Tuhin Kanta Pandey, Chairperson, SEBI, in conversation with Nikunj Dalmia of ET Now. Pandey says stricter regulations may not eliminate fraud. Greed can lead to misconduct even under surveillance. Overregulation to prevent a few cases can cause type II errors. This hinders business operations. Avoiding type I errors, where risky activities are allowed due to lack of regulation, is important. However, excessive surveillance leading to tighter rules is not the solution. I must put it on record that one of the big reasons why Indian markets are trading at a premium to global markets is thanks to the efficient regulator we have, I mean that is a hidden premium and which always is captured in the PE multiples of the Indian stock market. Thank you for this regulatory framework that we have. You are open to expansion of the market, which means more and more products, more and more intra-products would be there. Are we looking at the derivative market in India expanding?Tuhin Kanta Pandey: Certainly, I think new products need to be added. Energy Futures for example, I think we can look at it for our energy markets and others there is some area, there could be many other products. But then, for every product you have to do a proper research, the market participants have to come together, exchanges have to come together, develop something, have a risk framework and we should be able to then prepare regulations around it. For example, REITs, InvITs, SM REITs are the kind of things which have come and opened another opportunity for people to invest. Otherwise, if you were to invest in real estate directly and which may be far more illiquid, but if you have a more tradable REITs, etc, you can actually invest in real estate in that sense and in a fairly liquid market. InvITs have come and a lot of infrastructure funds, pension funds, and other long-term funds would be very much interested in specific instruments of this kind. There are a variety of investors with a variety of interests and there should be a variety of instruments to suit that interest. Let us talk about the mutual fund industry, the grand success of India. It is the SIP investor who is really enjoying the benefits of the India growth story. But mutual funds have some concerns that as they are growing, their total expense ratio is being questioned. As they are growing, they are getting more and more regulated. How would the entire total expense ratio move for the mutual fund industry as they are growing?Tuhin Kanta Pandey: There are always two sides of that. There is an industry viewpoint, there is also a viewpoint from investors. The mutual fund industry is very important from a systemic point of view as a system as a whole because so many investors are into it and secondly, so many funds are there. Now, obviously, we have to really see how that market is well regulated, well managed, so that this is beneficial for both investors as well the issuers. So, in things like total expense ratio, right now we have an upper cap but somebody can say everyone is crowding around upper cap, but there are possibilities. For example, you have 2% for debt securities but what is being charged is much less. We have only prescribed an upper cap, so there is competition there and the competition can do it. But in my opinion there has to be a reasonable charge also because sometimes when you try and put it to the rock bottom, then there could be other risks emanating. So, we have to see that cost must be reduced, but cost also must be recovered, whatever cost is there. So, as long as you are efficient, you can reduce the cost, but there is a minimum that you got to be paying because otherwise it does not work. So, you are not against mutual funds making high profits. Sebi is not really concerned about the profits….Tuhin Kanta Pandey: No, I would say that there is a competition and we should allow the competition to do and upper capping is something which can serve a purpose also. But within the upper caps, the people can play out in competition and see how they can reduce the cost. Is the way the SME market and the way SME stocks go public, the way they spike on day one, the way companies are getting up a genuine concern because this is where the retail investor comes in. It is not an institutional dominated market. Would you be looking at that market seriously because there is definitely froth there in that market?Tuhin Kanta Pandey: There is a relatively lighter touch regulation precisely because we thought that SMEs are a very important part of the Indian economy and should find it easy to access the capital market. So, ease of access will be there. Of course, we have been watchful and if we have seen some of the points where certain tightening was required, the tightening was indeed done in terms of bringing in conditions like operational profitability in two out of three years. Also, the funds cannot be redeployed only for the purpose of repayment of promoters’ loans. Also, trying to the general corporate purpose you cannot spend more than 15%. These are the kind of things which were necessary and which were also brought in initially because we thought that it was being misused. But there is also a lot of responsibility of merchant bankers on how they are doing it, both in terms of reducing the cost because sometimes the cost of raising money is a bit too high. So, for them, if it could be 15% as 17% becomes onerous. So, that is one point which needs to be seen. Then, we will be watchful, of course. The question is that this is on the SME board and this is on the main board and we are saying that if you have to graduate that is one part. The second thing is whether the SEBI itself will look at the IPOs and which we have delegated to exchanges. So, we have to see how the exchanges are doing their jobs and we will be watchful of that situation. But what we have to see is whether statistically, data wise, whether it is an egregious kind of a thing or more widespread. If it is an egregious kind of case, you cannot really fix it with regulation. It is a supervision issue. It is a surveillance issue because regulations are there. Now, we cannot simply increase paperwork and regulation on the ground because one or two cases have gone wrong. Even if you make the regulation tighter, still people can slip through. If you have greed as a thing, if you really want to have a fraud, the frauds can be committed under the most watchful of conditions and even if you put CCTV all around, the people can still sneak in and here we are talking of businesses. We cannot be in every boardroom, we cannot be doing this because then we will be doing tremendous type II errors. So, while we should avoid type I errors where because of our non-regulation a lot of risky things we allow, so we should avoid that, that is a type I error. But we should not also commit type II errors where we should overregulate only because some cases, one or two cases, three cases have been caught. Then, in that case what will happen, every surveillance action will end up in still tighter regulation, which is not the case of surveillance. There is an impression that Sebi is having some issues with the NSE IPO. Every time when they come up with clarification, there is a new list of perhaps clarification goes back. What is the status of the NSE IPO?Tuhin Kanta Pandey: There has been some discussion on these points vis-a-vis the NSE IPO. There were some points and they have replied. There are broadly four issues, one on governance, second on technology, third on clearing corporations, fourth is on litigation and settlement of the litigation. If they meet all four, will they get a green light?Tuhin Kanta Pandey: And these four, with a very intent to resolve and with the intent to actually make IPO possible, we should work out a solution for that. And you see that happening sooner than later?Tuhin Kanta Pandey: I think so because we will apply our mind on that matter and subject to satisfactory resolution of that, we should be able to see it through, but our intent will be to see it through.