an organisation which has a little under 300 officers. We have not as many lawyers as I would have liked to have. We've got about 23-24 lawyers, but I think the proportion will correct as we go forward. So, I think it should be really somewhere in the region of 35-40 lawyers at least. We should have a large number of accountants because at the end of the day we have to come to grips with all our accounts. In the past, we have got people who are MBAs, with finance as specialisation, not accountancy. So, that is something we might have missed out in the past, which we are trying to correct. We have just recruited a bunch of about 70 people who will get trained. The appointment letters have gone out. Another major issue that has to be addressed in such an organisation is compensation. Also, we don't have in India the practice, and I am hoping that it will come some time, of natural movement, of people from industry moving in here. Which happens anywhere else. So, had that happened, it would have addressed part of the problem of compensation. But the sharing of experience between the user industry and regulator doesn't exist. I think it will happen over time. The major challenge really is the people issue. The rest of it-cleaning up regulation, rewriting the SEBI Act-will go through the normal process. By 2007, it should work.

We've been used to seeing SEBI's orders being reversed by the appellate authority. Is this an issue that has to do with a lack of powers resting with SEBI?

I don't think it is an issue of empowerment. There was a time when SEBI didn't have enough powers, but after the last amendment, we have got more power. I think the processes are time consuming. The perception that most of our orders are set aside, may not be true. I have looked at the numbers, they're not that bad. We would all like it to be better, but 28 per cent orders passed by us are appealed against, which means 72 per cent remains; they are not tested and appealed. Of that 28 per cent, three-fourths are upheld by the court. Which means, if you take 100, and 28 of them go to appeal, three-fourths of the 28 survive the appellate process. What happens in some cases, and we don't have a quarrel with that-nobody should-is that the appellate authority says the punishment is too much, and that we have to reduce it. Then, there are those that are overturned in appeal, which says clearly that our decisions are wrong. Against some of those we have gone to the Supreme Court and appealed, and in the Supreme Court we have had limited success. But many of the appeals are pending in the apex court and we are hopeful that they will come through. What has happened is that in some of the more high-profile cases SEBI's findings have not been upheld and, therefore, we tend to get judged by that and people think that a whole lot of cases have gone against us.

Your recent order in the IPO scam has seen a lot of flip-flops, and you had to do a rethink in one case...

This is the first case in the primary market that something of this sort has been detected. After a torturous process, we discovered there were a certain number of people who needed to be proceeded against. We had two options: We could give all of them notice, we could hear them out and then pass orders in each of those cases which would seem the normal thing to do. But it was felt that this would take too much time and, to be consistent with what is done elsewhere-we ourselves have done it earlier-we decided that a post-decisional hearing would be approved. Therefore, an order was passed on April 27, where several entities were found guilty of certain things. The first guy that came next morning was Indiabulls. After listening to them, we told them, fine, the injunction that you cannot continue your business will be stayed to verify the claims you have made. That is all that happened in the case of Indiabulls; many people thought the order had been reversed, withdrawn. Nothing of that sort happened; the verification of what Indiabulls claimed is going on at this time. Only an interim relief was given.

How concerned are you about the volatile secondary market?

Interim volatility is something that nobody is comfortable with. I think we have had more volatility in the Indian market in the recent past than in any other market. It is not as if we looked at market levels and decided we need to pass this mega-order (on the IPO scam) to cool it or some such thing. But I think the volatility is because there is too much money chasing too few stocks. You need to see more stock in the market, which is why I am glad there are a number of good quality and reasonably big-size IPOs coming. But again, this is not a market free from rumours, so you will see these short-term wild swings taking place and when that happens, then we do a patch analysis to see who bought, who sold, what has been the behaviour pattern of these same guys for the rest of the day after the rumour. And then we attempt to see if there was an element of market manipulation. But we need to have fairly convincing evidence of this. I don't think we are alarmed (about the volatility). The day regulators get alarmed, we have to shut shop. Certainly, I am concerned, but not worried.

We have put in place the integrated markets surveillance system, which is not yet fully operational, which allows us to get information from NSE and BSE during the day, rather than at the end of the day. This will allow us to react much faster and the fact that you have a system like this in place, is a kind of disincentive for people who believe we'll take our time to catch up with them. We are, I believe, only the second or the third jurisdiction in the world which will have a system of this kind. Australia has one. We got this technology from Australia.

You hope one day the domestic investor will take the place of the foreign investor?

I think you are seeing some tilt in that direction. In the mutual finds certainly, if you look at numbers. If you look at what happened let's say, seven to eight months back, every day that the FIIs were sellers, the market would fall. But in the last three months, you are not seeing that pattern. There have been days on which the FIIs were net sellers and the market didn't fall, so there is a significant group that is there in the market-the mutual funds with really a lot of money. The mutual funds are not all investing money on day one, so, whenever they raise large sums of money, and whenever they are all in the market with new schemes, and it gets invested over time, then again there is this behavioural pattern.

Are you concerned about the quality of foreign money coming into the market?

The FIIs who are registering with us are buying and selling stock here. They issue instruments, called participatory notes, to people outside of India. The FII regulation says that they ought to give us monthly reports on who are the holders of participatory notes. They have all signed this regulation when they got this registration; they all give us these reports. Some of them say we don't know who is the holder of these notes at a particular point in time as these are transferable instruments. Which isn't good enough. That is what happened in one celebrated case we raised, which is in the Supreme Court now. One day we will get a final determination on it.

There are also concerns about how much of FII money is round-tripping (local money masquerading as FII inflows). But at the same time, why do you address the question of round-tripping when there could be an NRI sitting somewhere, who has legitimate money and wants to invest legitimately here? Should we close the door on him? He will think if a foreigner can invest in the Indian market, why can't I invest in my motherland? So, there are no easy solutions.

You acknowledge that there are hedge funds operating in the Indian market?

There are funds operating in the market registered as FIIs that have not called themselves hedge funds when they got registered. On the basis of evidence then available, there was nothing to show that they were hedge funds. If there had been such evidence, they would not have been registered. It's likely that the odd bird escaped, we don't know. By and large these are not hedge funds; we know the nature of these organisations. All of this is evolving...we want more people to participate in Indian prosperity, which is not such a bad thing, so long as they do it within a regulatory ambit.