THE ANNUAL conference of the International Organization of Securities Commissions (IOSCO) is being held for the first time in India from April 9 to 12. The meet will discuss several issues related to global capital markets. In an interview with The Hindu on the eve of the conference, Chairman of the Securities and Exchange Board of India (SEBI) M. Damodaran discussed developments in the Indian as well as overseas capital markets.

The annual conference is in two parts. The first part spread over the first two days and the morning of the third day is internal to IOSCO members, with meetings of the executive committee, technical committee, emerging markets committee and the four regional committees. On the third day is the meeting of the presidents committee of IOSCO, an annual feature. "We have four issues of contemporary relevance and we have four different panels to discuss these issues. These relate to hedge funds, transnational exchanges, accounting standards and a separate platform for small and medium enterprises. We are hosting the conference,'' said Mr. Damodaran.

India and several other countries are interested in hedge funds. Not only securities regulators but even governments are discussing this. So there will be some learning for India. As for transnational exchanges, Mr. Damodaran said, "We have seen in the recent past that both NSE and BSE have had some small foreign ownership and going forward there may be more foreign presence in the exchanges. What are the challenges for the regulators as a result of such ownership patterns? What are the issues for listed companies? That's also important. Here again, an expert panel will address various issues."

The conference will also look at accounting standards. The International Accounting Standards Board (IASB) has been saying for some time now all jurisdictions must ensure convergence of their accounting standards with the International Financial Reporting Centres (IFRCs). That is also an area of focus. India, like many others, is moving in the direction of convergence and the Institute of Chartered Accountants of India (ICAI) is working closely with the IASB. SEBI has a supporting role in this matter. On SMEs, Indian market participants have been asking for a separate platform.

On the question of regulatory arbitrage, Mr. Damodaran said, "Our position is and has always been that India will not canvass business on the basis of diluted regulatory standards."

Hedge funds are an important issue for the Indian capital market now. Participatory Notes (PNs) have been under debate for a long time. The RBI has been pointing out that funds are going out of the country and coming back through the PN route to claim certain advantages. How effectively is the regulator able to check this menace? Mr. Damodaran explained his stand on this issue. The PN is an offshore derivative instrument issued to entities outside India. They must be registered with regulators of their home country. Foreign institutional investors issue PNs to these entities and hold the Indian shares bought with the money.

What is the quality of the money thus raised? All the money comes into the markets only through bank accounts. All investors are brought to the market through market intermediaries, brokers and depository participants. All of them are subject to KYC (know your customer) norms. "We know money is coming through banking channels. Is it money that has escaped tax, gone overseas and come back? This is something that SEBI cannot say. There are other regulators who deal with issues of flow of money into India and its quality and we are in close touch with them. This is not our direct responsibility."

Mr. Damodaran also talked about issues related to terrorists, a topic of interest for some time now. "There is a financial intelligence unit, an income tax department apart from other investigating agencies. We will assist them with whatever information we have. But it is beyond us to check the quality of money coming to the markets. All that we know is that it is coming through people who are supposed to know their clients, including FIIs which give us regular certificates saying they know to whom the Notes are issued and that they do not include PIOs, NRIs and OCBs. So PNs being equated with money of dubious quality is not based on a one-to-one relationship. There are different reasons for different people to invest through PNs."

The IASB has been working on convergence of standards. India has significant convergence except in a few active areas. Now, an Indian is on the Board of Trustees of the IASB. He participates in the panel discussions. The ICAI, IASB, SEBI's standing committee on accounting standards and the Ministry of Company Affairs are working together in the direction of convergence.

A small or medium enterprise cannot come for raising its equity to an exchange or a platform that serves mainly the bigger companies. Hence the need for a separate platform for them. What about OTCEI (Over the Counter Exchange of India)? "It was an excellent idea. But it was ahead of its time. It should have come a little later." On revival of OTCEI, Mr. Damodaran said, "We do not want to keep exchanges alive artificially. There are others who want to run exchanges and who say they will set up a separate SME platform. We haven't decided yet. But the need is there. We will watch the panel discussions and see how we should proceed."

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