Securities and Exchange Board of India (Sebi) chairman U.K. Sinha has completed one year in office. This is considerable time in life as head of the market regulator, typically a term of three years. Still, it’s difficult to say if Sinha has been able to settle into his new position.
This is not to suggest that he wasn’t the right person for the position. Sinha is a finance ministry veteran, having held the position of joint secretary, capital markets, and had also been at the helm of UTI Mutual Fund for at least five years. Even staunch supporters of C.B. Bhave, the previous Sebi chairman who wasn’t granted a term extension, say his successor is competent and sincere.
UK Sinha Sebi chairman. Hemant Mishra/Mint
Why then is there the feeling that Sinha has perhaps not been able to settle into his new role? To start with, about five months after he took over, two of his three whole-time board members completed their terms. Both these positions were vacant for over three months, until Rajeev Agarwal, a former income-tax commissioner, joined in late October. The other position, expected to be filled by S. Sridhar, a former chairman of Central Bank of India, is still vacant.
The fallout of the controversy behind Sebi appointments is that it has slowed down the functioning of the regulator. Prashant Saran, who was the sole whole-time member for a period of over three months, had an unusually large number of departments reporting to him.
Some tasks, such as Right to Information (RTI) orders, had to be given priority because they come with a strict deadline. It’s not surprising that no major orders came out of Sebi in the second half of last year.
What’s more, Sinha had to grapple with allegations of bias by a former colleague, K.M. Abraham. In a letter to the Prime Minister, Abraham said he was asked by Sinha to be lenient in some investigative cases since they were of interest to the finance ministry. And then, there was the public interest litigation (PIL) filed in the Supreme Court challenging his appointment.
While the PIL was dismissed by the Supreme Court, and the charges by the former Sebi whole-time member haven’t been proved, they were without doubt distractions. Sinha, for instance, was asked by the finance ministry to respond to Abraham’s letter. Assessing Sinha’s performance in the past year, therefore, isn’t a straightforward task. Additionally, as one former Sebi official says, one needs to ask if Sinha has been provided the right environment to operate in, alluding to reports about the finance ministry’s increased interference in the functioning of Sebi.
Keeping all these constraints in mind, Sinha has done reasonably well. He had been expected to reverse Bhave’s policy of banning the entry load charged by mutual funds. While Sinha has been far more sympathetic to their cause, he wisely refrained from engaging in a policy flip-flop.
In the mutual fund space, reform has been incremental, but ongoing. The regulator has also taken forward the long-pending issue of regulation of investment advisers. It’s also good to note that Sebi has decided to simplify the norms for KYC (know your client) and have a common KYC across products.
In the primary markets space, Sebi’s investigations team did well to nail the culprits in the small initial public offering (IPO) scam, something that had got out of hand since early 2011. And Sinha’s attempt to curb manipulation of stock prices soon after listing is a good one.
By imposing price bands and compulsory settlement of trades of IPOs with a size of less than Rs250 crore, the price manipulation will be nipped in the bud. Even so, a lot more needs to be done with respect to punitive action to ensure that market participants don’t attempt such audacious frauds in the future.
The decision to review the risk management system of the secondary markets is timely and essential. At the same time, Sebi’s silence about the muhurat day episode, when volumes inexplicably surged, on BSE hardly inspires confidence in the market place. The regulator has done well to permit exchanges to launch market-making schemes, which seems to be helping BSE compete in the equity derivatives market. Indeed, Sebi has initiated a number of changes in the past year and, keeping Sinha’s constrains in mind, this is commendable.
But a lot more needs to be done. And market participants need to see more evidence that the functioning of Sebi is indeed independent of the government. The capital market regulator notified the new takeover code late last year, but with significant changes to the recommendations made by the Sebi-appointed committee that drafted the proposals for the new regulations. News reports suggest that these changes were made after deliberations undertaken by the finance ministry.
The Bimal Jalan committee’s report on ownership and governance of stock exchanges appears to have been totally ignored. Even if one comes to the view that the proposals can’t be implemented, it goes without saying that the regulator’s stance on these issues must be clear. It’s because of the lack of clarity that Sebi is in a court battle with MCX Stock Exchange Ltd. Sinha must pursue these uncomfortable decisions.
The regulator has rightly said the consent order mechanism must be reviewed, since market participants must have the assurance that it isn’t a haphazard process. Having said that, the review must be done quickly and Sebi must start settling the cases before it soon. The Reliance Industries Ltd insider trading case, for instance, has dragged on for years now. It will be unfortunate if another year passes because the regulator is still in the process of reviewing its processes.
To be fair to Sinha, there were genuine constraints that affected Sebi’s functioning in his first year as chairman. Looking forward, one hopes that he doesn’t merely settle in, but takes charge as the autonomous regulator that the legislature has intended Sebi to be.
Your comments are welcome at inthemoney@livemint.com
• • •
Also Read |Mobis Philipose’s earlier columns