Need for strict regulation

Suresh Krishnamurthy

OFFICIALS of Dean Witter Reynolds have been charged with securities fraud in the US for marketing securities falsely as safe low-risk investments.

In the US, there is evidence to believe that there is no laxity in enforcing the regulations regarding marketing of securities.

The situation in India is quite different, with no regulation regarding sale of securities. While recently rules were framed to cover mutual fund advertising, there is no law or guideline that states that false representations at the time of selling securities would invite penal action. The principle of caveat emptor operates in India.

Now, the need for such regulations is much more apparent in India, where investor awareness about the risks involved in investing in varied classes of investments is abysmally low. Also, given the intense competition for funds among MFs and the need to increase the assets under management, the likelihood of false representations is greater.

It has happened before in the fixed deposits market, where brokers aggressively canvassed for companies that offered them the highest incentives, and which eventually lead to investors being left with only worthless papers. This highlights the need for rules that govern the marketing of securities.

Of course, a similar crisis is most unlikely to dog the mutual fund industry. Also, MFs in India have been pro-active in educating their sales affiliates. Still, there is always the need for a formal set of regulations. The informal system may function effectively now, but come crisis time, it is more likely to crumble than respond positively.

The people behind securities regulation in India are more than aware of the best systems in the world. However, there always seems to be a reluctance in framing regulations that protect the retail investors. Only a crisis could push them to action mode.