Ajay Tyagi, the new chairman of the Securities and Exchange Board of India (Sebi), has inherited one of India’s best regulators. While Sebi deserves credit for what it has achieved in the past 28 years, there’s still much left to be done. Being among India’s best regulators isn’t a laurel to rest on, especially given the poor state of affairs at most other regulators. As pointed out in this column, Sebi is now in the so-called mature phase of the lifecycle of a regulator. It has nothing much original left to do, and is left mainly with the painful and thankless job of enforcing regulation.
Sebi has been evidently busy with enforcement; but far too busy for its own good. A senior Sebi official says the regulator has jumped into far too many cases, many of which have been challenged at the Securities Appellate Tribunal, and it has become clear that it has bitten off more than it can chew. This is reflected in some cases where Sebi investigations have been shoddy and have been overruled by SAT. Worse still, the Tribunal has reprimanded the regulator on more than one occasion for shoddy investigations, even saying that Sebi’s conduct has been disgraceful.
In a recent instance, SAT has drawn attention to Sebi’s incoherent approach in handling cases related to the use of penny stocks for tax evasion. Sebi’s enthusiasm in chasing these cases was strange to start with, and lately, the regulator appears to have come to the conclusion that it will be selective about which cases it pursues in this category. Even so, Sebi officials continue to pass orders in these cases, even where price manipulation hasn’t clearly been established, leading to confusion on what exactly the regulator’s stance is on the issue. This is one among many examples where Sebi’s enforcement actions have faced criticism.
Enforcement is an important area where Tyagi should ensure the regulator pulls up its socks. Done well, it can boost the morale of Sebi staffers, and a large chunk of them are involved in this function. For example, consider the thorough investigation and tough action taken in the Sahara case. But done poorly, it can drag the morale of the entire organization down. A case in point is Sebi’s extremely poor order in the Bank of Rajasthan case, where it lifted sanctions against the company’s promoter group, despite clear evidence they had flouted securities market regulations.
Tyagi should also stand up for bona fide and innocent decisions taken by Sebi staffers, when they are pulled by for investigation by other agencies. While there is no case to provide complete immunity to Sebi staffers from any investigation, Sebi should stand with those who demonstrate that their decisions were taken after following due processes and after application of mind. Similarly, investigation against the chairman and whole-time members should be sanctioned by the government. Else, needless investigations can throttle decision making at the regulator, for fear of being pulled up later.
As mentioned here, Tyagi would also do well to improve the regulator’s rule-making function . Sebi is accustomed to taking a consultative process for rule-making; it takes feedback from market participants and experts on board before arriving at a decision. But this isn’t always the case. When it decided to increase the minimum contract size for equity derivatives contracts, or clamp down on certain commodity derivatives contracts, for instance, it abruptly sent out circulars, with no data or clear rationale presented to support the decision.
Sebi needs to follow a consistent approach, and in fact should embrace many of the good suggestions of the Financial Sector Legislative Reforms Commission (FSLRC) in this regard.
As pointed out in this column last week , another important takeaway from the FSLRC handbook is to work on improving the Sebi’s accountability mechanisms. The government must specify what Sebi and Tyagi’s chief deliverables are. This will make his task much easier and far more effective. One leaf Tyagi can take out of his predecessor U.K. Sinha’s diaries is in resisting pressure from Parliamentarians on clamping down on certain market reforms. For instance, thanks to the efforts of a whistleblower, concerns about algorithmic trading have been raised in Parliament on a number of occasions. Sinha, somehow, has resisted pressure on this front and held back from clamping down on the segment, despite making statements that some remedial measures might be needed. This column has repeatedly criticized Sebi’s statements in this regard and its approach to policy-making on algorithmic trading. Sebi’s statements caused market participants no little anguish as well. In hindsight, however, it seems like the regulator managed to keep harsh critics at bay, and at the same time, avoided taking any drastic decision to clamp down on the market. Of course, this is not to say that the regulator shouldn’t apply its mind on strengthening processes and systems. In fact, reports suggest Sebi is studying Indian market data before deciding its next course of action.
All told, Tyagi has his task cut out. Sebi’s responsibilities have risen in recent years, and it is responsible for new segments such as commodity derivatives. To be effective, Tyagi must ensure the regulator picks battles that are necessary and important.