Why rules change

In 1982, two F1 racing teams, Brabham and Williams came first and second.

Nobody expected these teams to win.

So much so, other teams complained against Brabham and Williams. They said the two had cheated.

Why were the other teams so shocked?

F1 teams pour in unimaginable amounts of time, effort, skill, and money to make their cars go just a few seconds faster.

Often, it is just those seconds that decide who wins.

According to F1 rules, all cars have to be above a certain weight. In 1982, this was 580 kg or above.

In 1982, turbochargers started being used in cars.

Turbochargers allow engines to make much higher power by recycling energy from the exhaust.

They also make the engine heavier. Usually, the higher power produced compensates for this extra weight.

If you drive a diesel car, your engine (most likely) has a turbocharger. Many modern petrol cars also have turbocharged engines.

So, turbochargers were a new phenomenon in F1 racing back then.

At first, turbocharged cars were much heavier than 580 kg.

Many teams didn’t have turbo engines. But their cars were around 580 kg – much lighter than turbo cars.

So they were able to compete against turbo cars.

But slowly, as teams became better at saving weight, they managed to bring down the turbocharged cars' weight to 580 kg.

In F1 racing, the power produced, and the weight of the car are crucial deciding factors.

Earlier when the turbo cars were heavier, the non-turbo cars had one advantage: their cars were light.

Once the turbo cars became lighter, this advantage was gone.

This is what made Brabham’s and Williams’ victory astonishing. Their cars did not have turbos.?

To ensure everybody was following the rules, the cars were inspected after the race.

The rules said the cars must weigh more than 580 kg including all fuel, lubricants, coolants, etc.

After the race, these liquids would obviously have been used up. So the teams were allowed to refill the fluids before the inspection.

What both, Brabham and Williams did was first make cars that were much lighter than 580 kg.

Then, they added giant water tanks. This water would be sprayed on the brakes to cool them – this was allowed.

As soon as the race began, the drivers would dump almost all of the water – making the cars much lighter.

They actually only need a little bit of water for cooling brakes.

Then, after the race, before inspection, they would top up all the lubricants, and water tanks in the car – bringing the car’s weight to 580 kg.

Was this cheating?

Yes – of course.

But technically speaking, going strictly by the rules, they didn’t exactly cheat.

The rules were changed after that and this trick was no longer possible.

Regulations in F1

F1 racing is deeply competitive. The stakes are really high.

These machines are so precisely made, even a small advantage can cause a car to win over another.

A recent example: a team discovered that if they didn’t paint a part of their car, the car would weigh around 350 grams less.

So they stopped painting that part.

Rules are constantly changed and adjusted – to ensure the game remains fair while still being competitive.

This 1982 incident wasn’t a lone event. In fact, rule changes happen almost every single year.

The racing teams regularly find loopholes and exploit them. The regulators discover these loopholes and make necessary changes.

When rules are changed, many times, racing teams have to make significant changes to their cars.

Regulating Investing

As you’d imagine, the stock markets are insanely competitive. And they too require rules and prudent rule makers.

In a recent interview, SEBI chief Madhabi Puri Buch was giving an example of how people always try to bend the system.

Earlier, people used to do insider trading in their own name. SEBI caught them.

Then they started doing it in their parent’s name. Soon SEBI was able to trace them (same surnames).

Then they started doing it in their in-laws’ names – because of different surnames. SEBI managed to trace that too.

Then they started investing in the name of their brother-in-law. This was tough to catch.

But eventually, observing the call frequency data, SEBI managed to track that also.

Then came WhatsApp - which is a challenge. And then there’s disappearing WhatsApp.

She ended this example with a mention of how regulators are always in a cat-and-mouse game.

This is why you keep hearing of new changes every now and then.

This is also why all the racing teams (investors – you and us) have to ensure we are updated about the latest rules.

Regulators and Everchanging Rules

Like F1 amended rules to make the sport fairer, SEBI has a long list of steps taken to make investing fair.

A few years ago, mutual fund companies were launching many new funds – even in the same categories.

So, if XYZ mutual fund has one fund called XYZ small-cap fund in the small-cap category, they’d go on to launch newer small-cap funds in the same category because many investors tend to get attracted to new funds.

This made it difficult for new investors – it was very confusing.

SEBI mandated that every mutual fund company could have only one mutual fund in each category. This got rid of a lot of duplicates.

In 2021, there was the Gamestop saga in the US where short sellers were taken for a ride.

Not possible in India – because naked short selling isn’t allowed (selling shares without owning them).

Similarly, in India investors cannot take more than 5x leverage on their intraday bets.

In 2020, a fund manager was blamed for taking greater risk than necessary which led to the shutting down of some debt funds.

Following that, SEBI proposed a new salary payment scheme where fund managers’ 20% salary would be in the form of units in mutual funds they were managing.

That way, the fund manager’s income was tied to the mutual fund he/she was managing.

Of course, this doesn’t mean everything is airtight. There are leakages.

But as in F1, regulators are always one step behind.

At the end of it, a level playing field ensures we all benefit.

And ever-changing rules ensure new unfair practices are reduced or eliminated.