Market regulator the Securities and Exchange Board of India (Sebi) would be vigilant and pay attention to the settlement mechanism to ensure a smooth functioning of the market, a top Sebi official said.
"As a regulator, we need to pay attention to the settlement mechanism in all markets whether equity or OTC markets. We need to continue to see that the settlement is working properly or not," Sebi Chairman C B Bhave said during his speech at the Symbiosis Institute of Business Management's National Finance Summit here today.
"We were fortunate that during the entire episode of the financial crisis in 2008, the transactions on the bourses were settled smoothly. We were 100 per cent confident that transactions in the market will be settled, whether share prices went up or down," Bhave said.
A hard work of 13-years in developing the settlement mechanism has paid off, he said.
"That was a tremendous thing, which kept our markets going," Bhave said.
However, one had to continuously working as new markets would evolve and new products would come. Hence, one has to be alert all the time, Bhave said.
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Commenting on financial products being mis-sold, Bhave said, "There is the issue of financial products being mis-sold. And I think this is a serious regulatory issue."
Pointing out that there was a tremendous incentive for financial intermediaries to mis-sell financial products, he said that whether this kind of mis-selling was going on in the market or not and what needed to be done about it was the responsibility of the regulators.
"We worry about it in the mutual fund industry and the Reserve Bank worries about it...But this is a constant worry," Bhave said, adding that "this is an issue we have to address."
Several firms selling financial products market them in such a way that the products look attractive. However, companies hide the risk factors involved in the said products.
Replying to a query on delisting regulations, Bhave said, "The issue is not of delisting regulations. The issue is of balancing interests. If the delisting norms are not as free as corporates would want them, the reason for that is that we have to balance the interest of the investors to whom the companies had initially promised that there will be a public market."
The recent financial crisis has taught us many lessons, including on financial innovation and leverage, he said.
During the global meltdown, another issue that came up was this "so-called financial innovation", he said, adding that many times, financial innovation was nothing but a way of hiding higher leverage.
"Because leverage is risky and because regulators tend to control leverage and tell companies that you can't go beyond a certain point and leverage is profitable as well in good times, market entities are continuously trying to devise ways as to how can they increase their leverage. But they can't argue on those terms because that is precisely what the market regulator has controlled. Therefore, they argue in terms of innovative products," the Sebi chairman said.
A high leverage was a problem and could being about the collapse of the whole system.
"If leverage becomes excessive, however big a firm you may be or how small a unit you may be, excessive leverage is a problem. If you are big and have excessive leverage, then not only you come down but you will bring the whole system down," Bhave said.