T N Pandey: Paper chase

Sebi's unique identification number scheme is unnecessarily elaborate

There could be two views on whether the Securities and Exchange Board of India (Sebi), as market regulator, has been successful in its functions or not; but there could be no differences over the fact that it has been vastly successful in creating enormous paper work at various levels by issuing umpteen rules and regulations.

The recent example of this is the scheme to create the Market Participants and Investors' Integrated (Mapin) database by notifying the Sebi (Central Database of Market Participants) Regulations, 2003.

Sebi has specified, from time to time, the categories of individuals and entities that are required to obtain a Unique Identification Number (UIN) under the regulations. The Mapin database is being created enhance investor protection.

Sebi is of the view that intermediaries and key personnel who facilitate dealings in securities are a crucial link between the "market" and "investors", and, therefore, an inventory of these functionaries working in the market is necessary.

The Mapin database will allot UIN, which would be required to be quoted by all market participants and investors while carrying out securities transactions. In the case of "people", this database will contain their photos and bio-meteric identification details, like finger prints and so on.

A beginning has been made in this regard on November 11, 2003, by allotting the first UIN to Sebi Chairman G N Bajpai.

The scheme, through regulations, is to achieve: one, the development of an inventory of market participants and investors, and two, a standard for client code (UIN).

The regulations notified place a mandatory obligation on intermediaries, their employees and other entities under Sebi's jurisdiction, listed companies and specified investors to obtain UIN by December 31, 2004.

Corporations, specified investors, foreign investors and intermediaries will not be permitted to buy, sell or deal in any securities after the specified date. Body corporates were given time to obtain UIN till August 31, 2004.

Intermediaries have been enumerated in Annexures I and II to the regulations. Annexure-I contains the list of intermediaries who are required to obtain UIN.

These, among other things, include depositories, their participants, stock exchanges, credit-rating agencies, investors' associations, merchant bankers, under-writers, foreign institutional investors (FIIs) and host of other bodies.

Annexure-II contains the list of people related to intermediaries, such as the entity itself, its principal officer, those engaged in operational activities of the intermediaries "" such as all levels of employees directly engaged in the activity covered by the Intermediaries Registration "" all directors (other than those nominated by foreign investors) in cases of corporations, all partners in cases of firms, sponsors, trustees and association of the entities.

There is an omnibus clause that provides that spouses, dependent children and dependent parent of the people mentioned in Annexure-II will also be required to obtain UIN. A fee of Rs 300 a person is required to be paid for getting the UIN.

Specified investors are those who are specified by Sebi in the notification published in the Official Gazette. Unless specified investors possess UIN, they will not be able to buy, sell or deal in any security transaction.

This raises the issue whether the need for obtaining UIN can be considered a reasonable restriction on the right to carry on any trade or business. Many issues arise concerning the Sebi scheme, such as: what is proposed to be achieved by the regulations; whether these have been appropriately conceived; and how the objectives sought will be realised?

The purpose is, obviously, to protect the interest of the investors. But, for this, do we need such elaborate exercises? The number of people who are required to obtain UIN is going to be fairly large.

S.No 10 of Annexure-II, the omnibus clause, stipulates that the spouse, dependent children and parents of the nine entities mentioned in the Annexure will also be required to obtain the UIN.

Thus, spouse, dependent children and parents of promoters' spouses, children and parents will have to obtain UIN, and if they fail to do so, the consequences will have to be faced by those mentioned in Annexure-II.

Whether such wide coverage of related people and consequences mentioned is called for and whether administratively it would be possible to manage the work is the moot issue.

The requirement of taking finger prints for UIN is strange. Why should Sebi prescribe something that falls in the domain of those who are concerned with the administration of criminal law? If there is defrauding of investors, the remedy will not lie with Sebi but with the police. Moreover, such cases are not likely to be large.

The requirement of obtaining UIN may affect the volume of security transactions substantially and affect the development of capital market, which Sebi is expected to promote.

Further, there will always be uncertainty over various matters because the power to notify the class of investors who would be required to obtain UIN, will be with Sebi, who can go on notifying about people who will be required to obtain UIN.

It needs to be understood that an idea that is conceptually sound may not be implementable at a cost that does not commensurate with the costs involved. Should such schemes continue?

The next issue is whether there is any justification for imposing a fee of Rs 300 a UIN on the various entities enumerated in Annexure I and II for a scheme that has not been empirically tested with the figures, concerning cases, where investors have been cheated in the past, to establish its need and efficacy.

Also, why should Sebi prescribe a fee of Rs 300 for UIN when the income tax department's PAN card can be obtained for just Rs 65? Without a proper study in the background of past experience, the scheme in its present form appears to be a costly exercise. The scheme seems to be not well conceived.

(The writer is former chairman of the Central Board of Direct Taxes)